News round-up: 21 Nov 2008 – Countries, Citigroup, and Corporates

By Edward Harrison On Nov 21, 2008

Today’s round-up is going to principally be about the three CCC’s of Countries, Citigroup and Corporates. But I also have some tidbits on other topics as well. So let’s jump right in.

Yesterday sucked. Markets fell everywhere from Australia to Hong Kong to France to the U.S. The U.S. fell to a 11-year low (adjusted for inflation this would be even worse, of course). Quite frankly, we can’t stand any more of the selling pressure. Luckily, after an initial fall in Asia, things are looking a heck of a lot better today. Take a look:

So, let’s hope we can end the week with a bit of a relief rally. What most concerns me right now are Corporates. And by that I mean writedown risks, default/bankruptcy risk and corporate bond losses. Let’s start with default and bankruptcy risks.

General Motors

General Motors ranks right at the top of risk when it comes to defaults. I pick on GM out of the Big Three because it seems to be in the worst of shape cash flow-wise. According to Forbes, the company ranks number 9 worldwide in the number of employees: 266,000. A GM bankruptcy would have horrific effects on the employment market, retail sales and the cities that depend on it like Detroit, Gary, Indiana, Windsor, Ontario or Cologne, Germany to name just a few. Moreover, I believe the knock-on effects could be substantial in terms of losses in the Corporate Bond market, the Credit Default Swaps (CDS) market, the asset-backed securities (ABS) market and the CDO (Collateralized Debt Obligation) market. GM has $32 billion in corporate debt outstanding. It is a major subject of CDS contracts and its cars are the underlying collateral in many an ABS or CDO. The loss in retail spending from a GM bankruptcy would have negative repercussions for credit card defaults and, therefore, the ABS and CDO markets for securitized credit card debt. In short, a GM bankruptcy would not be good. Pat Buchanan has an interesting take on this – with Washington to blame for Detroits problems.

Yet, the Bush Administration is acting with GM much as it did with Lehman Brothers — assuming that a bankruptcy is best handled by the market without any contingency plan whatsoever for negative consequences. This is a very ideological approach to governance, and in the midst of a credit crisis, breathtakingly reckless. In my view, policy regarding General Motors is looking a lot like policy toward Lehman Brothers. And we know where that led us. Which brings me to the next Corporation.

Citgroup

Were GM to go under, it would create a difficult situation for other beleaguered companies just as Lehman’s demise did. Citigroup is one of the most beleaguered. This company has really taken a beating of late. And rumors are circulating everywhere about the company. Much ink has been spilled regarding the goings on at Citi and what to do about this.

I’ll leave it at that.

China

Then there are the countries. China is the first to think about. I got a note just a while ago from a friend published by UBS regarding China. It reads:

A major announcement is expected by the PBOC at 4.00 local time. Speculation is for a 54bpt rate cut and a 100bpt reduction in the reserve requirement. There is also talk that Hong Kong banks will be given direct access to the PBOC. There has also been talk from the Korean government that they would support the Korean shipbuilders and the Korean car makers. Whilst this all sounds great (and indeed it is), it raises a much bigger question. Given that Hong Kong is pegged to the dollar (and has been intervening aggressively in recent days to stop its currency breaking through the upper band) and given that China and other countries run quassi-pegs, then if the United States is quantitatively easing, then are these guys going to have to follow suit? And what of those free floating currencies; will Europe be left out in the cold, or will they start to print money as well?

The rumors circulating about China are that the country has untold rural poor stalking urban centers for employment and that China needs to continue to grow to meet employment demand or civil unrest will ensue. As the world depends on China as a major source of savings for investment, slowdown in China has disquieting implications both domestically and globally. See Yves Smith’s “China fears grow over job losses”.

Ireland
And then there’s Ireland. I already wrote a provacative piece pondering whether Ireland was about to go the way of Iceland (strangely enough, if you replace the ‘c’ in Iceland with an ‘r’ – voila: Ireland). But, I find the drumbeat of bad news leaving this country is growing very loud.

Irish shares slump 75pc from peak as ISEQ hits 13-year low
Fears of company closures as banks tighten grip on lending
AIB raises €2bn by tapping the bond market
Bank of Ireland shares surge on takeover reports
Jobs fair seeks to lure Lithuanian workers home (the Lithuanians don’t have a lot to go home to right now)

So, those are my worries. I am heartened by the market’s likely rise but we face some serious hurdles to overcome in the near term.

I have a lot more news to share as always via the news feed. Below are a few of the stories. Enjoy.

Senate sends Bush expanded jobless benefits bill
Eurozone output hits record low
Toyota Will Cut 3,000 Jobs in Japan as Car Sales Fall
Australia, Japan Money Costs Rise; Banks Hoard Amid Bond Risks
U.S. global dominance ‘set to wane’
Have past crises taught us anything?
The bailout is turning into a fiasco
Looking Back Even Further (The Panic of 1873 was the real Great Depression)

Sources
General Motors, Fortune Global 500 – Fortune
GM, Ford, GE debt volumes exceed CDS exposures – Reuters