Recession Watch, Q4 edition

Here are a few indicators of credit stress:

The TED spread is at 0.99, sharply lower. (improved)

The TED spread was stuck above 2.0 for some time. The peak was 4.63 on Oct 10th. The TED spread has finally moved below 1.0, although a normal spread is around 0.5.



The three month LIBOR has decreased to 1.109%. The three-month LIBOR rate peaked (for this cycle) at 4.81875% on Oct. 10. (improved) Imagine all those adjusted rate mortgage loans tied to treasuries or even the 3 month LIBOR? The rates are looking pretty good!


The A2P2 spread as at 2.23. This spread has seen a huge decline in 2009. This is far lower than the record (for this cycle) of 5.86 after Thanksgiving, but still way too high. (improved).

This is the spread between high and low quality 30 day nonfinancial commercial paper. Right now quality 30 day nonfinancial paper is yielding close to zero. If the credit crisis eases, I'd expect a significant further decline in this spread - although this is good progress.


The two year swap spread from Bloomberg: 52.25. (improved). This spread peaked at near 165 in early October, so there has been significant progress, and the swap hasn't been this low since mid-2007.


By these indicators, the Fed is making progress.

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Whomp said:

Good stuff Integral.

My guess is the Case-Shiller will bottom when we hear the greater New York area starts to crack. The lack of bonuses and in many cases jobs on Wall Street will be ugly this month. Some of the $10k/month mortgage payments in Darien, CT. might not be paid...

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Cutlass said:

The Governor of CT has been saying tax revenue from people who work in NY and live in CT is well off, necessitating a lot of as yet un agreed to budget cuts. So the money from that direction has been declining for a couple months now.

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Meanwhile, economic commentator Jim Power has predicted the unemployment rate may increase to 15% by this time next year in one of the gloomiest jobs forecast to emerge from the current recession.

He said 15% was 'easy to see' by this time next year, which would mean 420,000 people signing on the live register compared with almost 300,000 in December.

The unemployment rate is currently running at 8.3% according to December figures released by the Central Statistics Office earlier this month.

FÁS says unemployment will increase to 12% by this time next year. In December the ESRI predicted unemployment would rise to 10% in 2009.

Mr Power, who is chief economist at Friends First, says the country is facing a labour market crisis.

Speaking on Morning Ireland, Mr Power said it was difficult to see any area of the economy that would be a net job creator over the next 12 months and easy to see areas of the economy losing jobs.

Mr Power said most of the economy was contracting including manufacturing, financial services, construction, hospitality and retail while there was a freeze in the public sector.

Here in Ireland there was a sense of waiting until January to see if times got better before cutting jobs, he added.

He said labour was the biggest cost faced by most companies.

Mr Power said he could see many more retail jobs going once the January sales are over.

He said the recession was feeling like a depression because so many people knew friends and colleagues who were losing their jobs and starting to feel very nervous about their own job prospects.

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Mortgage finance company Fannie Mae (FNM: 0.63, 0, 0%) says it's likely to need up to $16 billion from the government as conditions in the U.S. housing market continue to deteriorate.

Fannie Mae's need for $11 billion to $16 billion in taxpayer aid comes after sibling company Freddie Mac (FRE: 0.63, 0, 0%) disclosed last week that it's likely to need as much as $35 billion in federal support on top of the $13.8 billion it received last year.

Fannie, which has yet to receive any government aid, is still preparing its fourth-quarter financial statements and says the actual amount needed "may differ materially from this estimate."

Fannie and Freddie were seized by federal regulators last fall. An agreement with the Treasury Department allows the government to invest up to $100 billion in each company.

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RedRalphWiggum said:

Fanny mae asking for mooooooooarrrrr!!!!

form fox business

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A gloomy economic outlook dominates discussions as global political leaders and business people gather for the annual World Economic Forum in Davos.

Economists are warning that global recession and trade protectionism will be dire for developing countries.

A poll of business leaders suggests any recovery could take three years.

Chinese Premier Wen Jiabao and Russian PM Vladimir Putin are to speak on the first day of the summit, which is themed "shaping the post-crisis world".

Klaus Schwab, the founder of the World Economic Forum, has warned the crisis is nowhere near over yet.

Politicians rule



We have to face up to the fact that the recovery, when it comes, later this year or early next year, is going to be anaemic



Stephen Roach, chairman, Morgan Stanley Asia
Davos gets down to business
Gloomy bosses fear slow recovery


Some 2,500 guests, including senior executives from some of the world's biggest banks as well as 40 heads of state and government - a record number - will join discussions on the economic crisis, poverty, energy, climate change and free trade.

While the annual event in the Swiss mountain village of Davos keeps attracting many of the world's most powerful people, the mood has changed dramatically.

Some companies have been wiped out by the world's continuing financial crisis, while others have been rescued by governments or nationalised.

As a result participants agree that this year it will not be bankers dominating discussions; instead politicians will set the agenda.

However, they will focus on economic issues as well.


HAVE YOUR SAY Let's hope that they are worth their salt and can come up with some constructive ideas
Chris Sims, Nova Friburgo
Send us your commentsIndeed a new survey conducted by PricewaterhouseCoopers suggests that business confidence among top bosses around the world has plummeted in recent months.

"We have to face up to the fact that the recovery, when it comes, later this year or early next year, is going to be anaemic," said Stephen Roach, Morgan Stanley's Asia chairman

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Spanish police have arrested six people on suspicion of perpetrating a £420m fraud relating to a London-listed company, it has been confirmed.

The arrests relate to the fraud committed at a bogus, AIM-listed company called Langbar between 2003 and 2005, said the London Stock Exchange.

Reports suggest that the main suspect involved is among those arrested.

The six arrests were made in Madrid, Barcelona and the town of Elche in the southeast of Spain.

According to Danny Wood, the BBC's Spain correspondent, police also said they had searched six premises where they confiscated computers and documents.

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World economic growth is set to fall to just 0.5% this year, its lowest rate since World War II, warns the International Monetary Fund (IMF).

In October, the IMF had predicted world output would increase by 2.2% in 2009.

It now projects the UK, which recently entered recession, will see its economy shrink by 2.8% next year, the worst contraction among advanced nations.

The IMF says financial markets remain under stress and the global economy has seen a "sharp turn for the worse."

'Virtual halt'

The outcome, it says, has been to send global output and trade plummeting.

"We now expect the global economy to come to a virtual halt," said IMF chief economist Olivier Blanchard in a statement.

The process of loss recognition and restructuring of bad loans is still incomplete

IMF World Economic Outlook Updat
The IMF says that despite a number of policy moves, which have been carried out by many states, financial strains remain.

International co-operation is needed now to draw up new policy initiatives, and for capital injections to support "viable financial institutions".

Meanwhile, it predicts that the eurozone economy is poised to shrink by 2.0% in 2009 and the US economy by 1.6%.

Banking crisis

The report comes on the same day the International Labour Organization said that as many as 51 million jobs worldwide could be lost this year because of the global economic crisis.

It had been hoped that growth in developing nations would continue at a steady pace and help offset the recession in developed nations such as the US and UK.

If the recession deepens in 2009, as many forecasters expect, the global jobs crisis will worsen sharply

International Labour Organization


Global job losses 'could hit 51m'

But the seemingly endless crisis in the banking system has put paid to that notion.

Countries such as China are now struggling with a collapse in demand from their primary export markets.

Meanwhile, developed economies such as Japan, Spain, the US and UK are in recession, with new job losses being announced on a daily basis.

'Uncertainty'

The IMF says that growth in emerging and developing economies is expected to slow sharply, from 6.25% in 2008 to 3.25% in 2009.

It cites the main reasons for the drop as being falling export demand, lower commodity prices and much tighter external financing constraints.

The outlook is highly uncertain, and the timing and pace of the recovery depend critically on strong policy actions

IMF World Economic Outlook Update

The IMF points out that policy efforts to tackle the downturn so far - such as liquidity support, deposit insurance and recapitalisation - have been drawn up to address the immediate threats to financial stability.

However, it says that these emergency measures "have done little to resolve the uncertainty about the long-term solvency of financial institutions".

"The process of loss recognition and restructuring of bad loans is still incomplete," says the IMF's World Economic Outlook Update.

'Bad bank'

The IMF says future co-ordinated financial policies should concentrate on recognising the scale of financial institutions' losses and on providing public support to those institutions that are viable.

"Such policies should be supported by measures to resolve insolvent banks and set up public agencies to dispose of the bad debts, including possibly through a 'bad bank' approach, while safeguarding public resources."

The IMF says the global economy is projected to experience a gradual recovery in 2010, with growth picking up to 3%.

"However, the outlook is highly uncertain, and the timing and pace of the recovery depend critically on strong policy actions," it warns.

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More than 50 million jobs could disappear around the world this year, a United Nations agency warned .

As the global economy battles its worst downturn since the 1930s Great Depression, the International Labour Organisation said its worst-case scenario would see 51 million more jobs lost by the end of this year, taking the global unemployment rate to 7.1% from 6% last year.

More realistically, the organisation estimates that 30 million people could lose their jobs if financial turmoil continues through 2009, pushing the unemployment rate to 6.5%. Under its most optimistic scenario, this year would end with 18 million more people out of their jobs and a jobless rate of 6.1%.

"If the recession deepens in 2009, as many forecasters expect, the global jobs crisis will worsen sharply," the ILO said. "We can expect that for many of those who manage to keep a job, earnings and other conditions of employment will deteriorate."

Developing countries will suffer most, according to the organisation, whose governing structure includes governments, employers and workers groups.

"Sub-Saharan Africa and south Asia stand out as regions with extremely harsh labour market conditions and with the highest shares of working poor of all regions," the report said.

The ILO estimates that North Africa and the Middle East had the highest unemployment rates at the end of 2008, at 10.3% and 9.4% respectively.

Central and south-eastern Europe and the former Soviet states ended last year with a jobless rate of 8.8%, sub-Saharan Africa's was 7.9% and Latin America's was 7.3%. East Asia fared best of the world's regions at 3.8%.

Most job creation in 2008 came from south Asia, south-east Asia, and east Asia, while developed economies and the European Union had a net loss of some 900,000 jobs.

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