2008 8
Russia saves Iceland but who will save Switzerland?
Published by MartinVarsavsky.net in General with No Comments
I was just reading about how Russia lent 4 billion euros to Iceland to shore up its financial system. I was very surprised that the EU or USA had not helped out. The Iceland bailout may be the beginning of bailouts of small countries by larger countries. A global financial crisis, such as the one we are going through right now, shows the benefits of being part of a larger country or belonging to a country association such as the EU. The little country that must be most worried now is Switzerland. With its federal system, how are the small cantons going to be able to help out if one of the Swiss giants needs $100?
What the world now needs is a well functioning global financial institution. An IMF that is not neoliberal but who understands that what works around the world is sociocapitalism not pure capitalism and stands ready to help.
Update: Since I wrote this article I see that something close to what I was proposing is happening.
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Gordon Cameron on October 8, 2008 ·
Martin,
Perhaps Iceland went to Russia first. A closer look at who has big deposits in the Icelandic banks and who are (or were, more likely) the owners of some of the big financial institutions will provide some clues…
Gordon.
bernino on October 8, 2008 ·
Hi Martin,
Sorry for a long post…I live in CH. Here in Switzerland we do not have much of a problem, so far, except for asset managers in panic.
Swiss banks and bank legislation is extremely conservative here, which makes it resilient to crisis f.x.:
A normal consumer / private individual has to put down 20% cash to take out a mortgage and the cash money will be traced that it comes from savings.
F.x.: foreigners are not allowed to buy real estate unless they have a C-permit, meaning they have had a good paid job for min. 7 years in CH => little chance of overhot real estate market.
F.x.: there are heavy legislation against real estate speculation (50% capital gain tax if you flip within 2 yrs. and only 0% after 30 yrs. ownership)- foreigners cannot setup companies to buy real estate and even Swiss can’t easily do it with out a special license.
F.x.: risk profile / liquid and investment mix of banks by legislation is super conservative in CH.
Combined with liquidity:
Cash influx from ultra high net worths, and from re-assurance…makes it very liquid market for investments.
All in all — the crazy high risk bank products from US and EU does not exist in Switzerland. Consumers cannot take out a second mortgage against the house appreciation and leverage it by investing in stock equity. Consumers cannot get 120% mortgages. Consumers cannot get mortgages where they only pay the interest and like in the EU under the legislation, have a break in paying the mortgage + interest accrued.
All in all => there is very little to none bad debt in Switzerland.
Therefore appreciation of real estate has been “normal” a healthy 5-8% p.a. vs. out of control several hundreds in EU and some places in Russia, Asia and the US.
There is no such thing as unsubstantiated growth. Taking out second mortgages and getting cheap mortgages obviously was meant to boost consumption => production; however the liquidity for this was based on fictional expectation value from consumers in a real estate market to continue to grow.
Blue chip companies, which are responsible for most production on this planet, have smart analysts…they are ofcourse aware that the spending pattern of consumers based on a huge liquidity boost from second mortgages etc. is a blip – a one time event – so they dare not recommend expanding production (demand) because, well, its a one time peak – not a long term pattern.
There is only one lasting growth factor, and that is the growth in production from growth in consumption => companies investing in more supply and more jobs => higher salaries => more consumption.
Salaries did not rise with real estate, and certainly not in the same pace => unsubstantiated growth because companies did not expand capacity in bigger scale.
Hence, all the doctor Herr professor ph.d. in economics talking about a new economy bla. bla. (they seriously said that its possible to have growth without new jobs…BS) forgot economic b.sc. book no. 1: demand and supply. There is no such thing as unsubstantiated growth in the long term, so it was written in neon signs: the party will be over.
And so the music stopped, credit was frozen, so companies can’t finance anything, so they down size, so jobs are lost so consumption goes to hell, so confidence in the market goes to hell, so consumers prepare to cut costs, sell the expensive car, buy a cheaper, sell the boat, go cash.
I’m not a doctor professor, just a lay man entrepreneur who is ofcourse influenced by the credit freeze. Sometimes they are the ones who says: “Wait a minute, the emporer’s new clothes? He is naked.”
Ciao growth. Hello recession. And we have not even seen the depth of the mess which will hit us, once the credit freeze hits consumers and companies big time.
The good news is, if you have cash, there are some heavily discounted companies out there up for grabs; so the ones who can afford long term positions and are good at doing value based investments (Buffet will teach us…)…well, they are in for a ride in 10-15 years time. Watch eBay, Google and other CF+ companies, as they cut costs and jobs and do aggressive M&As in the near future.
And more good news:
Medicine, alcohol, gambling and advertising typically increase during a recession.
Now I must go back and manage my own startup and make the bank as happy as I can 😉 … good thing my model is based on live betting and ads.
Weird how greed makes people blind, even when dot com crash is not far away, 80s junk bonds must still resonate in bank CEOs etc.
I like things that are written in neon on the wall. When every one else follow the hype, and you are the only one saying its BS, you are rediculed. When things hit the fan, you are invited for lunch.
Just like pitching VCs.
best regards, bernino
ps. 700bn USD bail out towards 300mln consumers of which 7.2mln home owners took out new mortgages on their existing mortgages in 2007 (I think) of lets say avg. 400k USD for a home in the US, makes a potential 7.2mln x say 200k USD bad credit = 1,440bn USD bad debt vs. 700bn rescue plan…so analysts probably knows that, so they will continue to recommend not to unfreeze credit…
Conclusion: Dear China — please put your surplus of USD into the market, please unfreeze the credit market — please please please — and so China became the economic power no. 1. in the world. Murphy’s golden rule: He who has the gold, makes the rules.
casper on October 8, 2008 ·
I dont like news with such a negative cliffhanger..
i think that’s todays mainproblem: negative press.
you can’t compare iceland to switzerland:
as everybody, we don’t know what’s going on and don’t know where that leads to…BUT:
if there will be that worst case, the swiss government won’t let a swissbank die, they have enough ressources, also the swiss national bank (snb). instead of bank2bank lending, the swissbanks have a big pool of money supplied by the snb – so the liquidity is more or less warranted.
every deal or credit a swiss bank makes is secured or there is a deposit.
in iceland, lots of deals are based on credits with no security in mind.
iceland’s economy had a much stronger growth and we still don’t know if there was also some russian mafia money involved (why did they pump now so much money into islands banks?) -> they always had extreme high rates for fixed deposites..
i think the only problem in switzerland is the bad media coverage. we have lots of people taking their money from big swiss banks to local/smaller swiss banks. and that’s bad for the balance.
swiss’ buy what they can afford, not more, not less 😉
just my 50 cents – as a non trader and not direct involved in that business…
Martin Varsavsky on October 8, 2008 ·
@ casper:
If the chance of UBS for example going under for example were as low as you say why are UBS shares down 70%?
bernino on October 8, 2008 ·
@casper:
Its not bad press: Lehman went bust. Wacovia had to bailed out big time, and a couple of others would die if the US government didn’t bail them out. These are facts.
@Martin:
UBS is heavily discounted – but also they had heavy losses on bad debt overseas (US operations). However the Swiss federal reserves are fat, so they need not worry + as far as I know they were the only one with exposure. Yes, the swiss spend less than they earn, incl. the expats like me, partly because the banks will not lend you money unless your balance sheet in life is positive 🙂
@Gordon:
Iceland capital groups invested heavily in real estate particularly in Denmark and east Europe. They leveraged these investment gains for more investments. And then leveraged that again and again. Rumor is some are leveraged +10x !!! Hence, the russians are probably not eager to see east european real estate collapse as they are themselves exposed…
casper on October 8, 2008 ·
the critics about “bad press” is only related to switzerland. ubs will never go broke. but still many many swiss citizen transfer their money from ubs to local banks, because they still think that their money is insecure @ ubs.
ubs shares go down (and up) cause ubs was/is involved in the us hypo crisis/us operations as bernino mentioned. and of course cause the worldwide financial crisis / insecurities
@bernino: all in all i agree with you.
petardo on October 8, 2008 ·
That’s true here. Credit Card is a bad word. only to book flights, rent a car. all the rest: cash and maestro.
you can buy a house/flat not having the C-Permit if your only house for living. but the legislation changes every kanton and geminde. 2nd property not possible , maybe some far away land outside cities as 2nd property.
here there a saying: which is not regulated is prohibited.
cheers
Martin Varsavsky on October 8, 2008 ·
@ bernino:
Bernino I agree with you that Swiss banks are very conservative. They have lent to US homeowners and are suffering for it but it is most likely that they will weather the storm. Indeed I give it 95% probability that UBS will survive. But its own shareholders don´t seem to be so convinced….
Bratislav Metulsky on October 8, 2008 ·
After US forces have left, Russia has just taken their chance to capture Iceland with it’s strategic position by making them financially dependant. While the US approach Russia’s eastern and southern borders, the Russians creep up on US borders through Venezuela and now Iceland.
Mariano on October 9, 2008 ·
I want to share with you all this:
http://gigaom.com/2008/10/08/sequoia-rings-the-alarm-bell-silicon-valley-in-trouble/
A on October 17, 2008 ·
As an Icelander I want to correct the, what seems to be a misunderstanding, we have NOT settled a deal with the Russians yet and perhaps we won’t do it at all.
The Icelandic government is discussing the matters with Russians, just like they’re doing with the IMF and Norway and other places too. However it’s kind of thank to Russians that other nations bothered looking into the things and that there was a nation that could actually use a little support. I believe it’s rather harsh that we need to go to Russia to be able to get more “active” support from other countries that claim to be our friends and some turn their backs completely and go in the other direction, hence the UK.
I want to emphasize that we have not yet borrowed anything from Russians and many aint cool with borrowing from Russia because it does indeed raise red flags, but we might if everything else fails. Personally I wouldn’t want Russia’s money nor of the IMF to be honest, settling a deal with another country would be more profitable for us but time will tell.
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petardo on October 8, 2008 ·
I know some guys moving assest from UBS/CS to the ZKB/PostFinance
those are considered the best choose to secure savings.