Strategy

Financial crisis update

Thu, May 22 2008, 10:37 GMT
by Danske Research Team

Danske Bank A/S


The aim of this publication is to provide an overview of current stories/issues in relation to the financial market crisis. We update this publication regularly, the previous Financial crisis update being from 23 April.

  • • The improvements have generally continued over the last month and risk appetite has increased. However, problems remain on some markets, not least in the money markets. Term liquidity (such as 3m EURIBOR) is still priced significantly wider than corresponding EONIA rates. Moreover, we continue to see a significant negative CDS-cash basis (the CDS spread is tighter than the corresponding cash bond spread) and as long as this continues to be the case we are not yet out of the woods.
  • • That said, we think that the nature of the credit and liquidity crisis is changing. We are moving away from a situation where the large spread movements were first and foremost driven by technical issues such as forced selling and unwinding. Going forward we think the attention will be turning to how deeply the real economy will be affected by the crisis ie, if we look at the banks, we will be moving from a period where focus is directed at mark-tomarket losses, to a period where the focus is turning to real losses. We believe this could drive spreads wider.
  • • Bloomberg currently reports USD 382.6 bn in losses from banks world-wide and USD 269.6 bn in capital raised. So banks have to a large extent been able to raise fresh capital. The IMF has estimated that losses stemming from the US mortgage crisis may approach USD 1 trillion. Falling US house prices and rising delinquencies may lead to USD 565 bn in mortgage-market losses according to the IMF in their latest Global Financial Stability report. Despite the great uncertainty regarding the size of future losses, it seems safe to state that much more is in the pipeline and that risks of negative surprises going forward remain.
  • • Lending standards continue to be tightened in both Europe and the US, underlining the overall picture of tightening credit availability globally.

Key things to watch going forward:

  • • 30 May – Results and possible actions from BBA on the way LIBOR rates are collected and calculated.
  • • The next earnings results from the large banks are due in June, eg, Lehman Brothers is expected to report on 12 June, Goldman Sachs on 13 June and Morgan Stanley on 20 June. Focus will not only be on the banks’ possible losses going forward, but also on their ability to raise new capital.
  • • The end of Q2 may be an important event on the money markets.
  • • How will the already-implemented initiatives from the central banks work? And what new initiatives are in the pipeline from central banks? An expansion of TAF from one to three months is a possibility.
  • • Default rates and economic news should become more important as the crisis changes towards being driven by economic factors and fewer technical issues and forced selling. However, the risk remains that the financial crisis will flare up again going forward.

Published on  Thu, May 22 2008, 10:40 GMT

Archive

Danske Bank  | Holmens Kanal 2-12, DK-1092 Copenhagen
http://www.danskebank.com/ | danskeresearch@danskebank.com

Legal disclaimer and risk disclosure

This publication has been prepared by Danske Bank for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Bank's research analysts are not permitted to invest in securities under coverage in their research sector. This publication is not intended for private customers in the UK or any person in the US. Danske Bank A/S is regulated by the FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange. Copyright () Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.

Interested in forex trading? forex brokerage firms!


GFT
Contact the broker/FDM
Open a demo account
ACM Advanced Currency Markets SA
Contact the broker/FDM
Open a demo account
Saxo Bank A/S
Contact the broker/FDM
Open a demo account		FXA Securities Ltd ( MF Global Group)
Contact the broker/FDM
Open a demo account		Alpari (US), LLC
Contact the broker/FDM
Open a demo account

FXstreet.com will give you a 3 months membership as soon as minimum rebates have been generated (€150 for private trader/ €300 for corporate trader)

[Read Premium full description]


Note: All information on this page is subject to change. The use of this website constitutes acceptance of our user agreement. Please read our privacy policy and legal disclaimer.

Opinions expressed at FXstreet.com are those of the individual authors and do not necessarily represent the opinion of FXstreet.com or its management.

Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.

©2008 "FXstreet.com. The Forex Market" All Rights Reserved.