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Juan Toro

Doomsters abound and are able to see black when it is white. But it is also true that events repeat themselves, not exactly but very similarly in time . I just saw this in “The Big Picture”. Just bringing the view of the doomsters or may of be those who like to check on past events.

Juan Toro

In the recent stockmarket turmoil and interventions by Central Banks two important information problems were at play. One was the adverse selection issue as many banks tried to outguess the balance sheets of their partners. This halted borrowing among them and the appearance of a risk premium in money markets. The second issue was the moral hazard problem that could rise if Central Banks bailed out some financial institutions by cutting rates, setting the precedent that banking malpractice will always find the safe net of a lenient Central Banks. This second issue has been much disputed and many economists have maintained the blunt positions that “Central Banks should not rescue fools”(see http://blogs.ft.com/wolfforum/2007/08/central-banks-s.html).

Continue reading 'Moral hazard and bending the rules'

Juan Toro

El jueves 9 y el viernes 10 de Agosto el Banco Central Europeo (BCE) intervino en los mercados de dinero inyectando liquidez para ajustar los tipos de interés en los mercados interbancarios a corto plazo, que estaban alejándose del objetivo del 4 %. Al BCE le siguieron otros bancos centrales. Pero, ¿por qué fue en ese preciso momento cuando se decidió intervenir? ¿Qué fue lo que desencadenó las tensiones en los mercados monetarios los días 9 y 10 de Agosto?

Lo primero que hay que clarificar es que no faltaba liquidez. De hecho, los bancos estaban dispuestos a prestarse entre ellos, pero no al precio de los últimos meses, sino a uno mayor. Los bancos que participaban en el mercado monetario habían introducido una prima de riesgo por la desconfianza que se había generado entre las distintas entidades financieras en relación con el volumen de préstamos en sus balances. Ese mismo día, la Banca Nacional de Paris (BNP) suspendió la retirada de dinero en dos de sus fondos, y eso pudo crear incertidumbre sobre las obligaciones y deudas de los bancos que intervenían en el mercado monetario Europeo. Existía miedo a que los bancos no pudieran ofrecer la liquidez deseada (a un precio razonable) y el BCE se dispuso a intervenir.

Continue reading '¿A QUIÉN TEMEN LOS BANCOS EN EL MERCADO INTERBANCARIO?'

Juan Toro

El jueves y viernes (9 y 10 de Agosto) el Banco Central Europeo (BCE) comenzó a intervenir en los mercados de dinero inyectando liquidez para ajustar los tipos de interés en los mercados interbancarios a corto plazo que estaban disparándose, alejándose del objetivo del 4 % fijado por el BCE. La cantidad de dinero inyectada fue grande en relación a actuaciones similares en períodos históricos previos, siendo comparable con las actuaciones llevadas a cabo por los Bancos Centrales después de los atentados terroristas del 11 de septiembre de 2001. Estas operaciones continuaron el lunes día 13. Otros bancos centrales actuaron de modo similar, entre ellos la Reserva Federal de Estados Unidos (Fed), el Banco de Japón, el Banco Central de Australia y el Banco de Canadá. El hecho de que fueran simultáneas en varios países no supone que éstas fueran concertadas. Muchos bancos tienen presencia internacional en mercados interbancarios de distintos países y esto hace que la necesidad de fondos de los bancos se puedan sentir en los distintos mercados monetarios de cada país.

La actuación de los Bancos Centrales ha sido muy distinta en diferentes países, no sólo en relación a la cantidad inyectada, sino también al tipo de subasta usada , y esto quizás pueda ayudar a entender la preocupación de cada Banco Central. Los Bancos Centrales pueden inyectar liquidez a través de distintos tipos de subastas.

Continue reading 'Ajuste fino, movimientos bruscos:'

Juan Toro

Thursday 9th of September the cost of borrowing money overnight in euro money markets rose above 4,62 % -highest level in six years-. This led the ECB to intervene and provided over 95 billions euros to the banking system. The following day the ECB continued its intervention providing additional 61 billions in money for the weekend. Other Central banks such as the Federal Reserve in the US, the Bank of Japan and the Australian central bank did also provided needed liquidity to fine tune overnight rates (and other short term rates in money markets) on Thursday and Friday. The first thing that needs clarified is that those fine tuning operations pursued a reduction in an undesired credit risk premium that has taken the short money rates to skyrocket levels. Over the 9th and 10 th of August there was liquidity in the money markets but at unwanted price. Banks were willing to borrow/lend money among each other but at a rate that was far away from the target followed by the corresponding Central Banks. Any spread between the target rate of the corresponding monetary authority and the realized rate was due to a risk aversion among banks that demanded a higher rate due to fears on the unknown credit position of other banks (their counterparties). The question that comes to mind is why this fear? Why did banks mistrusted each other?

Continue reading 'Why the jittery in money markets?'

Juan Toro

The Fed in its latest meeting left rates unchanged. Before the Wednesday’s meeting there were some odds in the markets that predicted a possible change in stance towards a more neutral position putting aside inflation concerns. On the one hand any suggestions of a drop in rates would have endangered Bernanke’s anti-inflation credentials. On the other hand, too much attention on inflation worries would have made nervous those that think that tight markets will spread in time affecting the real economy.
Departing from its most recent upbeat tone about the economy the latest Federal Reserve statement acknowledged that the “downside risk to growth has increased somewhat”. However the Fed still believes that “the predominant risk concern remains the risk that inflation will fail to moderate as expected”. The Fed reckons that “financial markets have been volatile in recent weeks and credit markets have become tighter” but still believes that this will not derail the path of stable economic growth.

Continue reading 'What are the arguments against a reduction in the Fed’s Fund rate?'

Juan Toro

The Wall Street Journal is publishing a set of well written and detailed articles on the CD0/CLO squeeze. In a very graphic way they have reproduced a map that shows were the most prominent and recent credit problems have blossomed. One sees quickly that it is worldwide phenomenon. Credit squeezes are taken places everywhere: Australia (with meltdowns such as those of the Basis Capital Funds or Absolute Capital) , Russia (with Rosfnet having difficulties to issue a big chunk of bonds) or the US (where the liquidity meltdown cases are too many to name them). It is interesting to see that it affects countries that are in different phases of the monetary cycle. It affects Australia where interest rates are above 6 % and it affects Europe where interest rates are sitting at 4 % and further hikes are envisaged.
In terms of who is affected, a prompt answer seems to be almost any investors seeking large chunks of financing. The WSJ has listed a detailed list of deals that have cancelled or delayed debt offering. The list is just shocking providing a grasp of how many deals are going through problems. These are two very illustrative snapshots. Click below to have a quick idea of the problem.

http://online.wsj.com/public/resources/documents/info-globalblowup07.html

http://online.wsj.com/public/resources/documents/info-BondTurmoil0707-sort.html