Algebra

October 13th, 2008 8:04 am | by John Jansen |

In the previous posting I noted that the German government rescue plan which includes guarantees and capital injections totalled 470 billion euros.

I hope that someone can point out a flaw in my logic but that would equate to about $2.7 trillion if one compares the relative GDP size of the US and Germany. In dollars the 470 billion Euros is $635 billion.  The US GDP is about 4.3 times that of the German GDP. Do the simple extension of 4.3 times $635 billion and you get something in the neighborhood of $2.7 trillion.

There are no words to describe that sum. I dare say that it would be impossible to raise that sum in timely fashion without a total disruption of capital market flows.

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  1. 22 Responses to “Algebra”

  2. By Alex on Oct 13, 2008 | Reply

    I believe the equity capital raising is 50-100 billion euros. The larger figure is related to interbank guarantees.

  3. By PV01 on Oct 13, 2008 | Reply

    On the surface, this feels like the FDIC…another program that currently has nowhere near what it would need to cover everything it promises to insure. If one believes the protection will never be needed, I suppose a seemingly impossible amount can be promised without concern for how to fund it. However, it remains dangerous in the “rare” case it doesn’t work…like writing CDS on LEH.

  4. By Mat on Oct 13, 2008 | Reply

    However, if you add up all the bailouts plan out there, it gives you a very high number. As with banks needing fresh capital quickly but punished by the market, are the countries going to raise money at the same time and be punished by market?

    Given the size of the needed funds, is it going to work for everyone out there: read the sooner the better?

    This is probably why a European fund would have come handy here. It would have put less stress on the markets, enable coordinated capital raising, avoid punishment of weak country borrowers…

  5. By John Jansen on Oct 13, 2008 | Reply

    thanks

  6. By Doug on Oct 13, 2008 | Reply

    Aren’t we already pretty close to totally disrupted capital market flows?

  7. By GreenAB on Oct 13, 2008 | Reply

    400b is in guarantees.
    the government is building provisions for 5% of that sum – 20b.

    sure – if all the guarantees would come due, the treasury would have a huge problem.

    but that´s the same with the US´ nationalization of frannies 9tr in debt.

    greetings from Germany!

  8. By Owe Jessen on Oct 13, 2008 | Reply

    I’ll try to paraphrase what Merkel just announced in her press conference:
    1. complete volume is 480 bn €
    2. 400 bn are bank guarantees with an expected loss of 20 bn, applicable to refinance instruments of max 36 months duration.
    3. 80 bn fresh capital for banks
    4. Institutionalized through a stabilization fund, owned by the finance ministry, but administration by Bundesbank
    5. Access to the fund to german banks and german subsidiaries of foreign banks
    6. lifetime of fund supposed to end 31.12.2009
    7. the fund may buy toxic assets if necessary.
    8. Money market funds to be secured through bundesbank
    9. banks have to pay adequate compensation when using the instruments.

    Source (German): http://de.news.yahoo.com/ap/20081013/tbs-das-500-milliarden-paket-f8250da.html

  9. By John Jansen on Oct 13, 2008 | Reply

    Thanks……and yes doug capital market glows are disrupted. Maybe I should have used a phrase such as “sucking the last liter of oxygen out of the room”.

  10. By joe on Oct 13, 2008 | Reply

    France is providing 360B euros or $490B. $440B in loan guarantees and $50B in to buy equities. France’s economy is approximately 1/7 of the US, so that would equate to $3T in loan guarantees and $350B in equity purchases. These are not insignificant numbers…

  11. By jck on Oct 13, 2008 | Reply

    I have posted some fresh sovereign quotes, better across the board.

  12. By jck on Oct 13, 2008 | Reply

    CDS quotes

  13. By John Jansen on Oct 13, 2008 | Reply

    thanks to everyone……i have to run out for a bit but should return in an hour

  14. By Owe Jessen on Oct 13, 2008 | Reply

    Here’s the english version of the ministry’s press info: http://www.bundesfinanzministerium.de/nn_4312/DE/Wirtschaft__und__Verwaltung/Finanz__und__Wirtschaftspolitik/Finanzpolitik/122__Paket__Finanzmaerkte__anl2__eng,templateId=raw,property=publicationFile.pdf

  15. By Deborah on Oct 13, 2008 | Reply

    There seems to be some sort of financial war taking place behind the scenes and in plain view if you watch for the catch phrases being used in the media. Remember 2006 when the MSM financial news were worried about London taking the financial capital of the world status from New York? At that time the financials were crying about legislation to deregulate the markets to keep up with the modern markets.

    IMO, Europe went even “wilder” in their financial systems and are now trying to blame their own self inflicted problems on the US. The war games are in crisis mode and now the pundits aligned to London are spouting about how the UK and Euroland are so far ahead of the US in solving this problem. They have upped the ante and pulled the US government into “sweetening the pot”.

    These are dangerous moves. Most of this war is being waged in shadowed battlefields and through a media game that even Geobels could never envision. If you really follow this story and try to connect the dots, then the outcome is very very scary.

  16. By Don the libertarian Democrat on Oct 13, 2008 | Reply

    Is this some kind of blank check?

  17. By Alarm Guy on Oct 13, 2008 | Reply

    >>>There seems to be some sort of financial war taking place behind the scenes<<<

    Indeed. As credit is rapidly destroyed, all of the governments are in the process of trying seize as much as they can.

    The system is in cardiac arrest. Goods are literally piling up all across Canada because letters of Credit are not being accepted from lenders.

    http://www.financialpost.com/story.html?id=866522

  18. By Alarm Guy on Oct 13, 2008 | Reply

    >>>Is this some kind of blank check?<<<

    yes

    http://www.federalreserve.gov/newsevents/press/monetary/20081013a.htm

  19. By John Jansen on Oct 13, 2008 | Reply

    If the US gets involved in the guarantee game,is the Treasury not constrained by the $700 billion price tag authorized by the much ballyhooed rescue package?

    So if they chose to do a package comparable in size to what the Europeans have done would they not have to go back and dance another fandango with the Congress?

  20. By doc holiday on Oct 13, 2008 | Reply

    I think the dis-connect in calculations goes back a few years, to accounting anomalies that were never fully resolved — in regard to what constitutes reality and what is false and misleading information.

    Re: Enron Taps $3 Billion From Bank Lines In Pre-Emptive Move to Ensure Liquidity,” Wall Street Journal, October 26, 2001.

    Re: Random stuff: Libor, set by 16 banks in a daily survey by the British Bankers’ Association at about noon in London, determines rates on $360 trillion of financial products worldwide, from home loans to derivatives.

    The size of the world stock market is estimated at about $60.9 trillion USD at the end of 2007. The world derivatives market has been estimated at about $480 trillion face or nominal value, 12 times the size of the entire world economy.


    Total Global GDP is about $50 Trillion

  21. By Jon on Oct 13, 2008 | Reply

    I agree that’s a staggering amount, but don’t think of it raising $2.7 trillion in fresh capital. That capital was already raised. It was then invested in bad loans. At its simplest interpretation, the governments are effectively inserting themselves in between the original investors and the original borrowers.

    There will be an enormous amount of market activity to effectively reshuffle the balance sheets, and there are a lot of other considerations as well, but if you’re thinking about it in an accounting sense, it’s not really new money being raised.

  22. By Milton Arbogast on Oct 13, 2008 | Reply

    IMO, Europe went even “wilder” in their financial systems and are now trying to blame their own self inflicted problems on the US.

    I am under the impression, living in France, that this is the case. Not only wilder but more mendacious. Much more mendacious.

    But will they ever buy a dollar of debt from the US again? These are nations of savers. People in Europe don’t even want to think that their savings are in trouble. You want to see people in the streets, fool around with a European’s savings.

  23. By Jeff on Oct 14, 2008 | Reply

    “I am under the impression, living in France, that this is the case. Not only wilder but more mendacious. Much more mendacious”.
    Is it in France that you can borrow money for buying a house without giving copy of your salary slip?
    Could you elaborate? About the European afterthoughts, don’t you think that you shold distinguish between Continental Europe and UK?
    But I agree that European nations are nations of savers.
    Rest of the world is financing US for what? It was considered as being a place which provides good returns on investment. Is it still the case? FIrst, US gave up manufacturing industries at a point which is not reached in Europe. It was replaced by services and IT.
    Then, after the explosion of the dotcom bubble, IT became less important and was outsourced to India.
    Post-manufacturing USA were supposed to get their income from sales of licences, software, etc. It is not the case. IT number of workers is lower now in the US than in 2000.
    IT services exports are not so much.
    The impoverishing effect has been kept away thanks to the real estate bubble and the massive inflows from capital to the US.
    The financial dependence of US to foreign capital has dramatically increased for the Bush years.
    The Reagan years were the end of manufacturing, but IT+added value services substituted.

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