Wednesday, October 8, 2008

Who is Going to Lend?

This question is more fully, which nations have the wherewithal,the worth, and the poltical capital / desire to lend the massive amounts of money necessary to facilitate the US economy?

A discussion of the potential players:
  • Russia: Not that anyone really expected to US to explicitly borrow money from Russia (imagine?), but it is not likely they'll be able to participate even in some kind of G8 proposal. With oil no longer being seen as a store of value, and again being seen as a commodity, of which there will be significantly reduced demand with a global recession, Russia is no longer the strong hand it was a handful of months ago.

  • Germany: Germany's banks are being ravaged by the banking failures in that country and their economic allies within the EU. Hypo bank has failed, Commerzbank and Deutsche are being attacked, and Germany has taken the extraordinary step of insuring all of its bank deposits. This, from a country where deposit insurance was a weird and complicated combination of public and private efforts (unlike the US) prior to the crisis.

  • United Kingdom: With the failures of Northern Rock, Bradford & Bingley, and the call for funds from the Royal Bank of Scotland, and the forced takeover of HBOS, not to mention the delitirious political ramifications of the UK support for the Iraq and Afghanistan wars; the UK, quite simply does not have the political capital, even if it had the money, to write a very large check to the United States.

  • China: China already holds at least $519 billion in US Treasuries. Certainly the value of these Treasuries has temporarily sky-rocketed with this crisis, but they know how destabilizing a mass sale to raise fresh capital could be. China has purchased the US Treasuries, in many ways, to establish a strong currency base with its largest trading partners given its export heavy economy. Unfortunately, nearly half of it's USD based assets were in GSE mortgage backed securities that have rapidly declined in value. China's central bank reserves now may be woefully short as a result.

    With shrinking global demand as evidenced by the Baltic Dry Index, China will be weary to lend more money, as an increase in trade any time soon is improbable. Moreover, with the US constantly putting China's political head on the proverbial chopping block as a 'currency manipulator' and other epithets:
    One frequently hears that China’s banks, capital markets and investment systems are inefficient, technically insolvent, and in desperate need of foreign invigoration.

    But Chinese senior leaders, supported by China’s successful record, don’t accept this assessment. Decades-old claims that China’s financial system is broken have grown stale, despite their repetition by international agencies, Wall Street and some academics. Data show that China’s financial sector—reforming rapidly on multiple tracks—successfully channels funds to essential infrastructure, profit-oriented firms, home mortgages and consumer credit. Meanwhile, world-class financial market reforms need at least a decade to mature.

    China may take a stern tone to any willingness it may have in helping, possibly in the form of devastatingly high interest rates. An idea for Chinese intervention has been proposed at the Financial Times:

    The Chinese government could offer to lend up to $500bn (from its current stock of $1,800bn) to the US government for the rescue of its financial sector. Its previous assistance – buying US bonds – was indirect and unconditional. Not so in this case.

    China’s loan offer would be direct to the US government to be spent in the current financial crisis. More important, it would come with strings attached. Tied aid, the preferred mode of operation of western donors since the postwar period, would now be embraced by China.

  • Japan: Japan has seen a strengthened currency (a declining number represents an increasingly valuable yen relative to dollar, as fewer yen are required to purchase one USD) and has limited exposure (estimated to be a mere $8 billion) to the worst securities at the root of much of the present turmoil. They have seen banking / credit crises for nearly 20 years, and their largest trading partern was the United States (now second largest). Moreover, the Japanese economy is rich with an overabundance of savings to lend. If any of our trading partners are likely to facilitate a large US bailout, I believe it will be led by Japan.


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