Want some ‘unlimited cash?’
If so, head to Europe, where the European Central Bank (ECB) is pumping out extra cash faster than it takes Lindsay Lohan and Britney Spears to bounce out of rehab.
The power of the ‘global economy’ and its effects on markets around the world was underlined again last week, as the intensifying U.S. sub-prime mortgage mess spilt over into Europe.
And it’s giving one of Europe’s biggest banks a punch in the mouth for its troubles, forcing the ECB to intervene in an unprecedented way…
French Flop As Paribas Funds Hit The Skids
I got into the office on Thursday to find the major European markets getting crushed. This was in response to French bank BNP Paribas suspending activity in three of its large, asset-backed funds, due to the ‘complete evaporation’ of liquidity.
And you can see why. According to Bloomberg, the BNP Paribas ABS Euribor, BNP Paribas ABS Eonia and Parvest Dynamic ABS funds are worth a combined 2 billion euros ($2.8 billion) – but 700 million euros of that is exposed to U.S. sub-prime mortgages, with a credit rating of AA or higher. The funds have slumped 20% over the past two weeks.
Doesn’t exactly do much for the credibility of Paribas’ CEO Baudouin Prot, who boldly claimed recently that the bank’s exposure to the U.S. sub-prime sector is ‘negligible.’ I think not, Monsieur!
In response, the ECB intervened and tossed 94.8 billion euros ($130.2 billion) into the market – what the bankers called a ‘liquidity-providing fine-tuning operation.’
That’s some pretty hefty ‘fine-tuning,’ boys!
To give you an idea of the scale of this ‘fine-tuning operation,’ that’s 25.5 billion euros more than they injected into the market the day after the terrorist attacks on New York and Washington, D.C. temporarily crippled the markets. The move allows banks to borrow at the bank’s main 4% interest rate, following the jump in the overnight rate to 4.7% – the highest level since 2001.
But BNP Paribas isn’t alone. Its fellow French company, AXA, an insurance firm, has also suffered losses on sub-prime assets.
Over in Holland, investment bank NIBC has suffered whopping losses around 140 million euros ($192 million), due to dodgy U.S. sub-prime investments. It’s even forced the company to postpone its plans for an IPO. And in Germany, IKB is hoping to receive a 3.5 billion euro ($4.8 billion) bailout from fellow German banks to help it recover from sub-prime losses. Three top executives have quit the firm in the wake of the disaster.
To read more about spreading subprime losses, read: If banks can’t trust each other, who can they trust?
A Mess In The U.S…
And speaking of sub-prime disasters, Bear Stearns provided dramatic evidence of this just recently, saying that, ‘… preliminary estimates show there is effectively no value left for the investors in the Enhanced Leverage Fund and very little value left for the investors in the High-Grade Structured Credit Strategies Fund as of June 30, 2007.’
Last weekend, this company’s President and COO, Warren Spector, got the heck out of Dodge and quit. And last week, CFO Sam Molinaro said, ‘These times are pretty significant in the fixed-income market. It’s been as bad as I’ve seen it in 22 years. The environment we’ve seen in the last eight weeks has been pretty extreme.’
Gee, you think?
And everyone is piling on the wounded Bear (Stearns). The S&P recently downgraded the stock to ‘negative.’ And one of the biggest investors in the company’s High-Grade Structured Credit Strategies Fund is suing the company, unhappy with the management’s ‘meager steps,’ despite the crisis.
But the Bear is fighting back – and fighting dirty. The lawsuit comes as the firm sneakily ships the crippled funds off to the Cayman Islands for bankruptcy protection and probable liquidation.
And need I mention American Home Mortgage (formerly listed as AHM on the NYSE). From trading in the mid $30s as recently as February, the wheels have totally fallen off the bus. Following a 90% one-day plunge and the suspension of its stock last week, the company filed for bankruptcy protection on Monday and is now delisted.
And if you think the sub-prime situation is bad in the U.S., Britain might be about to slide down the same slippery slope…
… And Mayday In The U.K?
Over the past few years, both the U.S. and U.K. real estate markets have enjoyed similar explosive increases. But while the U.S. market is cooling, the strength continues over in Britain.
This week, the National Housing Federation said house prices will soar by 40% over the next five years. That would vault the average house price over £300,000 ($608,250). While that makes ugly reading for Brits, it’s not entirely surprising, given the lack of space and land prices at a premium.
Jody Clarke also covered this issue in a recent MoneyMorning article. For his take on the National Housing Federation’s research, read: Are immigrants to blame for soaring house prices?)
But the problem is that the average U.K. house price is already more than 10 times higher than the average salary – and homeowners are struggling with debt. The ratio of household debt to personal income is 1.62, according to the National Institute of Economic and Social Research. That’s 0.20 higher than in the U.S.
And already, about 125,000 households are behind with their mortgage payments – and it’s starting to show. Over the first six months of 2007, banks and other lenders foreclosed 14,000 properties – a worrying 30% jump over the same period in 2006 – according to the Council of Mortgage Lenders. And the group attributes the bulk of the blame on ‘an increasing amount of sub-prime lending.’
But the problems for borrowers with bad debts could get worse – for two reasons. First, there’s virtually no chance that house prices will decline enough to give borrowers some breathing room. Second, the Bank of England has already raised interest rates to 5.75% – and signaled that another hike to 6% is likely to follow in the coming months, as it battles inflation.
So if you can’t afford your mortgage and it’s worth more than the current market value of your house, you’ve got a problem that you can’t solve by simply selling up. It may be that consumers will have to cut back on their spending – a situation that could squeeze economic growth.
By Martin Denholm, Managing Editor, Mt. Vernon Research for the Smart Profits e-Report, www.smartprofitsreport.com