Tuesday, 10 February 2009

Urgent -- Senate Passes Stimulus Package, Geithner Unveils $2 Trillion Bank Rescue Plan

Click here for the NYT story on the passage of the stimulus bill in the U.S. The package was approved in a 61-to-37 vote, paving the way for negotiations with the Lower House for the $838 billion bill.

Also, Treasury Secretary Timothy Geithner offered more than $2 trillion worth of funds to aid ailing banks and kick start lending. Click here for Bloomberg News' take on this story.

Courtesy of a Reader: Check on This Posting by Zero Hedge Blog

Click here on this link to read this posting by Zero Hedge, a blog about the crisis.

Interesting ... Writes our reader: ''Did the world economy almost collapse on Sept. 18 ??? Don't know what to make of this, but if true.... gad ..´´

Thanks, Mr. reader.

Fitch Vs. Mexico: Part II

Here is the text of the Reuters story about the impact of Fitch's comments on the Mexican peso:
''Mexico's peso weakened on Tuesday after credit ratings agency Fitch said on Monday it is monitoring Mexico's recent currency intervention actions to decide whether to downgrade the country's debt ratings. The peso lost as much as 0.57 percent to 14.2790 per dollar, slipping for the first time in four days.´´
Last week, the Banco de Mexico (Banxico) stopped disclosing information on its foreign-exchange market interventions, seeking to stop a slide in the currency that sent the peso to a record low. Banxico has since been buying pesos from banks, and witholding information on the amounts purchased. The bank therefore moved from a model of transparency to the other extreme. We guess it is aimed at discouraging speculation -- but scrapping transparency has its costs obviously. Fitch rates Mexico's long-term foreign currency ratings at BBB+, the third lowest investment grade ranking.

Reuters Gives Details on Bank Bailout Plan in the U.S.

According to Reuters, the Treasury Department's bank rescue plan will set $50 billion for foreclosure mitigation, $100 billion for ''bad bank´´ public-private partnership, $100 billion to expand Fed’s TALF program, and another $100 billion for bank capital injections. The news company obtained the information from sources familiar with the drafting of the plan.

This indicates that there is growing concern over the quality of loan portfolios and balance sheets, and the ability of banks to ramp up capital. The Obama administration said it would seek to provide Main Street first with an aid package, suggesting it was less concerned about the health of banks. The Reuters story suggests that the new plan would also extend the Federal Reserve's programme to revive consumer and mortgage lending, stretching up aid to $1 trillion in loans -- mainly aimed at holders of illiquid asset-backed securities and short-term debt.

Fitch May Downgrade Mexico Ratings Due to Interference in Currency Markets: Reuters

Well, this was way unexpected. We will try to get back later on with more details on this one.

Brazil Inflation: Temporary Uptick in Prices Shouldn't Have Significant Impact on Rate-Cutting Programme

The IPCA index, Brazil's benchmark inflation measure, gained more than forecast by analysts in January, mainly driven by food prices. These rose on speculation that a drought affecting the country will trim supply for the coming months. We believe that is a seasonal trend. The increase in the monthly IPCA was 0.48 percent; the 12-month number slowed to 5.84 percent in January from 5.9 percent in December. What seems to be a consensus among market participants, which we share in MM, is that inflation will continue to decline rapidly along the first six to nine months of the year, driven by weaker consumption and declining import demand, opening space for monetary easing front-loading by the Banco Central do Brasil.

Yet, most analysts are forecasting the IPCA to accelerate. Inflation is likely to come in at around 0.6 percent ot 0.65 percent this month, because of another seasonal round of increases in school fees. Government-controlled rates may rise too, driven by higher public transport fares in key cities. On the other hand, food and entertainment costs may probably help bring down inflationary pressure. In general, the markets are expecting a decline of 75 basis points to 100 basis points in the Selic for March. I am much more on the side of tose who expect a larger cut -- because of the markedly economic deceleration that we witnessed in the past month.

Now, read what Banco Itau economists are predicting for the Selic in the next monetary policy meeting. This comes courtesy of a source:

"We now expect the central bank to step up to a 150 basis-point cut on Mar 11, bringing the Selic to 11.25 percent. In our view, frontloading the cycle, rather than
smoothing it out, is the right response to fragile growth, falling inflation risk, and broken confidence. We still favour a total easing of 300 points, but the risk is rising that the centrak bank will go deeper than that.´´

More Declines in Emerging Market Debt Funds Were Recorded Last Week, Says EFPR

In the week ended Feb. 4, emerging market debt funds recorded outflows of $259 million, or about 0.6 percent of assets under management, according to EFPR. In the previous week, outflows were $251 million. Market price fluctuations led to over $400 million in declines in the value of assets across the board., while currency fluctuations sparked a further $257 million in value losses. This year, debt funds have shed almost $1 billion in value.

Brazil Car Loans and The Risk They Pose to the Health of Credit Portfolios ... With The Help of the Government

According to a report by the National Association of Auto Financing Companies (Anef), 64 percent of total sales of vehicles, buses and trucks in Brazil were financed through loan agreements. Lease agreements accounted for about 38 percent of the total, reaching 57 billion reais (about $22 billion.) Adding up leasing contracts to direct financing for consumers, (a modality of credit that is known in Brazil as CDC), the portfolio of auto loans rose 24 percent last year to 138.1 billion reais. The Lula government must be proud of the numbers, for sure.

The problem is -- because there is always a ''but,´´ -- auto loans have become one of the riskiest segments of credit in Brazil. As we have seen in the media, in this blog and the TV and almost everywhere, more than 800,000 jobs were lost in Brazil in the past three months. As we can infer from such development, the drop in employment and job quality has a causal impact upon the quality of credit portfolios. No analyst in the financial industry says it clearly, or openly, but auto loans are becoming a problem -- and they will become a real pain in the medium term: debtors have become quite vulnerable to the job market fallout, the collateral involved is a fast- and highly-depreciating one, the low borrowing costs practiced by banks for the past three years might be unable to cover the risks of rising defaults and, especially, the loans have long duration.

Now -- the media reported this, not me. Banco do Brasil, the powerful state-controlled lender that lost No. 1 spot in Brazil last year, is the biggest lender for car buyers in Brazil. Banco Votorantim, through its consumer finance unit, is another important player in this market. It happens that BB bought 49.99 percent of Votorantim not long ago. I wonder whether one serious analyst in Brazil has warned us about the potential risk embedded in this transaction, talking solely about the car loan issue. The only thing I get to read about the BB-BV transaction is that BB paid too much for its rival, that synergies could be relatively hard to implement, ... nothing about the quality of their portfolios or the vulnerabilities that both banks face amidst this crisis.