KeNo's Housing and Economic Portal: Saturday October 15 Housing and Economic stories

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Analysis: Greek banks face nationalization if haircut too severe - (www.reuters.com) Some of the biggest of Greece's debt-laden banks may be headed for nationalization, particularly if debt restructuring becomes more aggressive and investors continue to dump their shares. Hostage to about 40 billion euros of toxic government debt on their books in the form of deeply discounted bonds, their fate is inextricably tied to the outcome of the crisis, which many analysts feel will end with a Greek default. Private creditors, including Greek banks, have agreed to take a 21 percent "haircut" -- a loss on the face value of the debt they hold -- as part of a second, 109 billion euro bailout deal agreed by Greece and its international lenders in July. But a consensus is building among economists, politicians, and investors that without a bigger, 50 percent haircut, Greece will still stumble under its 350 billion euro debt load and lose its emergency funding. "The prospect of a larger haircut has got bigger. Certainly the CDS market sees a larger than 90 percent probability of such an event happening within 5 years," said analyst Niall O'Connor at Credit Suisse in London. "It is possible and could happen within a year, I would not rule it out."

IMF Explores Options to Expand Its Lending Power to $1.3 Trillion - (online.wsj.com) The International Monetary Fund, looking to assure markets that it has the financial firepower to deal with deepening problems in Europe and also crises elsewhere, is exploring how it can have at least $1.3 trillion in lending power, according to officials involved with the discussions. The IMF currently has about $630 billion in usable resources; about two-thirds of that could be lent under IMF rules. Under the plan be considered, the fund would need to make permanent a $590 billion temporary lending facility that was put in place in response to the 2008 financial crisis. The IMF is also counting on member nations to finally enact a doubling of IMF member country dues, totaling $750 billion, which have already been approved in principle. Approvals by national parliaments are expected in early 2012. In addition, say officials involved in the discussions, the IMF is also weighing whether to sell bonds in private markets on short notice, a move that could bolster its safety net beyond $1.3 trillion. The IMF has never sold bonds of this sort, and the U.S. and Germany among others have resisted such moves out of concern that the IMF would have too much independence from its major shareholders. It's not clear whether that opposition has lessened with the ongoing global financial turmoil.

Fed's Twist May Prompt Bigger Turn - (online.wsj.com) "Operation Twist" might be more powerful than many investors expect. As the Federal Reserve Bank of New York prepares to release on Friday new details about the central bank's rate-lowering program, some bond-market strategists have done their own back-of-the-envelope assessment already. Their conclusion: Operation Twist could in some ways do as much—or more—for the bond market than its predecessor, known as QE2. The program also could prove to be a boost for stocks. When the plan was announced Sept. 21, it got a resounding raspberry from the stock market. The Dow Jones Industrial Average fell 2.5% that day and had its worst week since October 2008. Stocks have stabilized somewhat since then. Operation Twist was initially maligned by some market participants because it mainly involves the Fed shuffling its bond holdings, rather than pouring new money into the system. By contrast, QE2, so-named because it was the second round of quantitative easing, saw the Fed pump in $600 billion. Even though Operation Twist hasn't begun being implemented, it already is having an impact on long-term interest rates. It also is affecting what bond investors are buying and selling, pushing many to buy somewhat more risky bonds like mortgage securities and corporate bonds. That's the outcome the Fed has suggested it wants to achieve.

German minister: no appetite for euro fund leverage - (www.reuters.com) Leaders in Germany's ruling coalition said on Friday they opposed moves to increase states' liabilities to the euro zone's rescue fund, keeping alive concerns that Europe will be not able to enough to prevent the crisis from spreading. Coming just as the German parliament gave final approval to giving the 440 billion euro European Financial Stability Facility (EFSF) more firepower, the comments by two party leaders helped send the eurocurrency down against the dollar. Markets see a further expansion of the fund, possibly via some form of leverage, as vital if it is to protect large states such as Italy and Spain from contagion in the event of a Greek default. Philipp Roesler, head of the Free Democrat (FDP) junior coalition partners, said parliament would not support any further boosting of the crisis fund for stricken euro zone states if it would mean an additional burden.

Fast TARP exit meant less capital for some banks: U.S. audit - (www.reuters.com) Some large U.S. banks would have stronger capital bases to better deal with today's market stresses had regulators not relaxed bailout repayment criteria in late 2009, a new government audit showed on Friday. Bank of America (BAC.N) Citigroup (C.N), Wells Fargo (WFC.N) and PNC Financial (PNC.N) were allowed exit the Troubled Asset Relief Program without raising as much equity capital as initially prescribed by the Federal Reserve, the TARP Special Inspector General said in the report. Following bank stress tests earlier in 2009, the Fed gave several banks guidance that they must raise $1 in common equity for every $2 in TARP bailout funds repaid -- a formula meant to enable them to withstand future stresses. But this standard -- which was never previously made public -- was quickly relaxed, allowing Bank of America, Citi and Wells Fargo to repay taxpayers nearly simultaneously in December 2009, raising a combined $49.1 billion in equity capital.