PrefBlog

Willem Buiter & Anne Sibert write a review of The collapse of Iceland’s banks: the predictable end of a non-viable business model. As an aside, they note:

In addition, outrageous bullying behaviour by the UK authorities (who invoked the 2001 Anti-Terrorism, Crime and Security Act, passed after the September 11, 2001 terrorist attacks in the USA, to justify the freezing of the UK assets of the of Landsbanki and Kaupthing) probably precipitated the collapse of Kaupthing – the last Icelandic bank still standing at the time. The official excuse of the British government for its thuggish behaviour was that the Icelandic authorities had informed it that they would not honour Iceland’s deposit guarantees for the UK subsidiaries of its banks. Transcripts of the key conversation on the issue between British and Icelandic authorities suggest that, if the story of Pinocchio is anything to go by, a lot of people in HM Treasury today have noses that are rather longer than they used to be.

This is the real danger of counter-terrorism laws … they will be twisted to justify anything the bosses want to justify. And be re-elected in a landslide by frightened sheep. Anyway, back to economics … the authors claim that Iceland’s business model was not viable due to:

the “vulnerable quartet” of (1) a small country with (2) a large banking sector, (3) its own currency and (4) limited fiscal capacity

With this in mind, they warn:

Iceland’s circumstances were extreme, but there are other countries suffering from milder versions of the same fundamental inconsistent – or at least vulnerable – quartet:
…
Countries that come to mind are:

Switzerland,
Denmark,
Sweden
and even to some extent the UK, although it is significantly larger than the others and has a minor-league legacy reserve currency.

Ireland, Belgium, the Netherland and Luxembourg possess the advantage of having the euro, a global reserve currency, as their national currency. Illiquidity alone should therefore not become a fatal problem for their banking sectors. But with limited fiscal spare capacity, their ability to address serious fundamental banking sector insolvency issues may well be in doubt.

Coincidentally, I’m sure, Dennis P. Quinn & Hans-Joachim Voth argue that benefits of international diversification are declining:

After Bretton Woods, it took half a century to restore the full openness of capital accounts in advanced countries. Many Eurozone countries only revoked the last restriction in the 1990s, in the run-up to the euro’s introduction.

We argue that it is no accident that the age of restrictive capital accounts also saw remarkably low equity market correlations. Cross-border diversification opportunities identified by early papers (Grubel 1968) were indeed “too good to be true.” Once investors can take advantage of low correlations elsewhere, they will rise. Initial investors may benefit since liberalisations tend to be followed by capital gains (Henry 2000). Yet risks will not fall anywhere near as much as initially hoped, as the covariance with other stock markets inevitably increases.

How tight is the bond market? The credit card companies have maxed-out:

Credit card companies were shut out of the market for bonds backed by customer payments in October for the first time in more than 15 years, as investors shunned the debt amid the global credit freeze.
…
It’s the first month since April 1993 that there have been no sales, according to Wachovia Corp. data. Issuers sold $17.1 billion of the debt in October 2007, the data show.
…
Top-rated credit card-backed securities maturing in three years traded at a gap, or spread, of 475 basis points over the London interbank offered rate, or Libor, during the week ended Oct. 30, JPMorgan Chase & Co. data show, 25 basis points higher than the previous week. The debt was trading at 50 basis points more than Libor in January.

PerpetualDiscounts eased off today, but volume was strong. There are many very strange yield relationships between issuers in the market; its hard to tell whether the degree of credit stratification is more or less surprising than the degree of credit inversion!

There were thirty-four other index-included $25-pv-equivalent issues trading over 10,000 shares today.

This entry was posted on Thursday, November 6th, 2008 at 1:00 am and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.