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License No CISF 064/06 of Cyprus Securities and Exchange Commission
Yesterday, the US Congress unexpectedly voted against Paulson’s plan (228 votes against vs 205 in favor). It seems that the majority of Congressmen are not willing to take the responsibility of voting for a plan, which is not favorably regarded by a significant number of ordinary voters, 40 days before presidential elections. Global indices reacted sharply – the S&P 500 fell by 8.8 (its biggest one day fall since 1987), the DOW fell by 6.98% (its biggest one day points fall ever), the S&P financials index fell by 16%, and European indices lost 4-5%.
The negative sentiment resulted in heavy losses on the commodities market also. Oil prices fell by almost 10%, with the November WTI contracts trading at $96/barrel, metals are also cheaper – only gold prices (the traditional refuge in times of crisis) rose, trading higher than $900/barrel.
Today, the Senate will try to convince Congress to accept Paulson’s plan. For the moment, markets are left dependent on the Federal Reserve for support – yesterday, swap lines with other global central banks were doubled from $290 bn to $620 bn and the rejection of Paulson’s plan has increased market expectations that the Fed will lower rates. This morning, Asian markets opened 4-5% lower, but have since recouped some of their losses and are trading 1.5%-3% lower than their previous close. (The Chinese markets are closed due to national holidays.)
At the close yesterday, the RTS lost 7.1%, closing below 1,200 and MICEX fell by 5.5%. Amongst the blue chips, the heaviest losses were suffered by Sberbank (-8%), Rosneft (-7.1%), and VTB (-6.6%) – in contrast, Polyus Gold continued to rise sharply higher (+21%) on corporate news. Russian ADRs, however, closed lower than the underlying shares on Russian markets.
Today, we expect that Russian markets will continue to fall due to the negative conditions prevalent on global markets, however the recovery of some of the losses suffered in the Asian markets by the close, gives us hope that the Russian markets will also not panic. As of this morning, the FMSS has again banned uncovered short selling, which will ease the downward pressure on the market.
At the same time, while we were waiting for Congress to ratify Paulson’s plan, European financial authorities were forced to step in and save their own banking systems as the problems afflicting the financial sector expanded. The governments of Belgium, Luxembourg and the Netherlands rescued Fortis, the largest regional bank in Europe, with an injection of EUR 11.2 bn. In the UK, Bradford & Bingley, a mortgage lender, also needed to be rescued. Banco Santander will acquire its deposit accounts and branch network for 400 mn pounds sterling, with the remainder to be nationalized by the UK government. The German authorities, together with a consortium of private banks agreed to provide a guarantee of 35 bn against the debts of the second largest German mortgage lender, Hypo Real Estate Holding AG. In addition, the largest bank in Iceland, Glitnir, was partially nationalized (a stake of 75% for 600 mn Euro). In the US, Citigroup acquired the banking business of Wachovia, with a cap of $42 bn on its losses (any losses beyond this level will be covered by the FDIC in exchange for privileged shares and warrants in Citigroup).
In Russia, Prime Minister Putin, announced a packet of anti-crisis measures – the Central Bank, through the Bank for development (VEB), will help refinance the foreign debt of Russian companies and banks up to $50 bn and will ease the refinancing conditions for banks through the availability of credit (without collateral). He also stated that the government was prepared to cover part of the losses suffered by banks on the interbank market through the Central Bank. As a result, any Russian bank or company can ask VEB for credit in order to payback foreign bank loans taken out before 25 September, up to an overall limit of $50 bn (8.6% of Russian gold and currency reserves).
According to the Central Bank, as of April 1, Russian companies and banks owed approximately $40 bn in foreign debt, which means that the limit above could be reached quickly. In our opinion, these unprecedented measures undertaken by the Russian financial authorities, speak volumes of the seriousness of the situation. It is becoming increasingly clear that the global financial system cannot cope with the expanding crisis and without state support, the crisis will threaten the real economy with serious consequences. On the other hand, at the moment, the mechanisms and scale of such support remains ambiguous. There is the danger that, over time, this could drain the state’s gold and currency reserves and lead to increased credit risks on the state level, which could result in lower sovereign credit ratings.
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