European Union Financial System Might Be Even Worse Off

The media tend to focus on the credit crisis too much on just the US and maybe the UK. Even the secondary focus was largely on how China would figure in being a catalyst for recovery. There are pockets of the world that are facing the crisis with more devastation, and urgency for help. In a sense for them, its should be called a debt crisis rather than a credit crisis. We are talking of Eastern Europe, Western Europe, Russia and Ukraine... hey, basically the EU. Most of what's written below was taken from The Telegraph, UK.

In much of Western Europe, things are nearing boiling point. Austria's finance minister Josef Pröll made frantic efforts last week to put together a €150bn rescue for the ex-Soviet bloc. Well he might. His banks have lent €230bn to the region, equal to 70pc of Austria's GDP.

"A failure rate of 10pc would lead to the collapse of the Austrian financial sector," reported Der Standard in Vienna. Unfortunately, that is about to happen.

The European Bank for Reconstruction and Development (EBRD) says bad debts will top 10pc and may reach 20pc. The Vienna press said Bank Austria and its Italian owner Unicredit face a "monetary Stalingrad" in the East. Mr Pröll tried to drum up support for his rescue package from EU finance ministers in Brussels last week. The idea was scotched by Germany's Peer Steinbrück. Not our problem, he said. We'll see about that.

Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay – or roll over – $400bn this year, equal to a third of the region's GDP. Good luck. The credit window has slammed shut.

Not even Russia can easily cover the $500bn dollar debts of its oligarchs while oil remains near $33 a barrel. The budget is based on Urals crude at $95. Russia has bled 36pc of its foreign reserves since August defending the rouble.

In Poland, 60pc of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly – by lenders and borrowers – it matches America's sub-prime debacle. There is a crucial difference, however. European banks are on the hook for both. US banks are not.

Almost all Eastern bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. En plus, Europeans account for an astonishing 74pc of the entire $4.9 trillion portfolio of loans to emerging markets. They are five times more exposed to this latest bust than American or Japanese banks, and they are 50pc more leveraged (IMF data).

Spain is up to its neck in Latin America, which has belatedly joined the slump (Mexico's car output fell 51pc in January, and Brazil lost 650,000 jobs in one month). Britain and Switzerland are up to their necks in Asia.

Whether it takes months, or just weeks, the world is going to discover that Europe's financial system is sunk, and that there is no EU Federal Reserve yet ready to act as a lender of last resort or to flood the markets with emergency stimulus. The European Central Bank already needs to cut rates to zero and then purchase bonds and Pfandbriefe on a huge scale. It is constrained by geopolitics – a German-Dutch veto – and the Maastricht Treaty.

It is East Europe that is blowing up right now. Erik Berglof, EBRD's chief economist, said that the region may need €400bn in help to cover loans and prop up the credit system. Europe's governments are making matters worse. Some are pressuring their banks to pull back, undercutting subsidiaries in East Europe. Athens has ordered Greek banks to pull out of the Balkans.

The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan – and Turkey next – and is fast exhausting its own $200bn (€155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights. Its $16bn rescue of Ukraine has unravelled. The country – facing a 12pc contraction in GDP after the collapse of steel prices – is hurtling towards default, leaving Unicredit, Raffeisen and ING in the lurch. Pakistan wants another $7.6bn. Latvia's central bank governor has declared his economy "clinically dead" after it shrank 10.5pc in the fourth quarter. Protesters have smashed the treasury and stormed parliament.

In almost every way, this is much worse than the Asian financial crisis in the late 1990s, as indicated by the table below. There are accidents waiting to happen across the region, but the EU institutions don't have any framework for dealing with this. The day they decide not to save one of these one countries will be the trigger for a massive crisis with contagion spreading into the EU. The governments and ECB cannot risk NOT saving any one country or banking institution, but that strategy is drawing almost all the reserves and ammunition these institutions have.

Europe is already in deeper trouble than the ECB or EU leaders ever expected. Germany contracted at an annual rate of 8.4pc in the fourth quarter. Germany will have shrunk by nearly 9pc before the end of this year. This is the sort of level that stokes popular revolt. The implications are obvious. Berlin is not going to rescue Ireland, Spain, Greece and Portugal as the collapse of their credit bubbles leads to rising defaults, or rescue Italy by accepting plans for EU "union bonds" should the debt markets take fright at the rocketing trajectory of Italy's public debt (hitting 112pc of GDP next year, just revised up from 101pc – big change), or rescue Austria from its Habsburg adventurism.

Hungary’s forint fell to an all-time low in recent days, and Poland’s zloty slumped to the lowest in five years on plunging industrial output. Half of all loans to the private sector in Poland are in foreign currencies so borrowers face a severe debt shock after the 40pc fall of the zloty against the euro since August.

There are contagion worries for Western banks that have lent $1.74 trillion (£1.22bn) to the ex-Soviet bloc -- split between $1 trillion in foreign loans and $700bn in local currency debt through subsidiaries. Austria’s banks are the most exposed with the share of risk-weighted assets tied to the region reaching 54pc for Raffeisen and 38pc for Erste Bank. The exposure of Germany’s Bayern Bank is 48pc, Italy’s UniCredit is 45pc, and Swedbank is 29pc.

The region needs to roll over $400bn in foreign debts this year, equivalent to a third of total GDP, raising concerns that it may need a massive rescue programme from the International Monetary Fund and the European institutions.

p/s photos: Elva Hsiao

Wen Jiabao Can Criticise But Putin Should Shut Up!!!

At the current Davos summit, many leaders have whacked the US for its role in bringing the global economy to its knees. Wen Jiabao of China can criticise, but OMG Putin should shut his face. For my life, I cannot understand why Russia was invited into the G8 and not China????? Why does he have the gall to even criticise the US? Its like Thailand advising Malaysia on how to play better politics, or rather, like Malaysia advising Thailand on how to play better politics!

Why Russia should shut up:

a) Despite the huge run up in oil price and hence Russia's reserves, the country did not improve its infrastructure. It allowed Russian gang leaders (or some may call them oligarchs) to lead many big companies, and when things do not go their way, these ballbusters would use the courts, extortion, kidnapping and murders to get their way. Foreign investors who have been in Russia can attest to that.

b) While opening arms to welcome foreign funds, Russia also openly go about nationalising industries whenever they wanted to, or coerce foreign interests to sell back their stakes whenever Russia wants. Now they are angry when foreign funds flee Russia in droves over the past 12 months... wonder why?

c) Business has been firmly reminded that in a country where traditional institutional mechanisms for the implementation of policy are weak, the informal lines of communication should be respected. Its a whole load of bureaucracy and tinged with vested interests everywhere.

d) According to Insead, some recent moves by the Russian central government suggest that foreign companies may face new formal and informal hurdles such as restrictions on investing in certain industries without presidential approval. The current challenging atmosphere creates greater possibilities for those firms that acquire this knowledge to reap greater profits. For example, a company is often served by such simple actions as paying regular visits to government officials, inviting bureaucrats to visit the foreign company, and helping to administer local programs such as work-force retraining or upgrading health care facilities.

e) Compared with the other BRICs, Russia’s market infrastructure is only moderately effective because of the government’s significant participation in and direct ownership of firms. Of Russia’s 80 largest public companies, 71% had a controlling shareholder. Among these controlling stakes, the government held 30%. An additional 21% (of the 80) had one or more blocking shareholder (those with a 25% or greater stake), with the government representing 10% of these. In Russia, the government’s influence is particularly strong at large “strategic companies,” and the combination of a bureaucratic approach to management and continuing pockets of government corruption can hinder the development of more effective corporate governance across a range of industries.

f) The problems with the ruble and Russia's fragile oil base economy seem to be rooted in an erroneous perception of the Russian economy, as the government is echoing the course that was taken following the 1998 default, but the present situation is drastically different. Ten years ago, most prices and salaries were in dollars, and those who were able to keep their jobs had their incomes indexed. Now, everything is mostly in rubles. The consumption growth model has been in place for the last eight years. It has been stalled and it is time to move on to an investment-based economy to improve production. Now they’re still following that model trying to get people to go and spend their savings by allowing further devaluation and inflation; whatever positive effect it has will be only short-term and we’ll still have the same model in place.

Russia, don't go blaming someone else for your problems. Yes, the US credit implosion had some effect but if you had improved your infrastructure, balance sheet, stopped bullying smaller former nations into submission, rein in your gang-like oligarchs, sell more government shares, improve shareholders' rights, treat foreign investors fairly and not in a Sopranos-way, regulate your banks better.... Russia might not be in such a pile of heap.

Russia should not be criticising the US until it has improved their market transparency, accountability, regulatory effectiveness, protection of minority shareholders... its like Iceland criticising the US, shuddup already!!!

Putin is mad because the ruble has totally collapsed, foreign investors have left in droves, and most galling is the fact that Russia used to get above $120 per barrel of oil just a year back. Now he is using the platform to criticise the US and everybody else for heaping troubles onto Russia. Please la Putin, why I don't hear you saying "Gee, oil at $140 is totally out of whack, it is unsustainable, its the US liquidity pushing up commodity prices... you guys beware OK"... If you were smiling when oil was raking in dough above $100... well, take your medicine now. You cannot have it both ways, grow up.

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Various News Media: Wen Jiabao and Vladimir Putin on Wednesday blamed the United States for causing the global economic crisis on a gloomy first day of the Davos forum. Both called for a new attitude by President Barack Obama, while deepening pessimism over the future of the global economy enshrouded the World Economic Forum.

Chinese premier Wen said America's voracious appetite for debt and 'blind pursuit of profit' had led to the worst recession since the Great Depression which has rocked the 2,500 strong political and business elite gathered in the Swiss mountain resort.

Mr Putin said the disappearance of some Wall Street titans over the past six months testified to the errors committed. Mr Wen blamed the crisis on 'inappropriate macroeconomic policies of some economies' and 'prolonged low savings and high consumption,' in a lightly veiled attack on the United States. He blasted the 'excessive expansion of financial institutions in blind pursuit of profit and the lack of self-discipline among financial institutions and ratings agencies' while the 'failure' of regulators had allowed the spread of toxic derivatives.

Mr Wen said the crisis had posed 'severe challenges' for China and that it needed 8.0 per cent growth in 2009 to maintain social stability while the International Monetary Fund predicted 6.7 per cent for this year. The Chinese leader called for faster reform of international financial institutions and for a 'new world order' for the economy.

The Russian prime minister followed him to the podium and said the crisis had been a 'perfect storm'. He also took aim at US banks and the outgoing US administration.' Although the crisis was simply hanging in the air, the majority strove to get their share of the pie, be it one dollar or one billion, and did not want to notice the rising wave.'

Mr Putin insisted that he would not join critics of the United States, but added: 'I just want to remind you that just a year ago, American delegates speaking from this rostrum emphasised the US economy's fundamental stability and its cloudless prospects. Today investment banks, the pride of Wall Street, have virtually ceased to exist. In just 12 months they have posted losses exceeding the profits they made in the last 25 years. This example alone reflects the real situation better than any criticism,' said Mr Putin.

Mr Putin called for a constructive attitude from Mr Obama in international affairs. 'We wish the new team success. I hope they are willing to cooperate constructively,' he said.

US tensions with China have been raised in recent days with new US Treasury Secretary Timothy Geithner saying Mr Obama believes China manipulates its currency to gain an edge in trade. 'In meeting the international financial crisis, it is imperative for the two countries to enhance cooperation, that is my message to the US administration. Three decades of formalised ties between the United States and communist China had shown that 'a peaceful and harmonious relationship will make both sides winners, while a confrontational one will leave both losers,' he added.

p/s photo: Akumsiri Suwansook

OPEC, Oil Price & Destabilised Countries

RGE: As anticipated, OPEC cut production in its October 24 Meeting. OPEC agreed to reduce production from its output ceiling by 1.5 million barrels a day from where it is currently set at 28.8 barrels a day. OPEC has been producing well over this quota for much of the summer and fall - so the reduction could be even larger. However as suggested in the piece below, written Oct 23, the prospect of even weaker demand as the economic climate worsens and the effects of wealth losses sink in, continued to push oil, other commodities and global equities downward.

However now reduced demand and financial panic are pointing in the same direction - a lower oil price. We could see prices in the mid-$50s over the next few weeks, even if oil rebounds as it seems now to be doing.

However, first off, we will see how OPEC members implement the cuts - Saudi Arabia is responsible for about 1/3 of the cuts - 466,000 barrels a day, Iran 199,000 and UAE and Kuwait about 130,000.

The farther the oil price falls the greater the likelihood OPEC members might cheat on their quotas to maximize revenues as occurred in the 80s and 90s. Deeper production cuts might be needed for a real price increase which would be difficult for producers and an oil price much higher than current levels could exacerbate the economic crisis and delay the expansion and thus demand for its commodity.

There are no shortage of uncertainties pervading the market - uncertainties specific to the oil market include - how much demand has been destroyed and how OPEC members would react to persistently lower prices.

The downward trend of oil prices (and those of most commodities) has been pretty unstoppable since investors finally realized that $147/barrel was too expensive in the face of a global recession. The belated recognition that this was a global and not a US centered crisis contributed to the initial turnaround and the escalation of the credit crisis has been marked by major losses in equity and commodity markets - and increased volatility. With credit markets still relatively frozen and the macro costs of the financial crisis still ahead, the outlook is gloomy for oil demand. And as mentioned before, it doesn’t take much of a reduction in demand, to trigger a big correction, especially when uncertainty abounds in global financial markets. With frequent news of foreclosures, flailing hedge funds, its no surprise that few want to take a risk in holding commodities.

The price for a barrel of OPEC crude is sitting at just over $60 a barrel - WTI is not much above $70. Some OPEC members have already suggested that the market may be oversupplied by as much as 2 million barrels a day.

OPEC faces several challenges 1) they don’t want to be blamed for exacerbating economic weakness 2) they want to maximize their revenues 3) they don’t want to overly encourage alternatives to oil or competition from non-OPEC suppliers. However, their biggest concern may be the continued panic in financial markets and mounting demand losses

Given the likely macro effects of the persistent freezing of the credit markets, economic output will continue to slow – and so should demand for hydrocarbons. Even if at a certain price point demand might rebound somewhat, particularly if the current surplus is removed.

The real wild card on the demand side is China. China accounts for the largest demand growth now and in the last five years. Its demand for oil is unlikely to follow the same large increases it experienced in recent years – meaning that its demand growth will fail to offset OECD reductions. The slowing of the Chinese economy and reduction in its imports of several commodities over the third quarter have confirmed the end of the current commodity super boom, if not the whole post 2003 boom. Already aluminum is piling up and inventories of several metals are on the rise. The question is whether this trend is temporary – ie how strong will Chinese demand be after some of the existing inventories are absorbed.

However, China’s torrid pace of commodity absorption is unlikely to return immediately– in part because it is trying to shift its economic sources of growth. However China’s fiscal stimulus will be partly channeled into infrastructure spending including to the railways and the construction sector, which could put a floor in prices – yet the expectations of Chinese demand growth that pervaded last year – and were a major justification for skyrocketing prices – seem overly optimistic in an environment where a figure like Gerald Lyons can suggest that China’s growth could slow to 4% next year. This may be overly bearish, but even at 7-8% growth, China will likely consume fewer commodities. and the combination of forces that led to the 2008 oil price boom seem unlikely to be repeated any time soon.

Many articles have been written over the last weeks about the reliance of OPEC countries (and some non-OPEC oil exporters) on higher oil prices which is likely adding to their concerns. Clearly they have gotten used to higher oil prices and on average budgets balance around 55-60 a barrel. Of course OPEC can’t just wish for higher prices and there is a risk that if prices keep dropping some OPEC members might break ranks and pump more (shades of the 1980s pricing conflicts).

There is a lot of uncertainty about the break-even points of some of these governments but a look at the range gives an indication of their respective “pain thresholds” to quote Russian Finance minister Kudrin. GCC countries prompt the most uncertainty. In fact estimates of Saudi Arabia’s breakeven point range from $30 a barrel to almost $60 a barrel. Its probably somewhere in the $45-50/barrel range. Estimates for the UAE also vary depending on whether one focuses solely on the rather small UAE federal budget or the broader spending that is directly or indirectly financed from oil revenues or the associated inflows. Bahrain and Oman, which have limited or declining oil output, have the highest breakeven prices – at or above $70 a barrel.

Even Libya and Algeria which had been relatively conservative now apparently have break even points at $45 and $54 a barrel respectively. And Nigeria recently scaled back its oil estimate for 2009 to $45 a barrel from the previously planned $62.5.

All of these countries have either saved a significant portion of their windfall – even Nigeria – or have almost eliminated government debt – providing them with some cushion. But lower oil prices may mean that their sovereign funds are called on for their stabilization and not investment objective. These funds are already being called on to invest more at home in the short-term and their savings or at least generated income could be tapped to finance next years consumption.

Iran and Venezuela likely have the highest breakeven points of OPEC members – as high as $90 a barrel for Iran. (Iraq which may need $100 a barrel according to some estimates, is not bound by OPEC quotas). Iran has a presidential election next year. (These 3 countries are most fragile. To me, a last ditch strategy might be to just go to war if you cannot balance the budget. War or creating uncertainty will give rise to a hike in oil prices. Its a simple strategy but one which has been employed more times than you think when economics-politics-oil are mixed in.)

Outside of OPEC, Russia and Kazakhstan may be most vulnerable in part because their accumulated savings are being used to shore up their domestic banking and construction sector. Their banks (and other corporations) borrowed abroad cheaply - net borrowings by Russian corporations start to make the rapidly shrinking savings of Russia's central bank seem small ($515 billion in reserves compared to $460 billion in private borrowing). Russia’s current spending requires about $72 a barrel. (Even Russia is not beyond using their military might to drive oil price higher, beware. Hence the key moving forward could be a huge carrot for the destabilised nations to wage war unnecessarily to boost oil prices. The longer the global slowdown continues and the longer we have weak oil prices, the higher the propensity for these nations to try "things".)

These numbers indicate two things 1) OPEC’s determination to stem the tide of oil price decrease may be great 2) the rate of growth of oil wealth abroad may slow sharply next year as the levels at which these countries run current account surpluses is not so far away from where their fiscal spending balances.

Ultimately, Saudi Arabia still is the key one to watch. As OPEC largest producer by far, it is likely to bear the brunt of most cuts and already has pulled back most of the additional supplies it added this summer. It has been reluctant to sign on to cuts advocated by more ‘hawkish members’ like Iran.

Another country to watch is Russia. Russia has been talking more about cooperating with OPEC, being involved in discussions etc. While it might not join OPEC it will be interesting to watch if Russia matches any OPEC cuts. Already Russian oil output is down this year and new production has been delayed to come online. . Meanwhile earlier this week, Russia joined Qatar and Iran in calling for an “OPEC for gas”– a reversal from its past desires to have a looser grouping but it may be a desire to secure a place at the table for any coordination. But it is certainly something that raises concerns among Russia’s consumers in Europe. Yet so far, natural gas is still not commodified like oil.

So the real test of the cartel is ahead. especially since asset markets have a tendency to overshoot.

However, the combination of lower demand and credit contraction may sow the seeds for higher prices ahead, even if they are not as high some of the trends seen earlier this year.

The lack of financing and uncertainty about the oil price outlook might defer energy exploration for now, though companies with cash may be able to snap up assets at cheap prices. The lack of financing may freeze deals in progress, though it will privilege investors that have cash even if they wish to hold out until it is clear where the bottom is in the oil market. With oil (and other energy commodities like Coal and natural gas) still on a downward trajectory investors may want to avoid locking in too high an implicit price.

At this point there are still many uncertainties in the financial markets for major moves – we may well see delays and deferrals especially of expensive oil sources like unconventional sources which may need a price above $80 a barrel to break even.

In fact the combination of low or negative real interest rates, credit shortage and a cheaper and possibly declining oil price may defer energy investment for some time, possibly pushing the arrival date of new supplies further into the future. Companies may prefer to invest later when they hope to get higher returns on their investments. This could contribute to a rebound in oil prices after growth restarts in a year or two.

But much will happen between now and then and for now, the downward trend could continue. And that may be something that scares OPEC even if falling commodity prices are one of the few positive signs in the global economy – the current account and fiscal positions of several emerging markets like India are improving.

The one saving grace for OPEC members – at least their petro”dollars” are worth more even if they are now getting fewer of them.

p/s photo: Daphne Iking

Risks Spreads To Emerging Markets

Emerging-market sovereign credit spreads came under extreme pressure Wednesday as a sell off in global stock markets intensified due to growing fears of recession.

The spread on J.P. Morgan’s emerging-market bond index, the EMBI+, broke through 700 basis points for the first time since March 2003 and is currently trading at 713 basis points over Treasurys. That’s up a hefty 33 basis points on the day and a massive 84 basis points from Friday’s close of 629 basis points.

“Another day of rising risk aversion that has seen emerging markets come under heavy selling pressure,” said analysts at RBC Capital Markets in a note to clients.

In sovereign credit-derivative markets, Russia and Turkey were among the worst hit, with their credit default swap spreads, a key measure of credit risk, widening significantly, a move that suggests investor sentiment toward them has deteriorated.

Five-year CDS on Russia widened around 64 basis points to 811/831 basis points. The price means it now costs $821,000 a year to insure a notional $10 million of Russian bonds against default for five years, up from $757,000 Tuesday and $517,000 a year ago.

Turkey’s five-year CDS widened to 684 basis points, compared with Tuesday’s close of 624 basis points given by Markit.

Comments: Risks have now spread to emerging markets. Russia and Turkey are first to get whacked. Safe to say that these developments would continue to override sentiment in all emerging markets. While we can argue that countries with healthier balance sheets such as Malaysia, Singapore, Taiwan and the like may be shielded somewhat, the overriding sentiment will tend to ignore such facts. Those with iffy balance sheet will be hurt most. The massive volatility in currency markets will bring forth a few major company "failures" such as Citic Pacific's huge currency linked losses. When currency moved as it did over the last two weeks, we are bound to see massive losses incurred by certain companies, hence brace yourselves for some major bad news affecting sentiment further. On the companies front, the markets will downgrade companies that rely on debt a lot to fund their acquisitions (such as KNM) as rolling over their loans might present a problem. Stay away from companies that are highly geared if you must hold stocks.

p/s photos: Go So Young

Biz Snippets & Exorcism

HK / BLR - The Hong Kong Monetary Authority cut its benchmark interest rate to help boost bank lending as the city's economy slows amid a global credit squeeze. The base rate for banks will drop to 2.5 percent from 3.5 percent Thursday, based on the level of the US benchmark target rate plus 50 basis points, down from 150 basis points, chief executive Joseph Yam said. The HKMA tracks the Fed Funds rate, which is now at 2 percent, because Hong Kong's currency is pegged to the dollar. Australia cut its benchmark interest rate on Tuesday by one percentage point, the most since a recession in 1992, sparking speculation that other countries will follow to unlock credit markets.

China / Steel - Four big Chinese steelmakers have agreed to cut production until steel prices stabilise, which could mean the rest of this year, said Zou Jian, chairman of the China Metallurgical Mines Association. "The steel price declined a lot, so the steel companies decided to cut production until steel prices are stable,'' he told Reuters. He said Shougang Group, Hebei Iron & Steel Group, Anyang Iron & Steel and Shandong Iron & Steel agreed earlier this week to cut output by between 10 percent and 20 percent. He said the agreement involved steelmakers in Hebei province, which encircles Beijing, but other firms were also affected by the low prices.

US / Budget Deficit - The US government's budget deficit ballooned in fiscal 2008 to US$438 billion (HK$3.41 trillion), or 3.1 percent of GDP, as the economic downturn began to bite, the Congressional Budget Office said. The estimate compares to the US$162 billion shortfall that represented 1.2 percent of GDP in fiscal 2007, said the CBO, which monitors federal spending on behalf of the Senate and House of Representatives. "That is about US$31 billion higher than the US$407 billion deficit CBO projected this summer, primarily due to lower-than-projected revenues and higher-than-expected spending for defense and deposit insurance,'' it said. In its Monthly Budget Review, the CBO said corporate income taxes fell by around US$65 billion during fiscal 2008, which ended September 30.

US / Consumer Debt - U.S. consumers reduced their debt load by a record amount in August, the Federal Reserve reported Tuesday. Total seasonally adjusted consumer debt dropped by US$7.9 billion, or a 3.7% annual rate, in August to US$2.58 trillion. This was the first decline since January 1998. Consumer credit rose 2.4% in July. Non-revolving credit - such as auto loans, personal loans and student loans - dropped sharply by US$7.3 billion, or 5.4%, to US$1.61 trillion, after rising 0.9% in July. Credit-card debt dropped by US$612 million, or 0.8%, in August to US$969 billion.

UK / Banks - The U.K. government said Wednesday that it will pump as much as 50 billion pounds (US$87 billion) of capital into the country's main banks as part of a rescue package designed to shore up the struggling sector. The cash injection, which will be exchanged for a stake in the banks, is part of a package that also includes plans to provide short-term liquidity and ensure the sector has enough funds to maintain lending. Combined, these institutions have agreed to increase their total Tier 1 capital by 25 billion pounds before the end of the year. The government said it will make the money available to be drawn on, if desired, as preference share capital or permanent interest-bearing shares and is also willing to assist in the raising of ordinary equity. It's also ready to provide an incremental minimum of 25 billion pounds of further support for all eligible firms. Details of how much will be provided to each bank are still to be hammered out. But the cash is likely to come with a string of conditions. Treasury said it will take into account dividend policies and executive pay packages and will also require that banks continue to support lending to small businesses and home buyers. Other U.K. banks, and the U.K. subsidiaries of foreign institutions, can also apply for inclusion. Shares in the sector were mixed in early trading, with RBS jumping 13%, Lloyds up 8.7% and HBOS rising around 28%.

Meanwhile Barclays fell 3.5% and HSBC dropped 3.1%.

ECB / Liquidity & USD - The European Central Bank pumped US$50 billion into money markets today and said it will double to 50 billion euros the amount of the single European currency it would lend for six months as it tried to ease a tightening credit crunch. In a separate statement, the ECB said it would also lend another US$20 billion to banks for almost three months in an operation that generated demand for more than four times that amount. On a day when currency injection announcements followed each other at a breakneck pace, the ECB, US Federal Reserve and other central banks appeared determined to reassure stressed financial markets that money was no object. The European Central Bank pumped US$50 billion into money markets today and said it will double to 50 billion euros the amount of the single European currency it would lend for six months as it tried to ease a tightening credit crunch. In a separate statement, the ECB said it would also lend another US$20 billion to banks for almost three months in an operation that generated demand for more than four times that amount.

The European Central Bank has announced a schedule for new coordinated action it will take with other central banks to expand the provision of US dollars to cash-strapped commercial banks. "In response to continued strains in short-term funding markets, central banks recently announced coordinated actions to expand the provision of US dollar liquidity,'' an ECB statement said. "Today, the central banks are announcing schedules for term and forward auctions of US dollar liquidity during the fourth quarter of this year.''

China / Yuan - The yuan rose the most in seven months, erasing a record loss posted in the run-up to last week's break in trading, after the central bank said it wants a stable currency. The People's Bank of China will focus on "maintaining the stability of the currency when applying macro-economic controls to the financial sector and formulating monetary policy,'' said central bank governor Zhou Xiaochuan. The currency rose 0.38 percent to 6.8169 a dollar as of 5:30 pm in Shanghai, according to the China Foreign Exchange Trade System. A 0.08 percent gain yesterday followed a 0.46 percent slide on September 26, the biggest drop since a dollar peg ended in July 2005. China's financial markets were closed last week for a public holiday.

Russia / Banks - Russia's government should lend the country's biggest banks 950 billion rubles (US$36bn) for at least five years to help unfreeze credit markets, President Dmitry Medvedev said. State-run OAO Sberbank and VTB Group, should get 500 billion rubles and 200 billion rubles respectively, Medvedev said at a meeting with senior finance officials in the Kremlin. "What we can decide on today is, first of all, giving subordinated loans to banks of as much as 950 billion rubles for no less than five years,'' Medvedev said.

Comments: The move to restore liquidity and confidence is well underway. Volatility will be high and the central banks will not stop until they get a proper hold of the markets. Its like a group of priests trying to calm down a child being exorcised, the reckless-financial-child's head is turning around and around and spewing green stuff (thought to be mashed up greenbacks) ... the exorcism continues...

p/s photos: Ayumi Lee