Can Central Banks Bail Out the Subprime Losses?

Rob Mackrill - Thu 13 Dec, 2007

$110bn certainly sounds like a lot of money... You could sort out a lot of things with that sort of dough. But is it enough to unclog the worlds money markets and bail out cash-strapped banks? No, appears to be the answer from the worlds financial markets....

$110bn certainly sounds like a lot of money...

You could sort out a lot of things with that sort of dough. But is it enough to unclog the world’s money markets and bail out cash-strapped banks?

No, appears to be the answer from the world’s financial markets. They sold off in Asia last night - Japan’s Nikkei fell almost 2.5% - and in Europe again this morning. The FTSE is down 107 points in late morning. Yesterday the US market whipsawed throughout the session as the news broke - first rising, then falling as oil added $4.

And it doesn’t appear to have had much of an impact yet on European money markets. The rate at which European banks lend to one another, remains at a seven year high, according to a Bloomberg report.

The $110bn is to be made available in a co-ordinated attempt by the world’s central banks – in itself a first they say – including the Fed, the ECB, the Bank of England, and the central banks of Canada and Switzerland. With other central banks in Japan and Australia voice their support, says the FT(whatever that means…). In addition, the Fed is going to accept a broader range of collateral for the loans they make to banks.

All told, banks have disclosed some $60bn in subprime related losses to date, reports the BBC. No one knows for sure how large the losses are in total but a variety of estimates have been made, ranging from $200-400bn. On that basis we have a long way to go yet in terms of finding out the full extent of the damage. Hence fear remains. This in turn makes you wonder whether the $110bn rescue package, enormous as it is, will be enough.

The “helicopters are flying”, comments Martin Wolf in the FT, and will continue to run sorties for as long as it takes. But will this showering of cash restore confidence or instil panic? So far we haven’t seen too much of the former...

Leading UK fund manager Anthony Bolton is bearish. He warns a combination of tighter credit, falling house prices (the Royal Institution of Chartered Surveyors reports a fourth month of falling house prices this morning) and a pressured consumer will act like a cancer on the economy next year.

"I remember that the effects can take some time to work their way through, but when they do, they act like a cancer - starting in one area and then slowly spreading to others. I would expect the contagion to seep into most stock markets."


*** According to the Automobile Association, the average price of a litre of petrol (unleaded?) is 102.8p. The average price of a litre of diesel is more, 107.9p.

In December ’06, average pump prices were 88.2p for unleaded petrol and 93.7p for diesel, they report. Now both are north of £1 a litre. On these numbers, unleaded petrol is up over 16% on the year and diesel up 15%, which runs a coach and horses through the 2.1% CPI. A graphic illustration of diesel’s price in recent years can be seen in this chart.

No surprise then that this is causing ripples of unrest, particularly among some whose livelihoods depend on fuel...

Seven years ago a protest group calling themselves ‘Transaction 2000’, organised a blockade of fuel refineries and storage depots protesting at the level of tax on fuel. They were more effective than they imagined. Widespead panic buying saw long queues forming at petrol stations around the country and shortages followed soon after.

The remnants of the group have, reformed into ‘Transaction 2007’. They are mostly a mix of hauliers and farmers protesting the cost of fuel and specifically the government’s 50.35p tax rake off per litre of diesel and low sulphur petrol. They’re demanding an “essential user rebate” and a cut in fuel tax.

If this is news to you and you’ve got places to go in a car this week-end you might want to bear this in mind and fill up ahead of time. They’re planning renewed action on Saturday though say “it’s not our intention to bring the country to its knees as we did in 2000”. This sounds a little hollow given they’ve picked the busiest shopping day in the calendar.

Diesel is the fuel of trucks, tractors and increasingly cars. It used to be cheaper than petrol but not anymore. ITN report comments from David Hanley, chairman of protest group Farmers for Action, a group associated with Transaction 2007 on the impact this is having:

"We really don't know what else to do. Something has to be done to try and ease the situation, otherwise essential users will have to put up their prices.
"If that happens, food prices will go up and everyone will suffer.”

It’s that food and fuel problem once again. And with Goldman Sachs forecasting $100-plus oil next year it’s not going away anytime soon.

P.S.
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