The US financial crisis has hit Europe in a massive way. European Banks - including Germany’s biggest, Deutsche Bank, and UK giant Barclays - may have to write down as much as $28.4 Billion in the second half of this year according to bank analysts. This would bring the total write-downs to around $ 116 Billion.
The world’s biggest wealth managers - like UBS and the Lloyds TSB group - will also write down as the value of US commercial mortgage-backed securities, real estate and loans sinks. Barclays is estimated to lose another $3.7 billion, while Lloyds TSB is expected to post a whopping credit loss of $ 5.7 billion in the second half of this year.
The European Commission wants Europe to strengthen the supervision of multi-national banks, tighten the rules on evaluating complex assets such as securities backed by high—risk mortgages and harmonise national deposit-guarantee schemes. Moreover, the executive body of the European Union has approved a plan to reform the capital requirements of financial companies and propose to reform the rules on rating agencies.
In response to the global financial turmoil, the British government in a desperate attempt to prop up the confidence of consumers has made a plan to raise the deposit-guarantee limit to $50,000 , up from the current guaranteed limit of $35,000. Ireland earlier has pledged to offer an unlimited or blanket guarantee on savings.
However, with credits markets remaining very tight, making tough rules on bank security and supervision can exacerbate the situation and even freeze the loan markets. The situation in Europe turned glimmer when the British government had to seek the European Commission’s approval to nationalise and sell mortgage lender Bradford and Bingley at the same time as the launch of an official investigation into German state government support for the WestLB bank.
What is also worrying to Europe and the rest of the world is the outlook for the US dollar, which looks very bleak and vulnerable indeed. According to Weiss Research, the burden of funding massive US government bail-outs is too much to bear and likely to have a downward spiral effect on the US dollar. Next year’s US federal deficit is predicted to balloon to US$482 billion, not to mention the incremental $ 985 billion cost of bail-outs. Therefore, the US federal deficit could double or triple very soon.
A substantial increase in the deficit would definitely push up the cost of borrowing for the US government. In a likely case, the Federal Reserve may have to help prop up the demand by buying US government debt securities. This is tantamount to printing money irresponsibly, and will cause the dollar to move precariously, risking more turmoil in the global economy and financial system.
It is very possible that the US may fail to fix the current meltdown any time soon. There may be more financial storms around the world. Panic may continue and pain may be prolonged. Investors and savers around the world are likely to hoard their cash and may put the rest in highly secured assets such as government bonds and gold.
By Chodechai Suwanaporn [email protected]
Source: Fiscal Policy Office / www.fpo.go.th