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Sunday, January 27, 2008 10:34 PM

Financial Crisis Poised To Hit Europe

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Three more nails in the were driven into the European decoupling myth coffin this past weekend. Let's take a look.

Reuters is reporting Financial crisis to hit 20,000 London jobs.

As many as 20,000 jobs in London's financial district are likely to be wiped out due to the financial crisis, a survey showed on Sunday.

The Sunday Telegraph reported that Experian, which provides data and forecasts to government and private bodies, had slashed its predictions for job growth in the City of London and Canary Wharf to a fall of up to 5 percent from its previous forecast of flat net employment this year.

Experian expects between 10,000 and 20,000 jobs to be lost over the year, with the majority going from the financial sector.

With up to 400,000 people employed in London's financial district, a fall of this scale could severely affect the economy, dragging commercial property prices down and hitting related industries such as IT and telecoms, it said.
European Hedge Funds Freeze Redemptions

The TimesOnline is reporting Crisis grips European hedge funds.
Up to 10 European hedge funds have suspended redemptions after investors clamoured for their cash when the managers made severe losses.

A London prime broker told The Sunday Times that even before last week’s extreme gyrations, nearly two-thirds of London-based hedge funds had lost between 4% and 10% of their value. A "significant number" had lost much more, he said.

The manager of one of Britain’s biggest hedge funds said: "It’s been an extraordinary week. Even in the crash of 1987 I don’t remember so much carnage."

The problems have been exacerbated by the fact that prime brokers, the arms of investment banks that finance hedge funds, have tightened lending policies.

One manager said: "Since market losses are magnified by leverage in a hedge fund, there can be a sudden need for a cash injection. But this time, the banks can’t lend as easily. Funds are then forced to sell, which causes even more problems."
Freezing Funds A Huge Mistake

I see European hedge funds have learned nothing from their US counterparts at Bear Stearns. Halting redemptions is a very poor decision. All it does is create a pent up demand for more investors to leave as net asset values sink.

I talked about the Redemption Trap in relation to Bear Stearns back in July. "An investor in Europe, who didn't want to be identified, says he's been trying to get his money out of the hedge fund since February."

The Bear Stearns High-Grade Structured Credit Strategies Enhanced Leveraged Fund eventually went to zero while the High-Grade Structured Credit Strategies Fund went for something like 12 cents on the dollar. Had redemptions been allowed in February, investors wanting out would have gotten more than that for sure.

More Subprime Bank Troubles In Germany

Reuters is reporting Landesbanks' subprime exposure 80 billion euros.
Four German state banks have a combined exposure of almost 80 billion euros ($117.2 billion) to risky assets and the state bank of Bavaria, BayernLB, could need an over 2 billion euro write-down, FOCUS magazine reported.

Germany's Landesbanks are financial institutions owned by regional government and local community savings banks.

The banks are considering whether to transfer their U.S. subprime debt-related instruments to a special-purpose vehicle, the weekly magazine reported without citing its sources.
SIV Madness

With everyone else trying to reduce SIV exposure, what the heck are Germany's Landesbanks doing considering creating a new SIV? Hasn't anyone learned anything from this mess yet?

Mike "Mish" Shedlock
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