More on Turkish FX liquidity

While I was trying to come up with some novel Turkish banking data for the Financial Econometrics class I am teaching this semester, a friend of mine in retail banking called up to ask where she could find data on syndicated lending to Turkish banks. I thought I could use the data for my class, so I took it to heart to helping my friend. Conversations with a couple of friends who analyze banks revealed that that data is not easily available, but I was halfway in my data-gathering efforts when I saw Erdal Saglam writing in Turkish business daily Referans on the same subject.

Normally, I am as naive as they come, but Erdal Saglam, whose interconnectivity is more than a CDS, and my banker friend on the same topic managed to raise even my eyebrows. So, a call to my friend and a couple of banking analysts confirmed what I suspected: Syndicated and securitized lending is likely to dry up for the rest of the year and in 2009. This, combined with the already hefty payments of banks in 2008 and 2009, means that banks are likely to continue to scramble for liquidity. In fact, I had mentioned in an earlier post that FX liquidity is getting tight in Turkish markets, and the fight for liquidity may have already begun: FX deposit rates have gone up to 7% from 5% in a matter of days.

As much as Erdal Saglam's article is right on target, it turns out that his numbers are not correct. Below are the actual numbers, courtesy of my retail banker friend, which I also confirmed with a couple of banking analysts.

Bank	year-month	Type	Size	Currency
Garanti	8-Nov	Syndication	700	US$
TEB	8-Nov	Syndication	240	EUR
Finansbank	8-Nov	Syndication	479	US$
Finansbank	8-Nov	Syndication	425	US$
Akbank	8-Dec	Syndication	400	US$
Akbank	8-Dec	Syndication	550	US$
YKB	8-Dec	Syndication	700	US$
Vakifbank	8-Dec	Syndication	200	US$
Vakifbank	8-Dec	Syndication	375	US$
Alternatifbank	8-Dec	Syndication	113	US$
Akbank	9-Jan	Syndication	100	US$
Isbank	9-Apr	Syndication	900	US$
Garanti	9-May	Syndication	600	EUR
Akbank	9-Jun	Syndication	500	EUR
Garanti	9-Jul	Securitization	175	US$
Sekerbank	9-Jul	Syndication	250	US$
Vakifbank	9-Jul	Syndication	750	US$
Akbank	9-Aug	Syndication	1000	US$
Tekstilbank	9-Aug	Syndication	132	US$
YKB	9-Sep	Syndication	1000	EUR
Isbank	9-Sep	Syndication	485	US$
Isbank	9-Sep	Syndication	236	EUR
Vakifbank	9-Dec	Syndication	175	US$
Isbank	10-May	Securitization	700	US$
Tekstilbank	10-Aug	Syndication	25	US$
Tekstilbank	10-Aug	Securitization	87.5	EUR
Garanti	11-May	Securitization	300	EUR
Isbank	11-Jun	Securitization	250	US$
Isbank	11-Nov	Securitization	600	US$
Akbank	12-Jun	Securitization	550	US$

Reads of the day

Tyler Cowen gives three main underlying causes of the crisis: Global savings glut, greater willingness to take on risk and weak governance & oversight. Well, actually three and a half: There was also some bad luck involved, as these three combined to create the financial mess we are in.

Some weekend gossip: This time, it's the IMF. Felix Salmon had warned on Srauss-Kahn's lower back problem more than a year ago. Interesting side point: The WSJ article and a blog piece by Felix Salmon were the only articles on the issue I stumbled upon in in the international news sphere, whereas it made headlines in all the major newspapers in Turkey. Do Turks, being the Fund's best customer in the last few years, follow the fund too closely? Or do they just love gossip?

There is anecdotal (chats with bankers) as well as hard (latest CBT actions) that Turkish banks are scrambling for FX liquidity. You can almost hear them screaming: Where is my swap line? Brad Setser goes on to discuss the broader implications of unlimited liquidity.

Mark Tahoma summarizes the argument that has been going on between New Keynesians and neoclassical economists (or at least one neoclassical economist) on using fiscal spending to simulate the economy- would be a very good case study in an Introductory Macro class as some of the main conceptual differences between the two camps are revealed.

One of the interesting results of the predictions markets literature has been confirmed: Manipulation, by letting the wisdom of the crowds take advantage of the manipulator, can actually improve the efficiency of prediction markets- see also my recent post on prediction markets

Leading indicators and consumer sentiment are at all time lows- and not just for the US. I've been wondering whether this shift reflects the recession or is simply a side product of the recent financial turmoil. News n Economics argues convincingly that it is the former.

Nice summary of where we stand on LIBOR from FT Alphaville- also has links to many of the interesting writings of the week on the subject.

Crowding in or crowding out, that's the question- whereas the first article argues that capital injections to banks will enable banks to attract more capital, Casey Mulligan applies Ricardian equivalence to argue for the opposite.

A new working paper, discussed in Odd Numbers argues that lending standards did not decrease in the subprime market after all. But an IMF working paper had reached the opposite conclusion. I wish I had time to go over both and decide for myself...

Fed's response to the crisis, in chronological order.

One of the leading experts on US housing argues against policies aimed at trying to stop house prices falling further.

The week in pictures from Econompicdata

Death of an theorem

CDOs and CDSs explained

To close with a lighter tone: Research of the week, dedicated my buddy Hakan.

Reads of the day: Special Turkish edition

Turkey becomes non-permanent member of the UN security council

A forthcoming paper in World Development finds that export decisions of Turkish manufacturing firms depend on exporting history, with the recent past weighing much more heavily: It'd be really nice if they dwell on the reasons in future research and distinguish between competing explanations, but you'd need a different database than the one they are using for that. I am also thinking that, after having mentioned Turkish firm-level databases twice in a row, I should write an introduction on what is out there.

Case analysis of the Turkey-US WTO rice dispute

Case study of Turkish automobile and consumer electronics industries (two major exporters)

I just noticed I might have wasted a few months of my life...

I just came across a really interesting paper by Ricardo Hausmann and company on growth diagnostics. They illustrate the problem of identifying binding constraints in an economy with the following example from the animal kingdom (Ricardo is great at coming up with such short stories for motivating his work):

"Suppose you were asking: what is the binding constraint to animals thriving in the Sahara desert? This is not unlike the question of what limits economic growth in a country. However, in the Sahara, it is instructive to note that of those few animals that do thrive in that environment, a very large proportion are camels and a very small proportion are hippopotamus. The fact that the animals most intensive in the use of water, hippopotamus, are scarce while the animals least intensive in the use of water, camels, are thriving suggests that the supply of water may be a binding constraint to the spread of animals in the Sahara.

In general, the idea is that looking at the nature of the most successful parts of the economy can be informative of the constraints that affect others. We would expect to observe that those who are either structurally less intensive in the constrained factor, or at least more able to bypass it, will be doing comparatively well. Conversely, those sectors most intensive in the constraint will be doing relatively poorly."

The idea is that surveys/interviews with firms to identify binding constraints, usually conducted with the relatively more successful companies, can take you in the useful direction because these firms are successful precisely because they have been able to surmount these constraints one way or another. For example, if such firms are reporting that customs is not a binding constraint, it may be that they bribe the officials to get their goods across, while corruption continues to be a major impediment.

At my previous life in Ankara, I spent a few months net working on the Turkey Investment Climate Assessement. In fact, we were using the TOBB database of firms, which covers all the registered enterprises rather than a limited (and therefore biased) databases such as from TUSIAD (for an extreme case of this problem, see McKinsey 2003, which used the largest firms to make inferences on whole sectors). However, by taking our sample from registered firms, we were totally ignoring unregistered firms, i.e. the informal sector (we even had a section on informality in the survey).

What is the solution? The "waste of life" in the subject was a bit of an exaggeration; the Worldbank ICA surveys have definitely been useful, at least for Turkey. But to identify the real bottlenecks in the economy, it could have been identified with the De Soto way, i.e. taking the informal sector into the picture.

Reads of the day

The Black Swan guy is stating the obvious after all (risk managers were really bad)

Brad DeLong goes over how the US tried to tackle the crisis in half a dozen ways for the past one and a half years.

The seen and the unseen of Fed policy (and a bit of Bastiat)

I have my cab driver index of economic indicators, but here is a better one: the mailman index

Estimating the damage in credit stress

Simple hedge fund outflow model

The scariest hour on Wall Street

August TIC data shows that the dollar rally in that month was not supported by inflows

Brad Setser looks at Treasury and agency holdings of foreign central banks (and does some more Fed balance sheet analysis)

Voice of a Hedge Fund

With the great hedge fund unwind underway, I thought it might be a good idea to publish a very recent investor letter of a hedge fund (the letter was written yesterday). I am skipping the boring (and private) parts on the returns of the fund and publishing the commentary on the current markets, with the manager's permission of course...

"...But we should ask ourselves, why is gold not making a stronger comeback? Gold, to many investors, is a safe haven. People demand gold as a hard asset which can protect investor’s diminishing wealth. The euro/dollar parity is showing a -9.92% drop while gold’s decline of -5.12% is less severe. The strengthening dollar contradicts skyrocketing money supplies and people are buying dollars instead of gold to shelter cash during this financial crisis.

We are going through a historic time which I believe and reiterate is the end of the credit era. The U.S. announced its bail-out plan to save the banks with a $700bn budget. European leaders pressed for an overhaul of global financial structures after Asia joined western countries in bailing out banks to avert a financial meltdown and tackle a looming global recession. Developing countries are investing directly into the banking system to insure bank deposits, guarantee certain bank debt and in some cases nationalize banks. I believe companies, mainly small and micro-cap ones, which need short term financing to continue their operations, are going to have a difficult time staying in business. Banks are not willing to lend and the customers they do lend to are being charged higher rates.

The catalyst to this lack of short term lending is Lehman Brothers. When Lehman went bankrupt, most investors, myself included, thought the bank’s failure—like Bear Stearns—was necessary to clean up the financial system. However, the most alarming development to emerge in the aftermath of the Lehman collapse centered on other bank’s money market accounts which held Lehman bonds in their portfolios. When Lehman became insolvent, investors saw an instant decline in the value of their money market accounts. Thus, people got scared and pulled their capital out. Furthermore, on the other side of the scale, banks used the funds from the money market accounts to lend short-term loans or lines of credit to small businesses and other banks. The bankruptcy of Lehman therefore, stopped lending between banks, capitulating the fall of the financial system.

The liquidity the government is pouring into the financial markets will take time to jumpstart the economy. The credit problems are beyond sub prime and will soon reveal the effects of the deterioration in the consumer credit markets. Two thirds of this economy depends on consumer spending which has tapered off considerably in the past six months. This is a very special time for the financial markets. The most important thing for investors to achieve is to preserve capital and steer clear of any unnecessary risk, as the additional systemic risk premium is still hovering in the markets.

The Meadowbrook Beta Neutral Fund is benefiting from its asset allocation model in these unstable and extremely volatile markets. Although we have experienced rough markets in the past and navigated our way through them, we are aware of the current market situation and additional risks like systemic risk, economic risk and political risk. We are confident in our processes and our investment discipline and we see great opportunity amidst this market turmoil. People make irrational decisions in chaotic markets and we are ready to take advantage of that. Once we see the markets stabilize, there will be an opportunity of a lifetime for funds like us with preserved capital and sensible risk management. Thank you for your continued support during this exceptional period.

Afsin Alp
Portfolio Manager"

Reads of the day

Macro Man summarizes developments of the last couple of days (as I was traveling yesterday, I found it very useful to bring myself up to speed)

News from the US housing market: Mortgage rates surging and house prices likely to decline further, but it don't look that bad when compared to some other countries

Some more good news: Econbrowser summarizes a couple of recent positive developments I had linked in the past few days

While a recent paper forecasts deflation for the US, financial markets are conveying a similar message (you can do the same exercise with TIPS and you get a similar picture)

A nice and short piece on the Lehman CDS payout, which also goes over some general topics of debate surrounding CDSs.

I've been seeing a lot of comparisons of the current US financial meltdown the Japanese 1990s crisis and worries that US is about to enter its lost decade. Here's a good expose of why it won't...

...And while we are in the 1990s, let's have a look at the Swedish bailout with an article from the Economist (1993)

Is the shipping sector about to become one of the casualties of the global slowdown? At least, that's what prices are signaling

A second Q&A from two Chicago economics on the financial meltdown (the first one, which I had linked way back, is here)

Menzie Chinn shows that despite the repeated rate cuts, monetary policy is still not lax, at least if we measure it by looking at its effects on some key interest rates

From Accrued Interest: Some more credit market indicators- here is a repost of an earlier one from Calculated Risk

RGE: How Risky is Turkey's Current Account Deficit?

RGE analyst Mary Stokes just published a short piece on Turkey's current account (or rather external financing) vulnerabilities. Other than a couple of minor points such as her statement that "any deficit above 5% starts to ring alarm bells", I don't have major objections to the article, and the the projections she is reporting are in line with the forecasts of local economists I trust. The only point that needs to be added is the resilience of corporate borrowing so far, which, in light of the current financial turmoil, emerges as a conundrum (too much exposure to GreenspanSpeak can be hazardous to your English, such weird words never came to my mind before reading his autobiography a few months ago) . And in fact, with the projections of other parts of the capital account more or less evident, whether this resilience will continue is the million-dollar question. But before answering that question, some quick facts on Turkish corporate borrowing:

• Corporate borrowing is at around USD 125bn (as of end-June), of which only 20% is short-term. Moreover, at the end of 2007, more than half the debt had a maturity of five years or more. Thus, Turkish corporate sector is unlikely to be exposed to a roll-over problem even if funding dries up.
• The Central Bank calculates the currency mismatch at USD 70bn (as of end-March), but this does not take into account that the owners of these companies hold significant FX. Fortis economist Haluk Burumcekci and his team calculate the currency mismatch of corporates and individuals at USD 5.9bn as of end-June.
• Again, CBT reports that foreign borrowing of corporates is extremely concentrated, with around 60% of borrowing in the services sector (40% of which in real sector) and 70% in 250 firms.

Where does all of this leave us? Certain sectors and large corporates could be under risk, but the danger is nowhere near as the media hype a figure of USD 125bn is bringing.

Back to the million-dollar (or 125 billion dollar) question, we could first ask if corporate borrowing in other comparable countries were just as resilient: A casual look at data suggests that Turkish corporate borrowing was indeed more resilient than Eastern European countries with large current account deficits, but there were definitely others such as Brazil with robust corporate borrowing in the first half of 2008. Then, we may postulate that there was some liquidity available in the first three quarters of this year, some of which made its way to corporates in Turkey and other EM. However, it'd be childishly optimistic to expect for the same pattern to hold up in 4Q08 and 2009.

My friends at Istanbul Analytics offer another, really intriguing explanation of the resiliency of corporate borrowing: They argue that "Turkish exports have been underestimated for years, and lots of money has been kept abroad as a result, in forms that are difficult to capture in the International Investment Position surveys. These assets are now being round-tripped to the Turkish economy as loans, to avoid financial taxes and disclosure requirements." Leaving aside the obvious question "why now", I tried to validify their theory by comparing Turkish export data with UN import data country by country (i.e. comparing Turkey's exports to Germany with Germany's imports from Turkey). Simple descriptive statistics reveal that the data are indeed rather different, but I did not continue with the exercise because the differences could just be do statistical errors rather than underestimations. I vaguely remember a reference in the Feenstra Advanced Trade book of a paper undertaking a similar task, so once I come up with an appropriate methodology, I'll come back to this exercise. Until then, the 125 billion dollar question remains unanswered...

Reads of the day

Some indicators for tracking the credit crisis (you know how I feel about LIBOR, but I have no problem with the rest)

While most economists critical of the original Paulson plan like recapitalizing banks, there is an important dissenter

My favorite Krugman post

Ice Age applied to bubbles, a la Krugman (my second favorite Krugman post, just reads like one of his brilliantly tractable models)- via Economist's View

Ian Ayres talks about what we still don't know about the subprime crisis and Shiller's The Subprime Solution(s) (see also my review)...

...While in a recent paper, Gary Gorton explains what we know (the best summary I've seen so far)

Speaking of Shiller, a recent WSJ article talks about his Graham P/E measure, named after Great Depression investor Benjamin Graham. Bob Shiller is a great student of economic history and is brilliant at bringing to light such things into light.

Dr. Doom continues to be pessimistic

How one of US Treasury's recently acquired toys can help value mortgage-related assets

Graph of the day: Factors adding to reserves and off balance sheet securities lending program (via The Big Picture)

A new paper shows that countries accumulate reserves as a precaution not for sudden stops but for "sudden flights"

This year's events have suggested that Bernanke may have been right on two important questions on the Great Depression, but Brad DeLong notes that he probably would have preferred to be wrong

Quote du jour (in French to make up for yesterday's zhe deflation)

If I die and am reincarnated, I'd like to come back as the bond market so that I can intimidate everybody...

I'll definitely be following my favorite bond market blog today

Reads of the day

We were warned on the mortgage crisis. Becker and Posner offer their takes on why the warnings were ignored, not just for the mortgage crisis but throughout the financial meltdown.

The role of informational cascades on the road to the financial crisis, a la Shiller

Central Banks announce unlimited liquidity

The credit crisis is spreading to credit cards and auto loans

Policymakers are thinking of easing rules on mark-to-market accounting, but it may not be such a good idea

News from the US Real Street: Retail sales continue to look bleak, but mortgage loans have surged in the last two weeks

Zhe deflation is coming (at least for the US)- sorry for the misspelling, I just watched the original Pink Panther)

Prediction Markets: US elections and Economics Nobel Prize

What do the Nobel Prize in Economics (actually the Riskbank prize in honor of Alfred Nobel), to be announced in a few hours, and US elections have in common? There are active markets for both where anyone can bet on the outcome of each of these events.

Prediction markets, as such markets are known, offer a wide spectrum, from large for-profit exchanges (Betfair and Intrade) to the non-profit (Iowa Electronic Markets). There are even prediction markets where all winnings go to charity (Bet2Give) and where no actual money is used (Hollywood Stock Exchange, NewsFutures). In fact, there is even a Prediction Markets Industry Association now.

Political prediction markets have been with us for quite a while; a recent paper traces the origins of betting on political outcomes to 16th century Italy and notes that betting on US elections was common until WWII. So we are in fact seeing the revival of a quite old trade. As I have been looking at what prediction markets/betting exchanges are predicting for US elections, I've come across an interesting phenomenon; in almost all markets covering elections, I've been seeing the reversal of fortunes in McCain and Obama, with a slight McCain lead in early September now transformed into a huge Obama lead. Of course, political analysts can come up with many reasons on this shift, but let me present an economic view: Yale economist Ray Fair has had an econometric model that predicts the outcome of US elections for more than two decades. You have to read the one of his papers to get all the details (I recommend the 1996 version), but his main insight is that current economic conditions determine the fate of the incumbent party. In my first year studying Economics (with Ray Fair himself), I was really confused by the results of the model after learning that the US economy is affected by business cycles rather than policy decisions in the short-run. Talk about the rational voter... Anyway, Fair allows us to compute our own predictions for the 2008 election using his 2004 equations. It is true that the US outlook for 2008 has really worsened in the past month, with all the forecasters including the IMF adjusting their outlook for the economy sharply downwards. However, to get the numbers currently in prediction markets, we would need a huge contraction in 2008! What is going on? For one thing, prediction markets are merely predicting the odds a candidate will win, not the number of electoral seats or percentage of votes he is expected to win, so direct mapping from prediction markets to the FairModel is not possible although it is possible to extract probabilities from odds. Call it wishful thinking if you want to, but although I am aware that the 30-point jump is difficult to be justified by economic outcomes alone, I feel that at least some of it is due to the the rapidly changing perceptions on the fate of the US economy.

The discussion in the previous paragraph, however, raises a more general question on the reliability of prediction markets. This is the subject of a literature survey piece, into which I do not dare to delve, but my quick skim of the literature did not provide a definite answer: For every paper that shows that prediction markets work, either theoretically or empirically, I was able to find another one that reports they don't. We may decide to heed the old saying that people will put their money where their mouth is and look only at markets where actual money is being exchanged, but there is research that shows that virtual markets fare no worse than actual ones (Disclaimer: Two of the authors are affiliated with NewsFutures, a virtual market and a firm that set us private virtual markets for companies, but anyone questioning the validity of their findings is full of bollocks, sorry Justin, just had to squeeze this in). One can also argue that some prediction markets are suffering from lack of liquidity, but in a recent paper, Paul Tetlock of Columbia University finds that limit orders may cause more liquid markets to be less efficient, i.e. deviate further from outcomes. So where does all this bring us to? My understanding of the literature is "prediction markets definitely reveal some information, but use it at your own risk", at least for now... I'll definitely continue tracking them, but I am unlikely to depend on prediction markets as my sole sources for forecasts.

Coming back to the Nobel Economics prize, what are prediction markers revealing? NYT Economix blog is listing the latest odds from some betting exchanges, whereas Greg Mankiw is reporting the results of the Harvard Nobel Prize Pool. I guess we'll know which market is the most efficient for this particular event soon...

Reads of the day

A simple bailout proposal/model from Mark Tahoma

Some misconceptions about the Credit Default Swaps markets

The G7 Action Plan to combat financial turmoil: Someone is rightly not very happy...

How to jump-start the interbank market

More doubts on whether LIBOR-based measures are accurate indicators lending strains

The Fed's latest custodial data is showing that central banks are taking shelter in US Treasuries

Shiller: The Subprime Solution

As I mentioned before, books on the financial crisis have started to appear even though markets and the world economy may not have hit rock-bottom yet. Robert Shiller's The Subprime Solution, as its title suggests, does not claim to be a comprehensive guide to the financial meltdown, but an expose of where it all began, i.e. subprime lending. However, it even does not cover all aspects of the subprime meltdown such as the repackaging of the mortgages and the plunge in mortgage-backed securities in the early stages of the financial crisis. The book's span is limited to the surge and subsequent fall in home prices and its effect and subprime borrowers. However, this narrow focus turns out to be the book's major strength, as it allows Shiller delve into topics he has worked for the past 20 years and where his real expertise lies without getting off-track.

In the first part of the book, Shiller traces the roots of the crisis at the housing bubble driven by what he has called before irrational exuberance before offering solutions. While the ideas expressed here will not be new to those familiar with Shiller's previous work, his solutions, classified as short and long-run, are definitely worth a look. Whereas the short-term solutions focus on a bailout to mortgage borrowers, the longer-term solutions, which are the more thought-provoking, are organized around two main themes: Shiller first concentrates on institutions towards a more efficient information infrastructure such as a system for comprehensive financial advice for all (not just the wealthy), a new financial watchdog, default-option financial planning, improved financial disclosure & databases and new economic units of measurement to take into account rising prices and incomes. Then, he goes on to suggest new markets for risk management such as real estate derivatives markets, mortgages adjusting in response to an individual's ability to pay and changing economic conditions, insurance against a fall in her earning potential and home equity insurance.

While his suggestions of new markets, some of which have appeared in his earlier work, are indeed novel, it seemed to me that they would be difficult to implement in the current information infrastructure. For example, while real estate price indices (initiated by Shiller himself) do exist, better data and more educated individuals would be needed for the proposed markets to function properly. In this sense, his suggestions for a more efficient information infrastructure seem to be necessary conditions for his markets for risk management. I believe the book would have benefited more from the explicit exposition of this link between the two types of long-run solutions.

Shiller's unique style of using interesting anecdotes to illustrate his points, in the same vein as his earlier books such as Irrational Exuberance and The New Financial Order: Risk in the 21st Century, keeps the book interesting. Although he is an accomplished economist with many important contributions, anecdotes such as a luncheon with Turkish investors in Ozdere and origins of the term "bailout" enable him to convey his ideas much better than a literature survey would. In fact, such quotes were exactly what Shiller was looking for when I RAed for him during his early research on indexation.

As the World is focused on illiquid interbank markets and more importantly financial meltdown & global recession, Shiller's latest book enabled me to pause and look back to the subprime crisis of 2007 with a book that is both thought-provoking and enjoyable...

Reads of the day

If rate cuts don't work, why not complement it with quantitative easing?

Plan for saving Main Street from Luigi Zingales: Offer recontracting option where house prices have fallen 20% or more.

Scientists may be prone to the winner's curse as well

Dr. Doom suggests actions to prevent systemic financial meltdown...

...But the IMF keeps it simpler

Amidst the financial turmoil, the WEO Global Competitiveness Report is out

Why are stock markets plunging: Is it heterogeneous agents and incomplete markets? Or is it hedge fund margin calls?...

...But whatever the reason, we may not have seen bottom yet: Interactive chart from NYT on how the current bear market compares with precedents

My thanks to Justin for bringing up an issue that has never ceased to amaze me at clothing stores

Quote of the day

LIEBOR: Why banks don't trust what their screens are telling them- From FT Lex

I am happy to finally have found someone who thinks like me on the LIBOR...

Reads of the day

More bad news from Dr. Doom

How to unfreeze interbank markets: Guarantee interbank markets or target LIBOR

Read my lips, we will not capitalize banks

What to do with USD 700bn besides capitalizing banks? Disaster insurance...

27 facts about banking crises- from a recent IMF paper/database

I guess I'm not the only one looking at the Fed's balance sheet (II)- I is here

Just in time for the G7 meetings: Leading academics offer advice

Shared National Credits Program, comprised of the Fed, FDIC and OCC, has reported that problematics loans in SNC (loans of USD 20mn or more made up of at least three banks) have tripled and now comprise of 13.4% of all SNCs- FT has a related story

Two new papers on local governments in Turkey

I just wanted to take a break from the financial turmoil and have a look at two recent papers that look at different aspects of local governments.

In the first paper, Aykut Arslan assesses the performance of Turkish local e-governments with their peers in Europe. He perhaps surprisingly finds that Turkish local e-governments compare well with the EU peers, but a close inspection reveals something else might be going on: In the study period July 2005-March 2006, out of 3228 local governments, 969 had websites and out of these 969, only 63 (sixty-three) were functioning. The author uses all these 63 websites in his study, displaying a classic textbook example of selection bias:) I am totally alien to this literature, but I am supposing that studies of other countries would have tried to overcome this problem. Anyway, my disappoint of the methodology does not preclude me from admiring the dataset; I would have loved to play with the dataset for a while and look at the determinants of having a web site (functioning or not) in addition to the characteristics of the municipalities with functioning web sites.

The second paper is about decentralization: I'll let the paper speak for itself: "The authors first describe changes since the early 1980s and recent reform efforts. They then provide an empirical analysis of the effects of decentralization in Turkish provinces using cross-sectional and panel data approaches. The analysis examines whether variations in local decentralization across these provinces and across time have had a significant impact on economic development and growth in those provinces. The findings suggest a weak negative economic effect of decentralization through a number of municipalities per capita. However, the findings do not show any significant impact from the creation of new provinces by separation from the existing ones." I don't have any problems with the methodologies employed in this paper, but I am not sure their findings reflect decentralization; after all, you can have 1000 provinces, but govern from the center, without giving much power to the local authorities. I wonder what my decentralization expert friend would say to this paper.

Reads of the day

One way to financial crisis could increase productivity: By channeling smart bankers to places where their skills would be helpful

I guess I am not the only one looking at the Fed's balance sheet

Looking at earlier recessions hints at tough times ahead

Now, it's the consumer

I guess we're now in step 12 (not a recent article but certainly relevant)

An IMF paper back from the summer shows that house prices still have room to go (down, that is)...

...But at least August pending home sales index is up; the index is usually in line with the more relevant existing homes sales

FAQ on the Fed's decision to pay interest on reserves, from the Fed itself

More from the IMF

The Global Financial Stability Report of the IMF has been released. The focus is unsurprisingly the financial crisis, warning on the consequences of failing to respond to the turmoil. Moreover emerging markets have not been spared either. The report has interesting sections on the causes and consequences of the elevated LIBOR rates and a discussion of mark-to-market accounting.

The IMF also released its projections (first two chapters of the WEO), and they don't look good, with global growth expected to fall to 3.9% in 2008 and 3.0% in 2009.

Also of interest is a recent IMF working paper that looks at how problems with subprime mortgages managed to spread and threaten the whole financial system- a summary of the paper is here.

On Turkish Treasury benchmark rates (I)

It turns out that the most popular question I get is also my least favorite one, many times I've felt the urge to declare that if I (or anyone else for that matter) knew where the interest rates or the dollar were heading, I would have made my millions and stay retired for the rest of my life. Anyway, I just couldn't say no to my friend who asked about the Turkish benchmark this morning; besides I need to be able to have a good grasp of the behavior of Turkish interest rates for a consulting project I am about to start for a bank (more on that later), and the benchmark rates seemed like a good place to start, so here's my first cut at Tbill rates:

I modeled benchmark rates as function of 2-year Turkish Credit Default Swap spreads (a proxy for default risk), CBT policy rates, inflation expectations and real US 2-year government bond rates (a proxy for risk free rates). Since I was more interested in long-term relationships, I used the autoregressive distributive lag (ARDL) model for my estimations. The results are in the table below:

CDS turns out to have the most pronounced effect on the benchmark. A 10bp increase in CDS increases benchmark rates bu 15.1bp. Similarly, 10 bp rise in inflation expectations, the policy rate and real US rates increase the benchmark by 7.1bp, 4.9bp and 4.4bp, respectively.

The model does a pretty good fit for time time period (January 1 2003, October 7 2008). Of more relevance to my friend's question, by plugging in all the variables, I get that the current level of the benchmark (around 20.90% compound) is 70bp lower than implied by the model. However, given the volatile environment in markets right now (CDS tightened while I was writing this blog entry after the joint Central Bank rate cut announcement), Turkish Tbills and bonds are likely to go where the global headwinds are to take them in the short-run.

In fact, as interesting as the preliminary results are, the short-run is really what my friend was asking. Besides, it would be interesting to see the interaction between stocks, Tbills and the FX market. So, the next step would be to use vector autoregressions (VARs) or more likely a vector error correction model (VECM) and also look at the direction of causality between the different markets. But I still haven't had the time for my daily run (too much newswatching), so that will have to wait for now...

Reads of the day

A Q&A on the Fed's last actions...

...one of which was to put a floor on the effective funds rate by paying interest on excess reserves. Rebecca Wilder argues that the low effective rates hint at a Fed easing at the next meeting, and given that the floor is at 1.25%, her 75bp easing argument cannot be dismissed.

On TARP and Tbills (a natural follow-up to my last blog entry)

Menzie Chinn summarizes Chapter 4 of the IMF's WEO

James Hamilton and Menzie Chinn of Econbrowser analyze the latest US payrolls data...

...and Alan B. Krueger goes over a recent paper that shows why relying just on payrolls data may not depict an accurate US employment picture.

The latest IMF Global Financial Stability Report

O-rings help understand economics again (see here for the first time)

How modern finance used to work in a picture

More from Greg Mankiw on rising TIPS yields; I think I am buying the deflation argument

A summary table from the New York Fed if you are overwhelmed like me on all the different types of Fed lending to financial institutions.

A guide for novices to the money meltdown- nothing new if you've following what is going on, but a must-read if you just woke up from a coma and want to get up to date fast

Some Observations on the Fed Balance Sheet

As I mentioned before, I have started to follow the Fed balance sheet a bit. One of the most striking observations is the drastic shift in the composition of assets, as the graph below shows:

As can be seen in the graph and Fed has significantly decreased the Treasuries in its balance sheet as it supports the financial system with ample credit. What I am wondering is how such an increase in supply in Tbills and bonds outstanding (in the market) would effect yields. For now, if anything there is too much demand rather than too much supply, as money market funds, among others, are increasing their holdings of Treasuries. Moreover, there is a plethora of reasons to believe that yields are likely to go up, not down- see here for a good argument. However, the effect of Fed's lifeline support is definitely a factor that needs to be kept in mind going forward.

Reads of the day

The right crisis to compare the current turmoil to

The week ended with yet another recession indicator, this time from US payrolls. Unemployment is at 6.1%, but this might be due to the unrevised birth death figures. Finally, here's good way to track unemployment from consumer confidence data.

Felix Salmon has been discussing for the past couple of days how banks hedge counterparty risk. He posted an explanation from a former industry professional, which I found extremely informative.

How credit default swaps create systemic risk. Easy-to-follow argument but I thought this was a common argument, so I am not sure he's the first one to have made it.

One of the scapegoats of the financial turmoil has been economic theory. Critiques all the way from the media to the Black Swan guy and George Soros have laid the blame on the insufficiency of economic theory. While some of the arguments have some merit, others simply do not know enough economic theory, validating the 1984 quotation ignorance is bliss (or too little knowledge is dangerous). Critiques of the concept of equilibrium fit particularly to this category. Here's well-written piece that clarifies what economists mean by equilibrium.

Ayhan Kose has written extensively on decoupling; here's his latest take with two co-authors.

All you need to know about how oil prices affect inflation (at least for US, the Euro Area, UK and Canada)

A Q&A session on the bailout, from one of the thoughtful journalists covering the issue

US Tbill yields are falling due to the classic safe haven affect, but 5-year TIPS have been on the rise since early 2008. Greg Mankiw presents it as a puzzle, but the simplest explanation is rising inflation expectations.

I was planning to summarize this paper, but James Hamilton beat me to it: Interesting research on how to update economic forecasts with real-time economic data, with an application to Euro Area GDP.

Last but not the least, some weekend humor: Don't forget to take your Libor before you go to bed!

Guest Blog in Turkish: Kapitalizmi Devletleştirmek

Since he’s getting engaged today, it is appropriate that I have another guest blog in Turkish from Afsin Alp (his first guest blog is here). The article below, which appeared in the August issue of Boryad, is a good summary of the Frannie bailout.

Geçtiğimiz aylarda finans dünyasının başrol oyuncularıydı Fannie Mae ve Freddie Mac. FED ve Hazine’nin, mali olarak zor durumdaki bu şirketlere destek vermesi, onları gündemin başına taşıdı. Destek kararının nedenleri, doğru olup olmadığı üzerine uzun uzun yorumlar yapıldı. Biz işe en başından başlayalım ve “Fannie Mae ve Freddie Mac ne iş yapar, niye vardır ve neden kurulmuştur” sorularına bir göz atalım.

Freddie Mac, ABD’de mortgage satın alma, kredi garanti etme ve portföy yatırım aktivitelerinde bulunur. Yani tek ve çoklu aileler için alınmış mortgage veya mortgage’a bağlı tahvilleri birincil mortgage piyasasındaki ev alanlara kredi sağlayan kuruluşlardan satın alır. Bu kuruluşlara, mortgage bankacılığı yapan kurumları, ticari bankaları, tasarruf bankalarını, bölgesel bankaları ve kredi sendikalarını örnek gösterebiliriz. Şirket ayrıca mortgage’ları ve mortgage’a bağlı tahvilleri satın aldıktan sonra karşılığında ikincil piyasalarda mortgage’a dayalı tahviller çıkartır. Freddie Mac, mortgage’a dayalı tahvillerdeki anaparanın ve faizlerinin ödenmesini garanti eder. Garanti edilen tahviller, kendisinin çıkardığı tek ve çoklu aileler mortgage katılım sertifikaları ve vergiden muaf çoklu aile konut bonolarıdır. 1970 yılında kurulan Freddie Mac’in misyonu, “konut
piyasalarına likidite ve stabilite getirmek, kredi kuruluşlarına konut vermelerini için sürekli bir para akışı sağlamak” şeklinde özetlenebilir.

Ekonomi haberlerinde yine adı sıkça geçen Fannie Mae’in de görevi, konut sahibi olmak isteyenlere düşük maliyetli kredi veren kurumlara düşük faiz oranlı fon sağlamak ve bu fon arzını sürekli tutmaktır. Freddie Mac’den farklı olarak Fannie Mae, 1938’de Başkan Franklin Roosevelt tarafından ev sahibi olamayan veya evini kaybetme riski olan milyonlarca ailenin bulunduğu bir dönemde kuruldu. Her iki şirket de halka açık olmakla birlikte aslında devlete bağlı kuruluşlardır. Fannie Mae1968 yılında borsaya kote oldu. Aslında kendilerine has olmakla birlikte son derece tartışılır yapıları vardır. Misyon olarak bir kâr amacı gütmeyen organizasyon yapısı belirlemelerine rağmen borsaya kote oldukları için hissedarlara karşı kârlılık ve büyüme gibi sorumluluklar taşırlar. Benim bakış açıma göre, böyle kuruluşların borsaya açık şirketler olmaları onları manipülasyonlara açık ve zayıf hale getirmiştir.

“Kötü mesaj veririz” kaygısı

Peki devlet tarafından sponsor edilen ama halka açık bu iki şirket şu an neden bu kadar önemli ve bu hisselerin fiyatları neden tüm zamanların en düşük seviyelerinden işlem görmekte? Hazine’nin başkanı ve FED’in geçtiğimiz aylarda bu iki şirketin borçlarının devlet garantisinde olduğunu söylemelerine rağmen, 2007 sonlarında 65 dolar civarında işlem gören hisseler bugün 3 ve 5 dolar seviyelerine inmişmiş durumda. Bu durum şöyle açıklanabilir: Borçlar devlet garantisinde olsa dahi şirketlerin sermayeleri sıfır noktasına inebilir. Ayrıca şirketin temettü payı ödeme veya ayrıcalıklı hisse temettüleri gibi yükümlülüklerini yerine getirememe riski vardır. Bununla birlikte, Eylül ayı içerisinde her iki şirketin toplam 225 milyar dolar değerindeki kısa dönemli tahvillerini yeniden finanse etme zorunluluğu var ve bu konuda ne kadar başarılı olacakları kuşkulu.

Burada aslında yapılması gereken şey, FED’in ve Hazine’nin piyasa değerleri 5milyar ve 2 milyar dolara inmiş bu kurumların piyasadaki çoğunluk hisselerini alıp devletleştirmesidir. Kapitalist bir düzende yapılacak devletleştirme dünyaya verilecek “kötü bir mesaj” olduğu için bu fikir ertelenmektedir. Ancak bu yaklaşım piyasaya güven ortamı sağlayacağı gibi, şu anda tek mortgage sağlayan kurumlar olarak görünen bu iki şirket sayesinde mortgage piyasaları işlerliğini sürdürecektir. Bugünlerde mevcut bankaların hiçbiri mortgage verme niyetinde değiller. Mortgage almak için gerekli olan tüm zorlukları tüketicilere göstermekte ve mümkün oldukları kadar bu piyasadan şimdilik uzak durmaya çalışmaktadırlar.

Peki, vergi verenlerin paraları ile böyle bir girişimin yani bu iki şirketin hisselerinin satın alınmasının mantığı nedir? Aslında çok basit: Tüm basılan bu mortgage tahvil ve bonolarını elinde bulunduran yabancı ülkelerdir ve bunların başında Çin gelmektedir. Diğer ülkelerin Amerikan tahvillerini ellerinde bulundurmaları ve bunlara talep göstermeleri dolar için önemli bir destektir. Bu iki şirketin batma olasılığı diğer tüm ülkeleri etkileyecek ve finansal sistemi çökme noktasına getirecektir. Çin merkez bankasının eski danışmanlarından Yu Yongding Bloomberg’e verdiği bir demeçte: “Bu iki şirketin batması dünyanın sonu olmaz, ancak mevcut uluslararası finansal sistemin sonu olur. Böyle bir olayın sonuçları felaket olacaktır” demiştir.

Euro Bölgesi’nden daralma verileri gelmeye başladı

Uzun zamandır Amerikan ekonomisinin yaşadığı duraksama ve krize karşın büyümeyi sürdüren Avrupa ekonomisinde de daralma verileri gelmeye başladı. Avrupa Birliği’nin sağladığı istatistik verilerine göre, Euro Bölgesi’ndeki Gayri Safi Yurtiçi Hasıla ikinci çeyrek itibari ile %0,2 daralma gösterecektir. Bu 1990’lardan bu yana Euro Bölgesi’nde Gayri Safi Yurtiçi Hasıla’da yaşanan ilk daralmadır. Geçen ayki yazımda ABD’nin korkunç bir enflasyonist ortama itildiğinden bahsetmiştim. Konuyla ilgili bu ay bir veri daha geldi. İş Kurumu’nun yaptığı açıklamaya göre, Temmuz ayı itibariyle ABD’de %5,6’lık (gıda ve enerji çıkartıldığında %2,5) oranla son 17 yılın en yüksek tüketici fiyat artışı gerçekleşti. Bununla birlikte, dünyanın dördüncü büyük ekonomisi olan Çin ve onu takiben Hindistan ile gelişmekte olan diğer büyük ekonomiler hâlâ büyüme göstermektedirler.

Yatırımcıları emtia piyasaları konusunda uyardığım geçen ayki yazımdan beri petrol, gördüğü en yüksek seviye olan 147 dolarlardan 112 dolar seviyelerine gerilemiş ve diğer tüm emtialar bunu takip etmiştir. Tüm bu olanların üzerine Rusya ve Gürcistan arasında yaşanan krizi de eklersek, neden Amerikan borsasında bir bahar havası hakim ve hisseler değer kazanmaya başladı?.. Bunun sebebi, piyasada doların değer kazanması, ABD ve Avrupa’daki tüketimin azalması ile birlikte petrol ve emtia fiyatlarının düşmeye başlaması ve bu durumun ileriki tarihlerde enflasyon üzerinde negatif bir etki yaratacak olmasıdır. Bu etki, ekonomisinin üçte ikisi tüketiciye endeksli ABD’nin tekrar büyüme kulvarına girmesini sağlayacaktır. Fiyat kazanç oranları şirketlerin kötü performans göstermesi ile yükselecek olmasına rağmen, düşen enflasyon bu fiyat kazanç oranlarını genişletecek ve etkisini azaltacaktır. Örneğin, Avrupa’da Aralık 1974 döneminde yaşanan daralma döneminde kurumsal kazançlar %40 azalmış ve fiyat kazanç oranları 6’dan 14’e çıkmıştır. Aynı dönemde borsa ise %50 oranında yükselmiştir.

Sonuç olarak sermaye piyasalarının yönü aslında, finansal sistemin toparlanması ve bununla birlikte konut piyasasında bir iyileşmenin yaşanmaya başlamasından bağlıdır. Bir sonraki yazımda, hedge fon olarak nerelere, hangi sektörlere yatırım yaptığımızı, nasıl stratejiler uyguladığımızı ve cumhurbaşkanlığı seçimlerinin ekonomiye olan etkilerinden bahsedeceğim. Altını çizmek istediğim nokta ise şu olacak: Piyasa trendi ne olursa olsun piyasalarda her zaman pozitif getiri ve alfa sağlayacak yatırım fırsatları mevcuttur.

Reads of the day

The world's largest hedge fun; pity they could not freeze redemptions...

Why it pays to read inflation reports (at least for Poland, Czech Republic, Chile, Sweden and Thailand, but not for Hungary)- I wonder what we would get if we did the same analysis for Turkey.

A recent working paper from the BIS goes over the factors contributing to the US housing boom and bust in trying to explain why the meltdown happened in the United States particularly.

Yet another hint that 3Q growth will be weak in the US: August non-residential spending and the revision to the July figures show a downside risk to investment in 3Q.

Yesterday, there were a couple of really good discussions on the financial turmoil. I managed to dial in to the Roubini/Ritholtz and watched another one on the West Coast soon afterwards (Brad DeLong, one of the participants, has provided the live blog)

I've been looking for a good piece on money market funds since mid-September and finally found one. Thanks to NewsnEconomics...

More on the Fed's balance sheet (USD 61bn of the USD 400bn jump is from AIG)

World Economic Outlook

The IMF has released four chapters of the World Economic Outlook. With my sister getting engaged tomorrow, I haven't had the time to read the report in detail. But here's my brief take, based on reading the IMF survey summaries and skimming through the report in five minutes.

Chapter 3 notes that some of the underlying factors behind the recent rise in food and energy prices and highlights that further monetary tightening might be called for certain countries; an article in the IMF Survey summarizes the chapter. Chapter 4 looks at the real sector effects of the financial turmoil on the US and Euro Area economies (see here for the IMF Survey summary). Chapter 6 analyzes the regional differences in current account balances in emerging markets (the IMF Survey summary is here). And last but not the least, Chapter 5 reiterates what any good economist would know about the IMF: In sum, It's Mostly Fiscal

Anyway, remember the famous Woody Allen quote, and do not make too much out of this summary. However, I plan to write on the report in more detail early next week, after I've had a chance to read and digest it. I'll focus on my own take of the report, with a special emphasis for its implications on Turkey.

Quote of the day

Again on mark-to-market accounting, but now from the opposite camp to reflect a balanced view:

Mark-to-market accounting is the worst accounting rule, except for all the other accounting rules. (unfortunately I forgot where I read this, so I cannot give the source)

Reads of the day

Robin Hood wannabees (or their suppliers) bailed out (Samoans and a bunch of others as well)

The debate is continuing: Should mark-to-market accounting be suspended or not?

More bad news from the US real sector: September manufacturing PMI and auto sales

...And implications on Fed policy rates

After Le BigMac, now Le Bailout

And why the bailout (not le) will not help money markets

A very particular case of adverse selection

In football, you need to learn to miss well to score well.

Reads of the day

What drives corruption in Italian football?- in Turkey, it is much simpler, having a black and white jersey is a necessary and sufficient condition to suffer from corrupt refereeing.

It almost went unnoticed due to the attention on the Paulson plan, but the latest BEA consumption data does not paint a rosy picture for Q3 at all.

Since they are next in line to fall in Roubini's dominoes list, it might be useful to know just how leveraged hedge funds are.

The Paulson bailout was rejected 198-197, if you exclude incumbent congressmen likely to be in a tight race in the elections that is...

...But of course there were other reasons as well.

A commercial paper index from the S&P (here's the methodology and factsheet)

Just the best predictor of stock markets this year, written at the end of February (via Freakonomics)

Quote of the day

From the Financial Times Lex: Mark-to-market accounting is a good idea, except when there is no market.

The Economist has a nice overview of the accounting issues around the financial turmoil.