Thursday, 23 April 2009

Looking for the green shoots

It is the nature of politicians in government to be optimists. When you are pretending to run a country it is hard to admit that you have very little idea of what is actually going to happen in the months ahead. And so it is that a feature of this global economic crisis has been that the predictions of the world's leaders as to the likely course of events have invariably been wrong. Thus I find myself treating rather sceptically the sightings of the green shoots of economic recovery. For me when I hear President Barack Obama spying "glimmers of hope" and US Federal Reserve Chairman Ben Bernanke saying “recently we have seen tentative signs that the sharp decline in economic activity may be slowing" I just think that they would say that wouldn't they. 
Wading through the latest output of analysis and predictions from the International Monetary Fund certainly has kept me in the camp of those expecting things to get worse before they get better. To give but one example from the mass of material released overnight. In response to difficulties banks have had in gaining access to funds authorities have responded by
introducing new liquidity facilities, asset purchase schemes, and guarantees for bank debt issuance to prevent fire sales of assets and bank failures. According to the IMF the measures announced so far provide up to $8.9 trillion of financing, but this amounts to less than one-third of the ongoing wholesale financing needs of banks. Government guarantees are new and still mostly undrawn, so most actual financing support has come through new central bank liquidity provision of $2 trillion. Banks have rapidly built up guaranteed issuance since the facilities were introduced in late 2008, totaling $460 billion in 10 countries through January—$130 billion in the United States alone. 

The IMF comments:
Despite these efforts, private bank funding markets are mostly closed—banks rely on central banks and the government (for guaranteed unsecuritized funding), raising the question of how large this financing might conceivably need to be. For an order-of-magnitude estimate, we project the maximum refinancing gap for the 22 largest global banks that would arise if no private wholesale funding were available. The gap rises from $20.7 trillion in late 2008 to $25.6 trillion in late 2011, despite bank assets remaining roughly constant on average over the period and customer deposits growing in parallel with nominal GDP. The rise reflects the large volume of existing long-term debt that will mature and need to be refinanced.
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