Fears over next victim of squeeze

Investor worries are mounting that the next big casualties from the credit squeeze might be the specialist companies that act as guarantors for bond issuers.

These companies, which write insurance to boost the credit ratings of various kinds of bonds, have seen their share prices pummelled and the cost of protecting their debt against default soar. Over the past week, sector leaders such as MBIA, Ambac, XL Capital Assurance, Radian and MGIC have all been hit hard.

In recent years, these companies, known as monolines, have moved away from their role of guaranteeing, or wrapping, bonds issued by US municipalities towards writing business related to structured asset-backed finance deals, such as mortgage-backed bonds and collateralised debt obligations.

Following the turmoil in structured credit markets, this business has turned sour, which could affect the cost of borrowing for the local US authorities who rely on their guarantees.

"Our conclusion is that MBIA and the rest of the financial guarantors are facing a prolonged period of stress," said Rob Haines, an analyst at CreditSights, a research house.

(...)

The cost of protecting $10m of MBIA's debt against default in the credit default swap market has soared from about $22,000 annually for a five-year contract back in February to more than $231,000 last week, said data provider CMA Datavision.

These monolines are rated AAA. That their default swaps jumped from 0.2% per annum to 2.3% per annum (multiplied by 10!) suggests that the market no longer believes that their ratings are worth anything.

The amounts covered by their guarantees are in the hundreds of billions of dollars - each.

These monolines have been serious competitors to banks in recent years as they could offer lower overall borrowing costs by, essentially, taking the risks, slicing them, repackaging them, and them reselling them in various tranches, the biggest one would get the AAA-rated gaurantee. This was cheaper thanks to the "dynamic" bond market and its appetite for the various underlying structured products. Oops.

In the long run, we're all dead. John Maynard Keynes

Britons' debts increasing by £373m a day | Metro.co.uk

Consumer debt rose by £1.35billion last month and total debts, including mortgages, went up by £11.2billion to £1.38trillion.

...

The squeeze has led to more people reaching for their credit cards, with reports some are using their plastic to cover mortgage payments.

...

The Council of Mortgage Lenders said it expected the number of home repossessions to rise by half next year from 30,000 to 45,000.

The number of borrowers in arrears of at least three months would also increase to 170,000 next year compared with about 145,000 this year, the CML said.

...

Meanwhile, Bank figures show the number of mortgage approvals hit a two-year low of 102,000, with experts warning that the credit squeeze could get even tighter.

But the money quote is this one:

Charities say they expect thousands of calls in the new year from homeowners left destitute after splashing out over the festive period.

The pre-conditions for this is that a short-termist and selfish electorate (not to mention political and economic elites), will not tolerate simultaneous higher taxes and reduced expenditure.

The public might be happy to stop corporate welfare, but will not accept major cuts in domestic social expenditure. Elites would probably favour the reverse policy. Most Americans also seem to be comfortable with wasting vast sums on a bloated military budget, skewed more to useless high tech projects that only benefit the military-industrial complex than to spending on the sort of relatively low tech but numerous forces which might actually be of use.

If a sovereign government is unable to raise the funds to pay interest on its debt, by taxation or further borrowing, there is only one recourse left. The printing press.

Everyone in such a country is likely to get poorer, but elite groups have more opportunity to diversify assets so as to maintain or increase their relative advantage over the rest of the population.

I find it difficult to know if the UK is in a similar position. However I am sure the Brown-Cameron National government can appeal to the Dunkirk spirit and relive the triumphs of the MacDonald-Baldwin National government of the 1930s. Of course the modern generation may not remember the Second World War or be willing to put up with enhanced austerity. The modern idea of savage cuts in public expenditure bringing about the end of civilisation, is a slight reduction in the projected percentage rate of growth in public expenditure. What the reaction would be to across the board reductions in actual amounts of expenditure is unpredictable. Perhaps Gordon also needs to invest in some new printing presses.

In a heartbeat, if you maybe thinking otherwise.

Money is a sign of Poverty - Culture Saying

however, there will be a welcome cleansing factor that speculators, who have been hoovering up property in the tax-abusive "buy-to-let" get-rich-quick scheme, are finding that rents are not covering the increases in their mortgages and the properties are coming back onto the market, for the overall benefit of everybody.


keep to the Fen Causeway

When I first came to live in London about 25 years ago, Germany was widely considered a more advanced economy than the UK. In the mid-1990s these perceptions began to reverse. During the course of the next decade, I would expect to see yet another reversal - in favour of Germany.

No, I am not going to leap to a defence of the Rhineland model. I remain sceptical about Germany's long-term economic performance. The country relies too heavily on manufacturing exports. It lacks a modern service economy and is committed to an antiquated financial sector.

So, anyone able to enlighten me what "a modern service economy" is?

As for "an antiquated financial sector" I'm somewhat suspicious of that too...