Things to get tougher for govts having deep-seated solvency problems
Thursday, 30 October 2008
From Fazle Rashid
NEW YORK, Oct 29: A fierce late half rally in Dow Jones yesterday brought cheers into the face of beleagured investors. The news emanating from the credit card companies and Reserve Fund, America's oldest money market fund drowned cheers into gloom. The scenario elsewhere including in the dollar-flushed Persian Gulf nations and Pakistan in particular is far from assuring. Credit Card facilities are the main artery of the US, nay, the European economies. Credit Card companies were generous in offering facilities alluring clients with sky-high credit lines. Lenders are now panicking and sharply curtailing their credit lines as the economy continues to shrink.
The lenders have written off an estimated $21 billion of bad credits in the first half of this year. The credit card companies stand to lose another $55 billion over the next year and half, the New York Times (NYT) reported today
If employment continues to slump, the loss could reach a 'historical' proportion. The current loss is about 5.5 per cent and it could rise to as high 7.9 per cent America's Reserve Fund has frozen hundreds of thousands of customer accounts for more than six weeks. At least 400,000 people and perhaps as many as a million cant get access to their savings despite the US Fed efforts at stabilizing the money market, NYT reported The despositors who thought their money was safe are now feeling desperate.
The euphoria in the oil-rich Arab nations is vanishing like thin air. The energy-rich nations find themselves sucked into the global financial meltdown undermined by steep fall in oil price. The stock markets across the Persian Gulf are down and the countries have tightened availability of credit. The governments across the region have stepped in to prevent a crisis. The era of sky oil-price is now a memory but regional nations have enough cash to prevent any meltdown. The western Banks like Standard Chartered won't describe it as a recession but looking at it as a slowdown.
An interesting development is gaining force in the ' communist world'. As the credit squeeze by the western banks is lingering, rich Russian oil companies have turned to China for financial assistance. Under a proposed loans-for-oil deal, Russian oil companies would borrow $30 billion. In return, Russia would sell about two billion barrels of oil to China over next 20 years.
China after years of piling up trade surpluses is awash in cash and possess hard currency reserve exceeding $1.3 trillion, easily the largest in the world. The IMF has revised its lending rules -- one is for transparently governed countries and the other, for those having less transparency.
The well-run countries in the estimation of the IMF will be eligible for its loan with few or no strings attached. Countries with sustainable debt and a history of good fiscal and monetary policies would receive Fund money within few days of applying. The IMF board will meet today to discuss a liquidity facility for relatively stable emerging markets nations like Brazil
Life will be tougher for governments that have deep-seated solvency problems. They will be facing demands for fiscal retrenchment and higher interest rates to improve government finance and attract foreign investors. Raghuram Rajan, the former chief economist of the IMF said: "The rationale for conditionality is not to inflict pain and suffering on the borrower but to ensure that the IMF gets repaid."
NEW YORK, Oct 29: A fierce late half rally in Dow Jones yesterday brought cheers into the face of beleagured investors. The news emanating from the credit card companies and Reserve Fund, America's oldest money market fund drowned cheers into gloom. The scenario elsewhere including in the dollar-flushed Persian Gulf nations and Pakistan in particular is far from assuring. Credit Card facilities are the main artery of the US, nay, the European economies. Credit Card companies were generous in offering facilities alluring clients with sky-high credit lines. Lenders are now panicking and sharply curtailing their credit lines as the economy continues to shrink.
The lenders have written off an estimated $21 billion of bad credits in the first half of this year. The credit card companies stand to lose another $55 billion over the next year and half, the New York Times (NYT) reported today
If employment continues to slump, the loss could reach a 'historical' proportion. The current loss is about 5.5 per cent and it could rise to as high 7.9 per cent America's Reserve Fund has frozen hundreds of thousands of customer accounts for more than six weeks. At least 400,000 people and perhaps as many as a million cant get access to their savings despite the US Fed efforts at stabilizing the money market, NYT reported The despositors who thought their money was safe are now feeling desperate.
The euphoria in the oil-rich Arab nations is vanishing like thin air. The energy-rich nations find themselves sucked into the global financial meltdown undermined by steep fall in oil price. The stock markets across the Persian Gulf are down and the countries have tightened availability of credit. The governments across the region have stepped in to prevent a crisis. The era of sky oil-price is now a memory but regional nations have enough cash to prevent any meltdown. The western Banks like Standard Chartered won't describe it as a recession but looking at it as a slowdown.
An interesting development is gaining force in the ' communist world'. As the credit squeeze by the western banks is lingering, rich Russian oil companies have turned to China for financial assistance. Under a proposed loans-for-oil deal, Russian oil companies would borrow $30 billion. In return, Russia would sell about two billion barrels of oil to China over next 20 years.
China after years of piling up trade surpluses is awash in cash and possess hard currency reserve exceeding $1.3 trillion, easily the largest in the world. The IMF has revised its lending rules -- one is for transparently governed countries and the other, for those having less transparency.
The well-run countries in the estimation of the IMF will be eligible for its loan with few or no strings attached. Countries with sustainable debt and a history of good fiscal and monetary policies would receive Fund money within few days of applying. The IMF board will meet today to discuss a liquidity facility for relatively stable emerging markets nations like Brazil
Life will be tougher for governments that have deep-seated solvency problems. They will be facing demands for fiscal retrenchment and higher interest rates to improve government finance and attract foreign investors. Raghuram Rajan, the former chief economist of the IMF said: "The rationale for conditionality is not to inflict pain and suffering on the borrower but to ensure that the IMF gets repaid."