morbius glass

Reviews – Comics, DVD’s, Books. Finance – FX markets, Stocks, Economics. Culture

A new liquidity crisis looming. Could a declining USD spark a currency crisis?

Posted by Adrian on November 8, 2007

The credit markets have suffered huge losses and are now under very shaky ground, banks like Citigroup Ltd have now disclosed losses in the 11 billion range, after backing bad loans from the mortgage meltdown in America, but most of the big investment banks have endured huge writedowns that have been estimated at 100 billion to 500 billion.

The credit crunch has emerged again in the UK, where in August 2007 and September 2007 one bank Northern Rock needed emergency funding from the Bank of England, which sparked massive over the counter withdrawals from it’s customers. Now, the Royal Bank of Scotland appears to be in trouble, as does Barkleys Bank either from writedowns, shrinking balance sheets, losses and toxic waste sitting in conduits. Either way, this will cause consumer panic again, instability in the banking sector and a global liquidity freeze, in other words banks will stop lending to other banks indefinitely. There appears to be no end in sight for the crisis sweeping the financial sector, from CNNbusiness:

Stocks retreated at the start of the session on dismal earnings news from General Motors, before the battered financials once again became the trading focus.

Banks and brokerage stocks tumbled following a handful of warnings issued Wednesday that more writedowns were likely before the year’s end.

Citigroup (Charts, Fortune 500) continued its recent decline, falling 3 percent. Morgan Stanley (Charts, Fortune 500) stock lost over 5 percent while Goldman Sachs (Charts, Fortune 500) fell over 3 percent and Lehman Brothers (Charts, Fortune 500) was over 4 percent lower. The AMEX Securities Broker/Dealer index (Charts) was 3.4 percent lower.

But as the US financial sector get’s battered, will Europe suffer the same fate? The fear is the European banking sector may not have enough capital to shake off a storm of losses, from FT.com:

“Once again, banking stocks led the market lower, with Royal Bank of Scotland among the sector’s worst performers. It shares fell 3.9 per cent to 438p on fears that it may require a rights issue to shore up its balance sheet, which has been stretched by the recent acquisition of Dutch bank ABN Amro.

Those worries were heightened by a note from Citigroup. Analyst Simon Samuel said he had benchmarked the European banking sector against a number of standard capital measures with alarming results

“What unfolds is that Europeans banks have significant capital deficits that would require recapitalisation to the scale of 5-20 per cent of market capitalisation,” Mr Samuel said.”

So with a harsher liquidity crisis looming, a potentially perfect storm of worrying developments in the world economy are forming too, one is the pending collapse of the US Dollar. Rumors that China may sell of it’s USD reserves to back a favorable currency like the Euro have emerged. The USD as a world base currency has lost a lot of it’s purchasing power due to the American economy keeping rates low and now cutting rates, which has all contributed to printing more of the ‘greenback’.

Can the world turn to a more secure currency like the Euro as a base currency? With an unstable worldwide market, a severe credit crisis worldwide forming, rising inflation in both the northern hemisphere and southern hemisphere, rising oil, food, energy costs. Is there such thing as a safe haven base currency? In my opinion European problems are going to be on par with America, as far as financial instability, especially in the banking sector. Are middle eastern and Asian countries namely China antagonizing the US, as far as their threat in un-pegging or selling off their USD currency reserves? Possibly. Even with the Euro being a high yielding currency, an extremely volatile market could dump the Euro without a second thought. But, if the threat of dumping the USD does happen, lead by China and we do see an unpegging from the Saudi Arabian Riyal and other currencies pegged to the USD – this would lead to a massive currency crisis, as a world base currency could not be determined, short term base currencies will hold little hope in replacing the USD.

Will Asian be able to whether a storm of various financial market turmoils? In some ways Asia is not overtly effected by the liquidity/credit/currency crisis from the disintegrating American economy. But China, like other parts of Asia are all developing huge bubbles, namely stock, real estate that could come tumbling down and burst at any point, from FT.com:

“Most commentators agree on three things about the Chinese stock market.

First, there’s a bubble. Second, the bubble is the result of excess liquidity in the Chinese financial system. Third, the madness of crowds in Shanghai and Shenzhen shouldn’t particularly concern Western investors. They are correct on the first two points and woefully wrong on the third.

The Shanghai stock market has climbed by around a third since early August and more than 300 per cent since January. In a recent talk, Peter Tasker, of Arcus Investment in Tokyo, described the course of the Chinese boom using a multi-stage model developed by the economist Hyman Minsky.

The bubble starts with a “displacement” which gives investors something new to reckon with, such as Japan’s rise in the 1980s and China’s emergence as an economic superpower over recent years. The rise in stock prices, initially slow, gathers momentum. In China, around 5m new brokerage accounts are opening every month. These neophyte speculators overtrade.”

So if a liquidity/credit and currency crisis globally hit’s hard, the other fear for western markets is the Chinese stock market bubble, if that bursts, according to FT.com online this will undoubtedly effect our markets FT.com:

“As China overheats, inflation is picking up. Sooner or later, Beijing will have to grasp the nettle. When excess liquidity is mopped up, Chinese stocks will fall. But the banking system could also suffer problems and the economy find itself plagued with too much manufacturing capacity and falling profits.

That’s what happened in Japan. Foreign investors may not be directly exposed to Chinese stocks but they are unlikely to escape the aftermath when this bubble bursts.”

Advertisements

2 Responses to “A new liquidity crisis looming. Could a declining USD spark a currency crisis?”

  1. […] Please also refer to A new liquidity crisis looming. Could a declining USD spark a currency crisis? […]

  2. I’ve seen a bunch of stuff related to investing in online books and posts and the majority of it looks to me to be contradictory. It’s so difficult to find reliable information that’s built on actual truth and not just some dude’s opinion.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

 
%d bloggers like this: