Nevertheless, the US Government Accountability Office (GAO) noted in a report at the end of March that Treasury should require that AIG seek additional concessions from employees and existing derivatives counterparties.
Meanwhile, in the real economy credit growth to the private sector has continued to slow at a fast pace in the US as well as in Europe, while US credit card charge-offs rose to an all-time high in February at 8.82%. Moody’s predicts the charge-off rate index will peak at about 10.5 percent in the first half of 2010, assuming a coincident unemployment rate peak at 10 percent. In turn, Fitch warns that credit card delinquencies point to record defaults ahead. Keep also in mind that global high-yield defaults are expected to reach 15% by the end of 2009 and that the commercial real estate market has just turned.
According to recent press reports, in a report next week the IMF plans to raise its global loan and securities loss estimate to $4 trillion by the end of 2010, including about $3.1 trillion in US originated losses (up from $2.2 trillion estimate as of January) and $900bn in European and Asian originated losses. Compare these numbers with US originated loan and securities losses of $3.6 trillion as estimated by RGE Monitor in a January report. As outlined in our report, $1.8 trillion are expected to fall on US banks alone.
Eurozone banks are also exposed to the US downturn, especially through expected losses on securities holdings. Adding the expected losses on Central and Eastern European exposures, as well as domestic originated loans and securities losses, a first back of the envelope calculation suggests combined losses of about 11% to 15% of GDP compared to the 12.6% of GDP calculated for the US.
How are eurozone governments responding to their toxic asset overhang? Both the ECB and the European Commission were reported to be working on consistent draft guidelines for “bad bank” while leaving each country its own strategy.
The rapidly worsening situation in Ireland - the Economist defines it as a depression - for banks, despite liability guarantees, forced the government on April 8 to introduce its nationwide “bad bank” scheme. In particular, the Irish solution envisions the government buying certain toxic loans at a discount from banks’ balance sheets in return for government bonds. Importantly, the assets will be transferred at an appropriate discount, thus forcing the current stakeholders to take a haircut. Moreover, the government requires the banking sector to cover any losses the toxic asset management company incurs at the end of its mission. While RGE thinks this is an efficient approach, the necessary upfront outlays to capitalize the investment fund weigh further on the country’s strained public finances and funding costs.
The German proposition, on the other hand, aims to distinguish between temporarily illiquid as opposed to toxic assets. According to press reports, the idea is to guarantee the illiquid assets in separate but still bank-affiliated vehicles with EUR200 billion in government funds. Press reports point to a far more radical solution in the making for problem banks, such as Hypo Real Estate (HRE), some state banks, as well as Commerzbank. A final decision is expected by April 21.
Source: RGE Monitor, April 8, 2009.
