Inflation, SIVs and Balance Sheets

On top of the largest spike in PPI since 1973, European inflation isn’t exactly tame.

European Inflation Rises More Than Initial Estimate (Update2): “European inflation accelerated more than initially estimated in November, to the fastest pace since May 2001, preventing central bankers from cutting interest rates as economic growth slows.

The inflation rate in the 13-nation euro area rose to 3.1 percent from 2.6 percent in October, the European Union's statistics office in Luxembourg said today. That exceeded an initial 3 percent estimate published on Nov. 30. Prices rose 0.5 percent on the month.

The European Central Bank has refrained from following counterparts in the U.S., U.K. and Canada in reducing borrowing costs, citing the risk that surging commodity prices and declining unemployment will trigger an inflationary spiral. ECB President Jean-Claude Trichet said Dec. 6 some governing council members favored raising interest
rates.”

Citigroup Rescues SIVs With $58 Billion Debt Bailout (Update2): “Citigroup Inc. will take over seven troubled investment funds and assume $58 billion of debt to avoid forced asset sales that would further erode confidence in capital markets. Moody's Investors Service lowered the bank's credit ratings.

The biggest U.S. bank by assets will rescue the so-called structured investment vehicles, or SIVs, taking responsibility for their $49 billion of assets, the New York-based company said in a statement late yesterday.”

The balance sheet is feeling the pressure and Moody’s reacted swiftly.

“Moody's lowered Citigroup's credit rating to Aa3, the fourth-highest level, from Aa2 late yesterday. The bank will probably ``take sizable writedowns'' for securities backed by home mortgages and collateralized debt obligations, Moody's Senior Vice President Sean Jones said in a statement.”

That makes borrowing for Citigroup more expensive.

“Citigroup got a $7.5 billion cash infusion last month by selling a 4.9 percent stake to the ruling family of Abu Dhabi after the bank's capital ratio fell below the company's target.”

With the SIV now packed into the balance sheet, another round of writedowns will definitely result in the need for more cash infusions from sovereign wealth funds.

Money-Market Rates Fail to Respond to Bank Measures (Update4): “Money markets failed to respond for a second day to the biggest effort by central banks in six years to restore confidence in the world financial system.

The euro interbank offered rate banks charge each other for three-month loans stayed near a seven-year high, falling 1 basis point to 4.94 percent, the European Banking Federation said today. That's 94 basis points more than the European Central Bank's benchmark interest rate, close to the highest since 1999. The two- week rate soared a record 80 basis points to 4.95 percent.”

The market clearly doesn't believe central banks can do anything about this crisis.

“Two-week rates soared because today is the first day on which a cash loan in euros for that term will cover a borrower's needs through to the end-of-year holiday period. The rate rose 81 basis points to 4.95 percent, the highest since April 2001, the BBF said. The two-week rate for dollars jumped 73 basis points to 5.11 percent.

Australian money-market rates climbed to the highest since 1996 earlier today and Japanese rates held near a 12-year high.”

This is definitely a sign of distress.