More problems in Iceland

From Felix Salmon….

Here’s how fluid things are: last week, Iceland nationalized Glitnir, the country’s third-largest bank. Today, it unnationalized Glitnir, putting it into receivership instead: clearly the bank’s liabilities were too large for the Icelandic government to take on.

Yesterday, Iceland pegged its currency to the euro; today it unpegged the currency, saying “there is insufficient support for this exchange rate”.

This is turning into an international incident. A lot of people in the U.K have money in banks based out of Iceland. Its looking like they won’t get their money back.

The Practical Affects of the Credit Market Freeze

From Blomberg…

“America’s homeowners are going to get uncomfortably familiar with ‘LIBOR’ starting next month,” the New York-based Citigroup analysts wrote.

Libor rates have soared since the bankruptcy of Lehman Brothers Holdings Inc. last month as financial companies hoard cash.

The average subprime borrower facing an adjustable payment for the first time next month would face a monthly payment increase of about 18 percent based on Libor rates as of Sept. 30, rather than the 10 percent that would have occurred based on the rates on Sept. 15, the analysts wrote. The payment would be $1,951, instead of $1,807, they said. Fannie Mae and Freddie Mac loans would be boosted to $1,021 on average, instead of $904.

(h/t Felix Salmon)

Want to watch people panic in real time?

Macro Man has a post up today where he blogs his reaction to the markets in real time. Read it and keep checking back if you want to be able to say that you where there when the world changed. I don’t know how long he will be able to keep it going though. He is on London Time so he will need to go to bed earlier the those of us in the US. Then again, he might not be able to sleep tonight.

Edit: Check on the comments on Macro Man’s post if you have time. I feel sorry for those who thought a rate cut meant a bounce.

The World Is Still Ending

From the AP….

The misery worsened on Wall Street Tuesday, with stocks piling on losses late in the session and bringing the two-day decline in the Dow Jones industrials to more than 875 points amid escalating worries about credit markets and the financial sector.

The Dow lost more than 500 points and all the major indexes slid more than 5 percent. The Standard & Poor’s 500 index saw its first close below 1,000 in five years.

Steps by the Federal Reserve to reinvigorate the dormant credit markets ultimately weren’t enough to calm nervous investors. News about financial companies only added to their despondent mood.

“The calls I’m getting — every money manager I deal with, and every client I talk to — are just very emotional. This is a very, very emotional time, and most of them are taking steps to shore up their defenses, reducing exposure to stocks just to defend their portfolios,” said Hugh Johnson, chairman and chief investment officer of Johnson Illington Advisors.

In other news, the Fed will now loan money to commercial enterprises directly.

Iceland is begging Russia for for a loan because no one else will give them one.

And Spain is begging people to turn in all their cash money. This has a risk of backfiring. Around these parts if the the Government started begging people to turn their money in people might start to pull their money out just to be on the safe side.

While No One Is Watching…

The Financial Markets are dominating the news. But other things are still happening.

From the Telegraph…

Pakistan’s foreign exchange reserves are so low that the country can only afford one month of imports and faces possible bankruptcy.

From Danger Room….

As if seizing a ship-load of tanks and small arms wasn’t bad enough. Pirates have attacked six more vessels off the coast of Somalia in just the past week, according to data from NATO. The now-infamous, weapons-clogged MV Faina remains in pirates’ hands. And international tensions are ratcheting up by the day.

From Haaretz…..

In an interview Friday with the daily Yedioth Ahronoth, Eisenkot presented his “Dahiyah Doctrine,” under which the IDF would expand its destructive power beyond what it demonstrated two years ago against the Beirut suburb of Dahiyah, considered a Hezbollah stronghold.

“We will wield disproportionate power against every village from which shots are fired on Israel, and cause immense damage and destruction. From our perspective, these are military bases,” he said. “This isn’t a suggestion. This is a plan that has already been authorized.”

Pension Funds to the Rescue

From Felix Salmon….

In a nutshell, the government first guarantees all the banks’ deposits. Then the buy side — the Icelandic pension funds, which have billions of dollars in foreign securities — sell everything they own abroad, and bring it back home. At an exchange rate of 126 kronur to the dollar, that will buy them a lot of kronur. (The currency has lost fully half its value over the past year.) The banks, too, will liquidate their foreign holdings, and bring them all back home.

Mr. Salmon thinks that this is a shrewd move. But how would you like to be a pensioner in Iceland right about now? This is a trick that only works once and then what?

For more info on the current sate of Iceland see this piece in Spiegel.

China’s Low Capital Dairy Farmers

I got into a discussion the other night about China’s milk scandal. I was arguing that China’s dairy farmers were unlikely to be responsible for the contamination of the milk. As best as I understand it, China’s Dairy farm’s are all small low budget affairs. In my view, the types of people who run those farms are unlikely to have the accesses to melamine or have the kind of knowledge that it takes to understand how to use melamine to fool milk testing equipment.

This article from the New York Times strengthens my view. Especially this part….

Sanlu, which is 43 percent owned by the New Zealand-based Fonterra Group, one of the world’s largest dairy companies, controls the only milk station in Nantongyi village, giving it monopoly pricing power in the area. Every day farmers guide their cows to the village milking station, pump milk directly into the station tanks and then return home, waiting to hear how much they will earn, if their milk passes quality inspections.

In the first place this shows how poor China’s dairy farmers are. They don’t even own their own milking equipment. In the second place, it makes hard to understand how the farmers could have contaminated their own milk when they sold the milk straight from the cow to the company.

If the article is to be believed, third parity milking stations are quite common in China.

Panic In Europe

From Naked Capitalism…..

Hypo Real Estate, Germany’s second largest real estate lender, teeters on the verge of collapse. The bank has a €400 billion balance sheet, which would make for a failure of a similar scale to Lehman’s (Hypo’s footings are roughly $550 billion, while Lehman’s were $660 billion as of its last balance sheet date).

Even though Hypo it technically a bank, it is not a depositary institution, so rescuing it poses similar difficulties (procedural and political) to the authorities as Bear and Lehman did in the US. The financial system cannot take another body blow of this magnitude. The authorities had better patch this one up over the weekend, or we face even more credit market panic on Monday.

And if that weren’t an ugly enough picture, the failure to salvage Hypo has even broader ramifications. From Marshall Auerbach, independent global strategist who does consultancy for a number of funds, and sometimes financial commentator, via e-mail:

The euro is in serious trouble with this Hypo Real Estate collapse. Germans remain completely in denial. The French get it, largely because their clever finance minister, Christine LaGarde, was educated at the University of Chicago and consequently understands something about markets. Sarkozy, to his credit, appears to be listening to her. The Germans are about to destroy EMU with their pigheadedness, and this will be the stuff of revolution, given that the German people were never consulted on abandoning the DM (if there had been a referendum, the euro would have never been accepted in Germany) and were forced to get rid of arguably the most successful post-war monetary institution, the Bundesbank.

The sop thrown their way was the stupid Stability and Growth Pact, designed by former German Finance Minister, Theo Waigel. So he has hoisted the Germans and the euro zone on a German petard. And that’s made things worse! No EU wide guarantee of deposits, no EU-wide prospect of a major fiscal stimulus and bye bye euro.

Read the rest of Yves post and the comments to get the full scale of Europe’s problems.

More Problems from the States

From the New York Times….

Gov. David A. Paterson said on Friday that he would seek $2 billion in new cuts to the state’s current budget and challenged lawmakers to abandon Albany’s spending habits amid a deepening financial crisis.

And where are the cuts going to come from?

Many observers believe that when a special legislative session is convened after the election, lawmakers will be forced to cut the two largest areas of the budget, Medicaid and education. Hospitals and their workers and teachers are among the most powerful interest groups in Albany.

Also there is this from the LA Times….

Plans by several state and local governments to borrow in recent days have been upended by the credit freeze. New Mexico was forced to put off a $500-million bond sale, Massachusetts had to pull the plug halfway into a $400-million offering, and Maine is considering canceling road projects that were to be funded with bonds.