DeadBeat Politicians

Deadbeats

The CDS spreads on British debt jumped even higher on Tuesday, touching 100 at one stage. This is a little frightening.

I suspect it reflects fear that the liabilities of the British-based banks—which include HSBC and Standard Chartered, with all their global exposure, as well as RBS, Barclays, Lloyds TSB, HBOS, and Northern Rock—are disturbingly large for the size of the UK economy.

Britain has no real debt in foreign currencies. Like other AAA states, it borrows in its own currency. This is a lifesaver.

However, and here is the awful catch, some of these private banks have vast dollar positions, so as more of them fall into the hands of the British state (partially or fully) the dollar debt implicitly moves across onto the sovereign balance sheet.

This is not a subject that I have seen discussed anywhere, but it is worth pondering. What killed Iceland was the dollar/euro debts of its three big banks, not its own sovereign debt in Krona. It is the dollar liabilities of Russia’s banks and companies that is now causing a run on the rouble.

Here lies the real danger of taking over all these banks so nonchalantly.

I suspect that some hedge funds have already spotted this Achilles Heel and are now testing the trade.

(Although a US hedge fund told me last weekend he was targeting the default risk in five other countries in Europe—and the EIB — but not British debt because he thought that the UK’s role as a military power and a permanent UN Security Council member provided an extra shield, ie the global order has too much political investment in Britain to let it happen. I have no idea whether this is a good judgement, but I pass it on)

By the way, my colleague Yvette Essen showed me the CDS data on some of the US states. These are quite revealing too.

Michigan 192

California 165

Nevada 164

New Jersey 150

Ohio 104

So, California is now priced as a greater bankruptcy risk than Slovakia 150.

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Conspiracy Theories

Nov. 20 (Bloomberg)—Pope Benedict XVI was the first to predict the crisis in the global financial system, a “prophecy’’ dating to a paper he wrote when he was a cardinal, Italian Finance Minister Giulio Tremonti said.

“The prediction that an undisciplined economy would collapse by its own rules can be found’’ in an article written by Cardinal Joseph Ratzinger, who became pope in April 2005, Tremonti said yesterday at Milan’s Cattolica University.

German-born Ratzinger in 1985 presented a paper entitled “Market Economy and Ethics’’ at a Rome event dedicated to the Church and the economy. The future pope said a decline in ethics “can actually cause the laws of the market to collapse.’’

Pope Benedict in an Oct. 7 speech reflected on crashing markets and concluded that “money vanishes, it is nothing’’ and warned that “the only solid reality is the word of God.’’

The Vatican’s official newspaper, l’Osservatore Romano, on the same day criticized the free-market model for having “grown too much and badly in the past two decades.’’

To contact the reporters on this story: Flavia Krause-Jackson in Rome at fjackson@bloomberg.net; Lorenzo Totaro at in London or ltotaro@bloomberg.net

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Nutjobs

By Ken Thomas

WASHINGTON (AP) – A plan to give troubled U.S. automakers billions of dollars in government-backed loans is on life support, leaving the fate of hundreds of thousands of workers and Detroit’s once-venerable car companies hanging in the balance.

Senate Majority Leader Harry Reid, D-Nev., canceled plans Wednesday for a vote on a bill to carve $25 billion in new auto industry loans out of the $700 billion Wall Street rescue fund. The Bush administration and congressional Republicans have rejected Democrats’ plan to dip into that pot of money.

Warning of economic disaster, a bipartisan group of senators from auto industry states are trying to reach a deal on an alternative package. If an agreement can be reached, Reid said, the Senate still could vote on it as part of a measure to extend jobless benefits.

But Reid acknowledged that was “not going to be easy.”

With all sides sensing doom for a Big Three automaker rescue, the finger-pointing began. White House press secretary Dana Perino said that if Congress “leaves for a two-month vacation without having addressed this important issue … then the Congress will bear responsibility for anything that happens.”

Congressional Democrats countered that the Treasury Department already had the power to grant emergency funds to the automakers, but the Bush administration opposed the approach.

The leaders of General Motors Corp. (GM), Ford Motor Co. (F) and Chrysler LLC painted a grim picture of their financial position during two days of congressional hearings, warning that the collapse of the auto industry could lead to the loss of 3 million jobs. Detroit’s automakers, hurt by a sharp drop in sales and a nearly frozen credit market, burned through nearly $18 billion in cash reserves during the last quarter, and GM and Chrysler both said they could collapse in weeks.

“I don’t believe we have the luxury of a lot of time,” GM CEO Rick Wagoner told a House hearing.

Alan Mulally, the CEO of Ford Motor Co., said the company had sufficient cash reserves to make it through 2009. But United Auto Workers union president Ron Gettelfinger said a bankruptcy could spawn others.

“If there’s a Chapter 11 (for) one of the companies, it will drag at least one other with them, if not all of them. And I do not believe Chapter 11 is where it will end. It will go to liquidation,” he said ominously.

Automakers ran into more resistance from House lawmakers, who chastised the executives for fighting tougher fuel-efficiency standards in the past and questioned their use of private jets while at the same time seeking government handouts.

“My fear is that you’re going to take this money and continue the same stupid decisions you’ve made for 25 years,” said Rep. Michael Capuano, D-Mass.

The stakes are high. The Detroit automakers employ nearly a quarter-million workers, and more than 730,000 other workers produce materials and parts that go into cars. About 1 million more people work in dealerships nationwide. If just one of the automakers declared bankruptcy, some estimates put U.S. job losses next year as high as 2.5 million.

The White House and congressional Republicans have called on Democrats to support a GOP plan to divert a $25 billion loan program created by Congress in September – designed to help the companies develop more fuel-efficient vehicles – to meet the auto giants’ immediate financial needs.

Sens. Carl Levin, D-Mich., Kit Bond. R-Mo., and George Voinovich, R-Ohio, are trying to broker an alternative that could provide bridge loans or a guarantee that the fuel-efficiency loan fund ultimately would be replenished. Negotiators were discussing a scaled-down aid package of $5 billion to $8 billion to help the automakers survive through year’s end.

But it was unclear whether any progress could be made. Democrats strongly oppose letting the car companies tap into the energy loans for short-term cash-flow needs.

Despite the gridlock in Congress, there could be a contingency plan: a return to Washington in December for another postelection session to try to strike a deal.

House Majority Leader Steny Hoyer, D-Md., noted that Democratic leaders were planning to gather for an economic conference the week of Dec. 8. “That is available,” Hoyer said. “The year has not ended.”

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