Worst is yet to come, says IMF economist
The Economic Times, 23 11 2008
The financial crisis that has engulfed many top banks is spiraling into a broader economic crisis that has yet to peak, International Monetary Fund’s top economist Olivier Blanchard told a Swiss newspaper on Saturday.
Blanchard said the crisis would continue for another year and called on governments to promote fiscal expansion and on central banks to cut rates towards zero.
“The worst is yet to come,” he was quoted as saying in ‘Finanz und Wirtschaft’ as he noted how the banking sector’s woes had started to spill over into the real economy by hitting the carmaking industry.
“This is only the beginning,” he added. “The risk exists that the data will get worse and worse, which would then lead to more pessimistic expectations and accelerate a fall in demand.”
“It will take a long time before we go back to normal condition.” Blanchard said the crisis should last for another year, but normal growth would return only in 2011. “For 2009 we (the IMF) forecast negative growth on average in the industrialized nations,” he said.” In 2010 there should be a recovery and we should go back to normal in 2011.
Blanchard said until now governments have not done enough to address the crisis and called for fiscal stimulus both in the United States and Europe. “In normal times the IMF would argue that budget deficits must be reduced….. But we are not living in normal times. Demand has collapsed. This is why a broad fiscal expansion is needed,” he said.
Blanchard said central banks should cut rates as much as possible to avert the risk of a “Great Depression” scenario. “They have to lower interest rates and bring them as close to zero as possible,” he said.
“We have to use all the ammunition that we have in order to limit the collapse of demand.”
U.S. Bank takes over Downey Savings, PFF Bank & Trust
Silicon Valley / San Jose Business Journal
U.S. Bancorp took over Downey Savings and Loan Association F.A. and PFF Bank & Trust late on Friday, ending several weeks of speculation about the financially-strapped institutions based in Southern California.
The Federal Deposit Insurance Corp. handled the deal, ensuring that both banks — and their combined 213 branches statewide — will reopen as U.S. Bank, including those operating Saturday.
Customer deposits will automatically transfer to U.S. Bank, the bank owned by Minneapolis-based U.S. Bancorp (NYSE:USB), and accounts are insured by the FDIC.
Downey Savings was the 10th largest bank in Silicon Valley, with 13 branches and $1.26 billion in deposits
here as of June 30. The Newport Beach-based bank had 170 branches overall in California and five in Arizona, with assets of $12.8 billion and deposits of $9.7 billion as of Sept. 30.
U.S. Bank was the 17th largest bank in the valley, with 31 branches and $740.6 million in deposits here as of June 30. It's parent corporation earlier this month said it was selling $6.6 billion is assets to the U.S. Treasury as part of that agency's troubled asset recovery program.
Pomona-based PFF Bank, which has 30 branches statewide, had assets of $3.7 billion and deposits of $2.4 billion. U.S. Bank takes over almost all of the assets.
So far, 22 banks have failed nationwide this year, with the most recent being Security Pacific Bank in Los Angeles.
Business Line / Nov 25 EDITORIAL
The US Government has stepped in, quite expectedly, to rescue the troubled banking giant, Citigroup. Apart from an immediate $20 billion direct cash injection, Washington is also providing a backstop against any default in the bank’s real estate related securities that are worth $300 billion. There is reason enough to believe that the ultimate fiscal burden to the US Government could be far in excess of the immediate cash outgo. These instruments are, after all, backed by commercial and residential properties that are gripped by the twin constraints of severe illiquidity and falling prices.
The latest US action will only serve to sharpen the debate over whether, in the long run, national economic interests are better served by a nuanced application of the principles of free markets that permits the State stepping in to alleviate the distress of financial entities that are ‘systemically’ important. Indeed, the US Government began to entertain doubts over an evangelical belief in the principles of capitalism in the wake of the chaos that followed the failure of Lehman Brothers, the third largest investment banking firm in that country. These developments underscore the need for a wider debate on the architecture of a global financial system with particular reference to ownership and regulatory aspects. It is a matter of some irony that the US automakers who perhaps are in as straitened a circumstance as Citigroup, if not worse, find their case deferred. This has prompted people to wonder if those managing the world’s largest economy regard Wall Street as more significant than ‘Main Street’.
The travails of Citigroup are but a manifestation of certain larger issues affecting the macro economy that experts and economic historians are bound to debate in the days ahead. Is the crisis in the US financial system an inevitable by-product of a reward structure for economic agents that laid excessive emphasis on quantitative output targets? The system, as it evolved, rewarded mortgage brokers not by the quality of borrowers that they enlisted but by the values of deals signed up. The primary lenders could not be bothered about the loan quality as long as they could find an investment banker who could bundle future cash flows on these loans and offer them to prospective investors. These investors themselves were in desperate need of outlets in an environment where interest rates were abysmally low. Throw in credit rating agencies and helpful statistical models to warrant acceptable credit rating and the picture of irrational exuberance in the housing market was complete.
Japan sinks into recession
By Peter Symonds 19 November 2008
The Japanese economy has officially entered recession for the first time since 2001, after the release of figures on Monday showing a second quarter of negative GDP growth. The data not only showed an annualised contraction of 0.4 percent for the July-September period, but revised the contraction for the April-June quarter from 3 percent to 3.6 percent.
Japan, the world's second largest economy, is the latest country to sink into recession. Last week, Hong Kong, Germany and Italy, as well as the eurozone as a whole, all announced a second consecutive quarter of negative growth. The United Kingdom and the US are expected to follow with gloomy predictions for the last quarter of 2008.
The Japanese government, economic analysts and international institutions such as the IMF and World Bank are all forecasting the recession will continue well into next year. Economic and Fiscal Policy Minister Kaoru Yosano told the media yesterday that he was "not confident" for the fiscal year starting April 2009. "I see no positive factors at home or abroad that could spur growth," he said.
Hideo Kumano, chief economist for Dai-ichi Life Research Institute, told the New York Times: "The really dark period hasn't even reached us yet. The stock declines are going to have a freezing effect. The end-of-year retail sales season will be miserable." The full impact of the international financial crisis in October is yet to be reflected in the official economic data.
Japanese export firms, which constitute the most dynamic sector of the economy, have been hard hit by the economic slowdown in China, the US and Europe as well as the rising value of the yen. The yen has gained 9.4 percent against the US dollar since the end of September.
According to the official statistics, Japanese exports rose by 0.7 percent in the July-September quarter after falling 2.6 percent in the previous quarter. However, preliminary export figures for the first 20 days of October show a sharp decline of 9.9 percent compared to the same period of last year.
Major auto and electronics companies have revised down their profit forecasts for the year. Earlier this month, Toyota, the largest auto manufacturer, foreshadowed a 74 percent drop in net profits for the financial year ending next March amid a slump in domestic and global sales.
Corporate capital spending—a sign of business sentiment—dropped by 1.7 percent in the last quarter, the third consecutive fall.
Other indicators of economic slowdown released last week included a 40.4 percent drop in machine tool orders and a 13.4 percent rise in corporate bankruptcies in October. Eight listed companies went bankrupt in October, seven of them in real estate and construction-related industries. Rent prices in new commercial buildings in Tokyo fell last month for the first time in six years.
Consumer spending, which accounts for 55 percent of Japan's GDP, continued to grow in the July-September quarter, but by just 0.3 percent. Nervous about the future, working people have been reluctant to spend.
Time pointed to "a deep-rooted pessimism" as evidenced by "abysmally low" consumer confidence. "For months, newspapers have been awash with ways consumers can ‘return to the home' to protect themselves against the economic downturn—suggestions range from buying a pasta maker rather than going out for Italian, to entertaining the kids with board games, rather than spending on family outings," the magazine wrote.
The Wall Street Journal spoke to Kaori Inoue, a housewife in western Japan, who said that her husband's income had not grown for four years, making shopping for her family more expensive as her young child gets older. She uses old bath water to do laundry to save on utility bills, and shops at three supermarkets to ensure she gets the cheapest groceries.
"We do have savings," Ms Inoue said, "but I've always pretended that we don't, because you never know what's going to happen. And now the economy is bad again. So we are trying to save even more."
The widespread pessimism is the result of nearly two decades of economic stagnation following the collapse of booming share and property prices in the early 1990s. What is often termed the so-called lost decade of the 1990s witnessed Japan oscillate between recession and long stretches of anaemic growth. The limited expansion since 2001 has been largely driven by rapid economic growth in neighbouring China, now Japan's largest trading partner.
Based on OECD projections, the unemployment rate was 4.1 percent last month. Given Japan's stringent definition of unemployment, the actual jobless figure is certain to be considerably higher and will rise in coming months.
Earlier this month, Toyota announced that it would lay off 3,000 contract workers by the end of March. Nissan has indicated that it will axe 1,500 temporary jobs. The business newspaper Nihon Keizai forecast more than 10,000 job cuts across the sector before the end of the year. Japanese semiconductor maker Rohm announced on November 7 that it planned to cut its workforce by 5 percent, or around 1,000 jobs, this financial year.
Last Friday, the Health, Labor and Welfare Ministry released figures showing a rise in the number of people receiving unemployment insurance benefits for the first time in 16 months. The total is now 606,000 in September—a 2.6 percent increase on August. The ministry also revealed that up to 10 million workers are eligible for benefits, but not registered.
A further expansion of joblessness will intensify already widespread alienation and disenchantment, particularly among young people. Over the past two decades, Japan's lifelong employment system has been badly eroded, leading to a huge expansion in the number of young people employed in low-paid, part-time and temporary jobs. An Asahi Shimbun survey released this week showed most of the country's top 100 firms intend to reduce or maintain their present level of graduate recruitment next year, forcing more young people to look for jobs elsewhere.
The economic downturn is already compounding the political problems facing Prime Minister Taro Aso. He took over as Liberal Democratic Party (LDP) leader in September, promising to fix the economy. But amid the financial turmoil, he has already been forced to ditch plans for early lower house elections. An Asahi Shimbun poll showed that Aso's popularity has plummetted to 29.6 percent, down by 13 percent since last month.
In a bid to boost the economy, the government announced a second stimulus package of 5 trillion yen ($US51 billion) last month. At the same time, the Bank of Japan cut interest rates on October 31 from the low level of 0.5 percent to just 0.3 percent. Finance Minister Shoichi Nakagawa told the media yesterday that the government might consider further stimulus measures.
The stimulus package is already embroiled in parliamentary wrangling as the opposition Democratic Party of Japan (DPJ) seeks to use the present economic crisis to force early elections. The DPJ, which controls the upper house, is stalling on two key bills to provide economic assistance to troubled regional banks and to authorise Japanese military assistance to the US occupation of Afghanistan. Having initially opposed the first stimulus package, the DPJ has now done an about face and is demanding that the government give priority to the second one.
Even if he succeeds in implementing his economic measures and avoiding an early election, Aso confronts a deepening economic and political crisis. The Nikkei share index sank another 2.28 percent yesterday—total losses for the year stand at more than 44 percent. Most economists predict at least another two quarters of negative economic growth, while others are considerably more pessimistic.
Junko Nishioka, chief economist at the Royal Bank of Scotland, told Time that she expects at least another two years of negative growth. With weak export and domestic demand, she told the magazine, there is "no positive driver in the Japanese economy if you think about the two-year horizon."
Bankers bet big on FDs
Business Standard / Namrata Acharya / Kolkata / November 25, 2008
Banks are hard-selling fixed deposit (FD) schemes like never before to mop up funds from depositors. While trying to stay away from high-cost bulk deposits, banks are busy advertising attractive deposit rates that are on offer, lining up road shows and door-to-door campaigns. Some of them are even offering incentives to their employees to woo depositors.
As a result, bankers said they expect to mop up more than 20 per cent of what they usually do during November. Banks have also stepped up the deposit-mobilisation drive this month because most of them have announced that they will be reducing interest rates from December. At present, most public sector banks are offering an interest rate of around 10.50 per cent, and 11 per cent for senior citizens, on one- to three-year deposits.
“It is a matter of raising resources. We have decided to reduce interest rate on bulk deposits, which (their share in the total portfolio) are expected to come down. Most banks have decided that they will not pay over 9.5 per cent on bulk deposits,” said United Bank of India Chairman and Managing Director S C Gupta. “We will take a call if we will reduce rate of interest on retail term deposits by December so that our retail customers are not affected,” he added.
The bank had launched a special campaign called Rainbow, under which its branches are offering reward points for mobilising retail deposits. It has set a target of garnering Rs 5,000 crore of retail-term deposit by March 2009. Last month, Allahabad Bank also kicked off its Diwali Bonanza scheme for a limited period, offering 10.5 per cent on term deposits of one to three years. Though the bank has decided to reduce rates, the scheme is still on.
“When all our competitors were offering high interest rates, it was very difficult for us to attract retail customers. So, we were a bit late in increasing interest rates. We tried to motivate our employees to get more retail customers and started campaigns for mobilising saving accounts, term deposits and recovery,” said a senior executive at Allahabad Bank.
“During November, there is more than a normal increase in the number of fixed deposits. Next month, we will take a view on when to reduce deposit rates,” said a senior Uco Bank executive. “People are hurrying to park funds as they expect a rate cut in December. Also, due to the financial turmoil, many people are transferring funds from private banks to public sector banks. As a result, there has been a very significant increase in the number of FDs,” a Syndicate Bank executive said.
The effect of the special drive is already showing. Union Bank of India has mopped up Rs 5,000 crore through its 900-day deposit scheme, offering 10.5 per cent interest. “We closed the scheme recently, but our retail deposits have grown by over 25 per cent during the present financial year compared with 10-15 per cent in the corresponding period last year,” said S Govindan, general manager (personal Banking and operations), Union Bank of India. So far in 2008-09, the bank has mopped up Rs 11,000 crore through retail deposits.
ON A ROLLTop ten public sector banks
State Bank of India
Punjab National Bank
Bank of Baroda
Bank of India
Central Bank of India
Union Bank of India
Indian Overseas Bank
55,081.89Similarly, Bank of India’s campaign from October till the end of December to focus on retail deposits of up to Rs 15 lakh has seen it mopping up around Rs 3,000 crore so far. “We hope to add another Rs 500 crore over the next one month,” said Bank of India Executive Director B A Prabhakar.