Now I am really worried.

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Iceland Drops Krona Defense; Abandons Bank Purchase (Update1) By Tasneem Brogger and Helga Kristin Einarsdottir Oct. 8 (Bloomberg) -- Iceland scrapped attempts to strengthen the currency and abandoned plans to nationalize the country's third largest bank as the crisis in its banking industry deepened. The central bank ditched a currency peg equivalent to 131 krona per euro after failing to convince investors it could maintain it. The government canceled the purchase of a 75 percent stake in Glitnir Bank hf and handed the lender over to regulators, saying it was in bigger trouble than previously estimated. Iceland's banking system is buckling under the weight of debts equal to 12 times the size of the economy, with financial regulators now in charge of Glitnir and the second largest bank, Landsbanki Islands hf. As the crisis mounts, the central bank has indicated it is powerless to halt the slump in the krona. ``They need to come up with a long-term solution to stabilize their economy,'' said Lars Christensen, a senior strategist at Danske Bank A/S in Copenhagen. ``This isn't something they can do on their own, they need outside help and frankly I can only see them achieving this with the help of the IMF.'' International Monetary Fund spokesman William Murray said yesterday a mission had been sent to Iceland, declining to say how long it has been there or what it was discussing. The Washington- based lender sends missions at the request of host countries. Icelandic Prime Minister Geir Haarde said yesterday the government will open negotiations for a 4 billion-euro ($5.47 billion) loan from Russia. `Hardly Surprising' The central bank said yesterday it would try to fix the trade-weighted krona index at 175, corresponding to 131 against the euro. Nordea Bank AB, the biggest Scandinavian lender, said the price suggested by bid/ask spreads in pre-market trading was 255 per euro, 49 percent below the rate targeted by the bank. The failure to fix the currency ``is hardly surprising,'' Christensen said. The Financial Supervisory Authority took over Glitnir after the government realized that the ``difficulties of the bank were much greater'' than previously estimated, central bank Governor David Oddsson told television broadcaster RUV late yesterday. The government on Oct. 6 announced a bill to protect domestic bank deposits as the credit crisis strangled banks' access to funding. Moody's Investors Service today cut its rating to A1 from Aa1, adding the ratings remained under review, citing the negative impact of the country's banking crisis on the government budget. `Short-Term' ``The attempt of the authorities to effectively `ring-fence' public finances from the fallout of the banking crisis may only provide some needed short-term respite,'' Moody's Vice President Kenneth Orchard said in the statement. ``But some of the banks' external liabilities will eventually filter through to the government's balance sheet.'' Glitnir has started ``restructuring'' its operations and said today it will sell its Finnish and Swedish holdings. The FSA's move means Glitnir is temporarily protected from its debt obligations, the bank said in a statement on its Web site. Chief Executive Officer Larus Welding will continue to head the company through the restructuring process, Glitnir said. Kaupthing Bank hf, Iceland's largest bank, said today it's in talks regarding its ``involvement in the reorganization of Glitnir,'' according to a statement. ``Further talks will be held over the next several days,'' the bank said. U.K. Prime Minister Gordon Brown said today Britain will sue Iceland over deposits belonging to 300,000 U.K. account holders with Landsbanki's Icesave Internet banking unit. `No Money' ``The Icelandic government, believe it or not, have told me yesterday they have no intention of honoring their obligations here,'' Chancellor of the Exchequer Alistair Darling told the British Broadcasting Corp. ``The first call would be on the Icelandic compensation scheme which, as far as I can see, hasn't got any money in it.'' Iceland's FSA will probably declare Icesave insolvent, Darling told parliament today. Landsbanki's Dutch Icesave unit ``can no longer meet obligations,'' according to a statement on its Web site today. The unit canceled transactions conducted since noon Oct. 6. The U.K. Treasury today transferred Kaupthing unit Singer & Friedlander's deposit business to ING Groep NV and put the rest of the business under administration after the unit went into default, the Treasury said in a statement. Iceland's government will ``immediately review'' the matter with a view to finding ``a mutually satisfactory solution,'' the foreign ministry said in a statement distributed by the Iceland stock exchange today. http://www.bloomberg.com/apps/news?...id=auCZ.ljDGCJ0

If you haven't been following their plight over the past week, they initially tried to bail out their over-leveraged banks. However their currency devalued 30% in a day and their soverign debt rating was cut. They responded by pegging their currency. The article tells you the rest. In the economy thread in the COR I mentioned that what's happening in Iceland is potentially a microcosm of what may spread to the rest of the world unless money market operations resume … banks need to start lending again. This isn't about a bailout. Those of you who think that governments should just hurry up and let institutions fail so we can start making money again should take a lesson from the past. Andrew Mellon was treasury secretary during the Hoover administration and his policy was: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate . . . purge the rottenness out of the system." The problem isn't about a bubble, the problem is about the financial system is not working anymore.

FYI, here are European bank sizes relative to the GDP of their respective of their countries:

http://www.ft.com/cms/s/0/61d7e148-...?nclick_check=1

The reason why I bolded that one part from the article is because it pertains to an email I received today from a friend who's a prop trader, very bright guy, and not a conspiracy theoriest at all. Anyway he sent me this:

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If you have excess assets sitting in any foreign (e.g. GBP) accounts, now is a good time to get them into a US-based USD account (or maybe a real Swiss account - not UBS or CS). The rationale is simply that the world is now full-on engaged in a sort of financial warfare, whereby countries are engaged in a financial arms race: Ireland guarantees bank deposits, Germany follows suit, Iceland basically on the brink of collapse gets bailed out by a Russian loan, and now basically UK government ownership of banks (how is that NOT communism?). The reason this is financial warfare is because a) each step designed to protect domestic financial interests acts at the EXPENSE of foreign interests, always; and b) other countries must respond in at least like-for-like or else their domestic financial conditions will implode as capital moves away from them. The problem with this financial warfare is that some countries will ultimately break, but more importantly, before they break they will have to use measures of last-resort - i.e. a financial nuke so to speak. That would be capital controls. Capital controls mean the end of globalization and capitalism as we know it, a sort of devolution to pre-war economies right before a global Great Depression that, in my opinion, could be worse than 1929-1933. Why would capital controls be so bad? Two primary reasons: Take an international corporate, for example, that is based in country A (and funds there) but derives a great deal of income from country B. If country B imposes capital controls, the company suddenly can't take the income it's earned and pay its bills and workers, many of which are in country A. That company thus goes bankrupt, screwing not only shareholders but employees as well, the majority of both of whom are in country A. Secondly, country B may benefit in the short-term in this case by preserving capital in its domestic system, but unless country B is truly self-sufficient (clearly not the case as it no longer gets goods from the company that has gone bankrupt, itself a "victim" of globalization), country B will essentially be left on its own to rot until the financial system can bend no more and it can no longer fund itself and has to print money, devalue the currency, and the cycle will be complete - war + inflation. So you have to ask yourself, which countries in this world are the most stable and self-sufficient in an anti-globalization world? The US is certainly one of them. While this does not in the slightest exempt them from the effects of this great contraction, they will hopefully be one of the last guys standing. Anyhow, I'd move all of my discretionary assets into the US in a federally insurred account, and consider buying hard assets (assets that produce something). Also, while it is counterintuitive, do NOT pay down debt now (assuming servicing the interest is easily serviced many times over considering your income/cash stockpile). The end game of all this will be war + inflation. This is scary, scary stuff. I am not saying the above scenario is a certainty, but it is more than just a distinct possibility and the impact of it is so severe it would be foolhardy not to take any precautionary steps to hedge that scenario. Some very good (albeit nerdy) reading material: Bernanke's thesis on the Great Depression (attached) and M Friedman's "The Great Contraction" - these two side-by-side represent the best foremost analysis we have on the subject. ____________________ Global Rates Proprietary Trading Deutsche Bank AG London

I'm not THAT doom and gloom, but I seriously think that much like the global coordinated rate cuts we saw by central banks today, we need to see global coordinated fiscal policies to restore faith in the money markets. I don't give a shit about the equity markets. Thankfully finance ministers are finally realizing how perilous this crisis is:

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Timing right for G7 to act on credit crisis: IMF Wed Oct 8, 2008 12:41pm EDT Email | Print | Share| Reprints | Single Page | Recommend (2) [-] Text [+] By Emily Kaiser WASHINGTON (Reuters) - World finance leaders who improvised their way through the first year of the credit crisis may finally be ready to come up with a comprehensive plan to clean up the mess, the IMF's chief economist said on Wednesday. In an interview with Reuters, Olivier Blanchard said policy-makers have had little choice but to react to each new emergency, but the rash of crises in recent weeks finally convinced them it was time for a broader response. A gathering of the Group of Seven finance leaders on Friday, followed by the IMF's weekend meetings, should provide an ideal setting for them to figure out what to do next. "Events focus the mind," Blanchard said. "What's absolutely essential to solve this financial crisis is the perception by the public and by the markets that there is a coherent plan." Six months ago, G7 leaders pledged to implement a series of recommendations to try to right the financial system, such as encouraging banks to disclose losses and raise new capital, but the crisis has worsened considerably since then and the response needs to change, too. European leaders balked at a proposal to send up a bank bailout fund similar to the $700 billion package recently passed in the United States, but the fact that they were discussing a coordinated response was a sign of progress. "We're now getting to the point where all governments understand that it has to be a coherent plan," he said. "From there to actually doing it there are still a few steps, but that realization is now here," Blanchard said. It was probably "too much to ask" that G7 leaders emerge from Friday's meeting with an agreed, specific course of action, but he said he was confident that some progress would be made this weekend and in the coming weeks. Central banks took a giant step on Wednesday when they announced coordinated interest rate reductions. Blanchard said that provided a vital dose of investor confidence, but the markets' mixed reaction showed investors need more proof that world leaders were working together. Until that happens, there may be a few more "difficult days" in the markets, he said. He said in hindsight, it was clear that allowing Lehman Brothers to slide into bankruptcy triggered a far more dangerous bout of financial market turmoil that has now darkened the global economic outlook. He said the U.S. Treasury Department took a gamble that letting Lehman fall would send a clear signal to markets that the government would not always intervene. "It was a bet. It was lost. What happened as a result is all kinds of financial institutions realized that their claims were not as secure as they thought. As a result, this led to an enormous increase in perceived counterparty risk, and then the system froze." "Whether without it (the fall of Lehman) we would have avoided where we are today, I do not know. Some other event might have triggered the same thing a week later." http://www.reuters.com/article/topN...l=10341&sp=true

This is undeniably the biggest crisis the world has ever seen since the great depression. I think that if the G7 finance ministers don't get their shit together for a truly coordinated global response, and I'm talking massive government spending packages ... fuck deficits. I think we can start to see financial warfare where it becomes every country for itself …

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I am surprised that Iceland is begging for a 4-billion euro loan from Russia. So now they want Russia's help, eh .... those pesky Russkies have over 500 billion in foreign currency reserves saved up, so go figure.

We'll see, but I still dont understand how this massive money injection can rescue the world from this impending crisis of astronomical proportions.

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Originally posted by Magnetonium I am surprised that Iceland is begging for a 4-billion euro loan from Russia. So now they want Russia's help, eh .... those pesky Russkies have over 500 billion in foreign currency reserves saved up, so go figure. We'll see, but I still dont understand how this massive money injection can rescue the world from this impending crisis of astronomical proportions.

There is virtually no short term or long term lending in the commercial paper market right now. Institutional investors and Banks need to start lending to other banks and companies or they will start collapsing. Panic has virtually seized the money markets. A global coordinated response in monetary and fiscal policy sends the message that governments are committed towards the restoration of normal market operations. It's all about eliminating panic.

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We haven't seen a global economic downturn like this since the 1930's.

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Don't you think that iceland is a rare case? It's a very small country that produces almost nothing except a few minerals (along with a fishing industry). I wouldn't be any more worried about iceland going bankrupt than i would be about North Dakota going bankrupt (and North Dakota has almost double the GDP). Apparently, Iceland's financial system was poorly managed, and it's economy was too highly leveraged. Perhaps if Iceland actually had some production capabilities it could withstand such a crisis. However, when the economy is built almost entirely on borrowing money, instead of through selling resources or domestically produced goods, the economy is more open to the risks associated with leverage. People seemed to forget that leverage can mulitply losses as well as gains.

http://www.bea.gov/regional/gsp/action.cfm

Last edited by jerZ07002 on Oct-09-2008 at 13:49

Pakistan is well on its way as well.

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Originally posted by jerZ07002 Don't you think that iceland is a rare case? It's a very small country that produces almost nothing except a few minerals (along with a fishing industry). I wouldn't be any more worried about iceland going bankrupt than i would be about North Dakota going bankrupt (and North Dakota has almost double the GDP). Apparently, Iceland's financial system was poorly managed, and it's economy was too highly leveraged. Perhaps if Iceland actually had some production capabilities it could withstand such a crisis. However, when the economy is built almost entirely on borrowing money, instead of through selling resources or domestically produced goods, the economy is more open to the risks associated with leverage. People seemed to forget that leverage can mulitply losses as well as gains. http://www.bea.gov/regional/gsp/action.cfm

I would be very worried about a whole country going bankrupt and collapsing financially. I think what occrider said is Iceland is an example of what is happening around the world. The fact it is a small country isn't grounds for dismissal. It's failed first because it is small. It makes sense that in a global financial crisis like this the smaller economies will topple first and those effects will reverberate upwards.

Real stuff - scary. It took a world war to drag us out of the great depression. It gets to me thinking about it, I still remember high school and how my counselors and everyone were so happy. The economy was doing so well and you heard stories of kids making all this money and there were plenty of jobs and opportunity... Then Bush got elected.

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Originally posted by occrider There is virtually no short term or long term lending in the commercial paper market right now. Institutional investors and Banks need to start lending to other banks and companies or they will start collapsing. Panic has virtually seized the money markets. A global coordinated response in monetary and fiscal policy sends the message that governments are committed towards the restoration of normal market operations. It's all about eliminating panic.

Do you really trust our world leaders to be able to coordinate that kind of effort? I sure don't.

Last edited by josh4 on Oct-09-2008 at 15:42

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Originally posted by jerZ07002 Don't you think that iceland is a rare case? It's a very small country that produces almost nothing except a few minerals (along with a fishing industry). I wouldn't be any more worried about iceland going bankrupt than i would be about North Dakota going bankrupt (and North Dakota has almost double the GDP). Apparently, Iceland's financial system was poorly managed, and it's economy was too highly leveraged. Perhaps if Iceland actually had some production capabilities it could withstand such a crisis. However, when the economy is built almost entirely on borrowing money, instead of through selling resources or domestically produced goods, the economy is more open to the risks associated with leverage. People seemed to forget that leverage can mulitply losses as well as gains. http://www.bea.gov/regional/gsp/action.cfm

Yes, and subprime was a small, manageable, ring-fenced problem...I heard Iceland compared to essentially a large, over-leveraged hedge fund this morning. It's just a microcosm of what's been going on.

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Originally posted by josh4 Real stuff - scary. It took a world war to drag us out of the great depression. It gets to me thinking about it, I still remember high school and how my counselors and everyone were so happy. The economy was doing so well and you heard stories of kids making all this money and there were plenty of jobs and opportunity... Then Bush got elected.

Would you stop with this overly partisan bullshit already?! The economic boom of the 90's was not about Clinton or Bush or anything like that. It was about entering the digital age and the huge impact of computers and productivity and the greater shift to a service based economy. The profits that were reported by tech/dot.com companies, particularly in the late 90's, were faux profits, as most of us know (Remember WebVan, Pets.com, Yahoo at $400, etc?!?). The tech market peaked right around Y2K (remember all of that extra money the Fed pumped into the economy in order to prevent the widely feared Y2K meltdown??) Prince was almost prescient in the 80's! The stock market peaked in March 2000, it's hard to say that those are things that Bush created or was somehow responsible for. His administration may have pursued plenty of decidedly poor economic policies and appointed more than their fair share of incompetent regulators, however your recollection of history is simply inaccurate.

Yeah, it's fairly deceitful to claim this wouldn't have happened had Bush not been in office.

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Originally posted by Shakka The stock market peaked in March 2000, it's hard to say that those are things that Bush created or was somehow responsible for.

So what you're saying is its possible this is all Bush's fault.

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Originally posted by josh4 Do you really trust our world leaders to be able to coordinate that kind of effort? I sure don't.

They have to. It's scary how involved the Fed and the Treasury are getting. If the G7 doesn't band together to come up with sweeping action sooner or later Bernanke and Paulson are going to reach into that tool chest and find absolutely nothing left to throw at the problem. Then you'll start seeing some REAL panic.

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Bernanke, Paulson Seek Global Help as Crisis Spreads (Update1) By Rich Miller and Simon Kennedy Oct. 9 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson are discovering both the leeway and limits they have as policy makers as they struggle to combat the 14-month-old credit crisis. The two have worked to come up with novel strategies, including a complex plan for the Fed to backstop the everyday finances of corporate America by buying commercial paper, and potential injections of capital into banks. So far, they've made scant progress in restoring calm to the markets and are turning abroad for help, including joint interest-rate cuts yesterday. ``The relative position of the U.S. in the world economy and the world of finance is much lower than it used to be,'' said Allen Sinai, chief economist at Decision Economics in New York. ``With markets so global, so interconnected, we need a more unified approach to fighting the world financial crisis.'' Which proves more important in the end -- the continued creativity of Bernanke and Paulson in fashioning policies to tackle the turmoil or the intractability of the now global crisis facing them -- will go a long way in determining whether a developing global recession turns into something even worse. Even as Paulson reached across borders, he played down the likelihood of the U.S. backing a U.K. proposal to extend guarantees to loans between banks. The Treasury chief told reporters yesterday that it might ``not make sense to have identical policies'' because each countries' circumstances are different. Worldwide Cuts Along with the Fed's half-point reduction in its benchmark rate, central banks from the European Central Bank to the People's Bank of China lowered borrowing costs yesterday. The coordinated rate cuts may presage a period in which foreign central bankers and finance ministers take up more of the burden of combating a crisis that Bernanke and Paulson are finding hard to contain on their own. Policy makers from the Group of Seven industrial nations -- Britain, Canada, France, Germany, Italy, Japan and the U.S. -- meet tomorrow, and how to handle the turmoil is at the top of their agenda. ``The G-7 governments are going to try all kinds of measures to try to get cross-border flows going to unleash locked-up credit markets,'' said Adam Posen, deputy director of the Peterson Institute for International Economics in Washington. Likely steps include further rate reductions in coming weeks and using taxpayer money to replenish capital at loss-ridden banks, with a slight chance of some nations extending guarantees to loans between them. One focus, according to Posen: attempting to find a way to get money moving from countries with record trade surpluses and currency reserves to countries where credit is scarce. `Keep Hitting' ``We should not underestimate the joint power of fully committed global policy makers -- markets will take notice and turn around,'' said Marco Annunziata, chief economist at Unicredit MIB in London. ``Policy makers must keep hitting the markets with decisive measures in the coming days.'' U.S. action so far is unprecedented in scale since the Great Depression. In the past five weeks alone, the government has taken over mortgage-finance firms Fannie Mae and Freddie Mac, rescued insurer American International Group Inc., backed the deposits of money-market funds and authorized a $700 billion bank rescue program. In putting together those measures, policy makers stretched the limits of what they can do under the law. The Fed has repeatedly invoked emergency powers only available to it at times of ``unusual and exigent circumstances'' to extend credit of up to $123.8 billion to AIG and set up its commercial-paper program. `All' Tools And U.S. policy makers aren't finished yet. Paulson yesterday signaled he's considering pumping capital into U.S. financial institutions, saying ``we will use all of the tools we've been given to maximum effectiveness'' under the $700 billion Troubled Asset Relief Program. Barclays Capital Inc., Macroeconomic Advisers LLC and other forecasters predict the Fed will cut rates by another half-point this month to 1 percent. That would match the lowest level in five decades. ``Policy makers want to get as much stimulus into the system as soon as possible,'' said Brian Sack, a former Fed economist now at Macroeconomic Advisers in Washington. Yet for all these efforts, investors remain unnerved and financial markets are in turmoil. U.S. stock indexes fell for a sixth day yesterday, plummeting 16 percent in that period. Fear Grips Markets Behind the panic: fear that Bernanke and Paulson have yet to get ahead of a problem that's now morphed from a U.S. housing recession into a global financial meltdown. To finally beat the crisis, policy makers outside the U.S. may have to show the same flexibility as their U.S. counterparts. The markets were unnerved earlier this week after a summit of European leaders concluded without a comprehensive, cross-border remedy for their banks' deepening woes, forcing countries to go it alone. The U.K. yesterday granted Britain's banks an unprecedented 50-billion-pound ($86 billion) lifeline and emergency loans from the central bank. ``It's going to take a while to work through this problem,'' Paulson said yesterday. ``Some financial institutions will fail'' even after the U.S. actions, he said. http://www.bloomberg.com/apps/news?...id=awcwOBcGPWeA

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