As the Financial Times points out today, we are witnessing a replay of the pattern seen during Japan’s credit bust, except in reverse. Western banks were leery of extending credit to the Japanese and charged a premium over normal interbank rates. Now that the Japanese credit markets are more liquid than many others, foreign bank borrowers now find that some Japanese banks require a higher rate.
From the Financial Times:
Western banks have seen the credit crunch increasingly choke off their usual funding lines in capital markets and among themselves and so have been forced to scour global markets for alternative sources of money.
Some have been turning to the yen money market, attracted by the relative stability of the markets so far.
However, some regional Japanese banks appear increasingly reluctant to lend to foreign institutions through the yen money markets as the fallout from the subprime crisis brings anxiety about creditworthiness to yet another shore.
A significant portion of the demand in the yen market for three-month term money is from foreign institutions raising money that is converted into currencies such as dollars, sterling or euros, says Masayuki Ebira, director of money markets at Barclays Capital in Tokyo.
This is pushing up the rates at which all banks lend to each other in the money markets as measured by the Yen Libor rate, or the local Tibor rate.
“There is a lack of credit access from Japanese banks to non-Japanese banks,” Mr Ebira says.
If the Japanese banks were to increase their limits, it would be easy for the others to borrow but “they are so conscious about credit conditions at banks that about half the regional banks never lend money to non-Japanese”.
A post on the Wall Street Journal Economics Blog, “U.S. Situation Could Be Worse Than ’90s Japan?” suggests these concerns may be valid:
“People say the U.S. isn’t like Japan 10 years ago,” Societe Generale strategist Albert Edwards wrote in a note to clients today. “I agree. Actually it’s WORSE!”
Mr. Edwards has been making Japan comparisons ever since the dot-com bubble burst. Many people disagreed with such assessments, pointing out that U.S. banks and real estate were in far better shape. That’s not the case anymore, says Mr. Edwards, who also notes that Japan didn’t experience a real credit crunch until years after the bubble burst in 1990. And while there’s a view that Japanese banks were glacial when it came to writing off bad loans, part of the problem was that bad loans kept on turning up as the situation worsened. Sound familiar?
What could make the U.S. situation worse, he says, is that Japan’s citizens had deep reserves of saving to tap into, whereas the U.S. personal savings rate is near zero. And Japanese companies were unwilling to fire people, which, while it may have made for a sclerotic economy, helped prop up spending.
Meantime, CLSA Asia-Pacific Markets strategist Christopher Woods, who writes as “GREED & Fear,” thinks that the U.S. will need to swallow the same sort of bitter pill that Japan eventually did. The Fed’s actions, in his view, amount to nothing more than a Japan-style staving off of the inevitable.
“[T]he stock market has now embarked on a rally driven by the view that the Fed will now ‘do anything’ to prevent a systemic problem,” he wrote in a note today. “If the moral hazard trade remains as seductive as ever, GREED & fear remains firmly of the view that the Fed’s unprecedented action has only delayed market clearing Japanese style and certainly does not mark a definitive bottom. Investors should, therefore, use any classic bear market rally led by the financials to sell any Western financial stocks they still own.”
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How about this homebuilder tax rebate. This is an affront to every American.
How about the equivicating when Senate pressed panel to reveal the BS portfolio contents. Quite remarkable that your governement just spent your money but they say don’t worry we got it under control children. And people were up in arms about listening ion on a few cell phone calls. One of the greatest stories here is the absence of the MSM. If only Eric Lichtblau new a thing or two about the finance. The best we get is a periodic break in from Charlie Gasbag after he gets the PR call. (notwithstanding opinion pieces). Where are the leakers from treasury a la Scooter Libby?
I don’t understand why homebuilders deserve that tax break, either, unless the government is inaugurating a new policy to protect all businesses from losses. The homebuilders are certainly not blameless in the housing debacle. And developers in general deserve some pain for their routine bulldozing over environmental and city/town planning concerns.
This whole system is insane. The sp500 is 20 percent finance companies and that doesnt include other companies like elambert sears which basically is a HF. How do we plan on keeping them all afloat? Answer. We cant.
I think we all need to know what exactly is in that $30 billion portfolio that the Fed just lent our money for. The media needs to pound the table on this. The financial smoke and mirrors needs to end.
Gee, nobody could ask what portion of that $30B is level 3 and level 2? That would be far more informative than the CUSIPs. Anway, I’m happy to learn that the Fed knows value better than the market…after all, this `mispricing’ and `panic’ have only gone on since last summer. Sometimes it just takes a while for fundamental value to be appreciated.
“Some Japanese banks reluctant to lend to foreign banks”
When choosing between wall street and the yakuza, at least we could understand the terms of the yakuza deal.
The fact is that some Japanese banks are reluctant to lend to ANYBODY unless the borrower is preferred by Financial Services Agency, the micro-management regulator.
Japan’s credit crunch in the 90s was mostly internalized within the country and so the people/banks within felt the full brunt of the crunch.
Today with the US though, the risks and therefore damage associated is greatly externalized to other markets such as Asia, Europe, Middle East etc etc.
Also, there is a much larger interest to keep the US afloat (even if its “wrong”) than Japan due to the large vested interest the world has in the US as well as sharing the burden of the crunch. The actions by the world and the Fed might keep the US afloat long enough for some limited faith to be restored and some liquidity to be restored in the security market which would greatly mitigate the impact of the recession.
Personally I am a bear and totally want US financials pounded but I still want to analyze the other side, any comments?
Yep, basically you have to make an appointment 10 days in advance to borrow 200 yards of JPY.
I think you are seeing another unintended consequence of the Fed’s new facility for primary dealers. Now *all primary dealers are tainted*, and that’s over 50% of the financial world’s muscle. All primary dealers are tainted because no one can be sure if they are alive because they should be, or alive because the Fed has them on life support. The Fed’s new facility, rather than increase confidence, will diminish it.
Like Ben Franklin said, “they who would give up an essential liberty for temporary security, deserve neither liberty nor security. Here’s an interesting book, http://www.bostonteapartybook.com