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World Crisis scenarios for the 21st century – Worldwide economic depression. (update 9)

Posted by Adrian on January 11, 2008

World Crisis scenarios for the 21st century – Worldwide economic depression. (update 9)

The seriousness of shrinking bank balance sheets from the avalanche of defaults from mortgages in the US, has caused not only the big investment banks on Wall Street to feel the pinch, so much so that various amounts of cash has been injected into the banks from other investors, namely from China and Singapore. But the fear is the amount of smaller banks globally that may start to show signs of trouble, in a more extreme scenario of banking failures on a global scale; the question should be asked how many banks will become insolvent from the liquidity/credit crisis? Or losses on mortgage defaults? The smaller regional banks may suffer, the UK in particular has shown this with Northern Rock bank nearly going under, only to be lifted out by the Band of England. At this point no information as been made available if any European banks have been drastically effected and are on the brink of insolvency. But, just recently the battered and struggling Countywide US bank that dealt primely with mortgages and savings has indicated (although not confirmed by the bank) through it’s absolute hammering from the subprime meltdown and then bail out by the Bank of America in August 2007 (of the amount of 2 Billion dollars); that it is near bankruptcy.

Regardless, even if bankruptcy has not been officially disclosed, the insolvency rumour recently was a contributing effect on both US and Europe stocks (negatively) on the 9 Jan 2008; the rumour in the markets was centered around the amount of money that has been loss by Countrywide’s creditors. Whether or not Bank of America increase their stake in Countrywide to keep the bank afloat, which is further an indicator that the bank is on the verge of bankruptcy. The question is how many other banks, even large asset based ones could be in trouble, of course panic would not be an ideal situation. But with banks protecting their balance sheets and relying on consumer deposits – losses and writedowns will cause harm to banks on a significant scale, no matter how much shored up capital is in their accounts from bank deposits.

But where are the banks getting their capital from? Since the credit crisis and liquidity crisis gripped the global banking sector in mid 2007 right into 2008. The amount of money that is transferred between institution to institutions is tightening, even though the interbank and libor rates have eased from the Central banks cash injections last year (although even the European Central Bank may be reluctant to pour too much money into the interbank markets). The interbank lending market is still very volatile.

Saving rates among the US consumer is at an all time low, refer to graph:

save_personal.gif

It may be the smaller banks, that will not survive the prolonged, and serious liquidity/credit problems facing the world financial sector; but one should watch the larger banks as well.

” Countrywide Chief Executive Officer Angelo Mozilo, 69, has failed to quell concern that the company he founded in 1969 may go bankrupt. The lender posted its first loss in 25 years during the third quarter. Mozilo had said he preferred to keep Countrywide independent rather than sell amid what he called the worst housing slump since the Great Depression.” Bloomberg

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One Response to “World Crisis scenarios for the 21st century – Worldwide economic depression. (update 9)”

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