Worthless Guarantees and Printing Presses

Yesterday in Fannie, Freddie Commit to Waste $40 Billion a Month Taxpayer Money I talked about the chain reaction of guarantees.

Ireland guaranteed bank deposits putting Germany and the UK at a disadvantage. After criticizing Ireland, Germany did the same. The UK stepped in to guarantee bonds so now Germany and the US are at a competitive disadvantage.

Am I the only one who sees how absurd his is? Is the final ending point, the government of every nation guaranteeing everything?

Australia and New Zealand, get into the Guarantee Business.

Australian Prime Minister Kevin Rudd said Sunday the government will guarantee all bank deposits for a period of three years.

From Sunday, the government will also guarantee all term wholesale funding by Australian banks operating in international credit markets "to make sure they have the best possible access to global capital," Mr. Rudd said.

The New Zealand government followed Mr. Rudd's announcement by introducing a bank deposit guarantee program as both countries sought safeguards against turbulence in global credit markets.

The EU and UK get into the Guarantee Business.

Bloomberg is reporting European Leaders Seek 'One Voice' to Counter Crisis.

"I want Europe to speak with one voice for Europe and for the world because this is a global crisis," French President Nicolas Sarkozy told reporters as he greeted European Commission President Jose Manuel Barroso at the Elysee Palace in Paris. Sarkozy said he's seeking "an ambitious, coordinated plan."

German Chancellor Angela Merkel, whose government earlier this month rejected French suggestions to form a joint bank- rescue fund, said yesterday the euro region will implement "the same toolbox of instruments." Merkel, Sarkozy and their counterparts in the 15-nation euro region are being forced to shift stance as a deepening slide in financial markets has threatened to tip Europe into a prolonged recession.

The 15 euro countries may agree to guarantee interbank loans of as long as five years to break the credit-market freeze, according to a draft statement cited by Agence France- Presse.

Luxembourg's Jean-Claude Juncker, who heads the Eurogroup of euro-region finance ministers, said in a statement today that "no financial institution of systemic importance" can be allowed to fail.

Brown's government has also proposed guaranteeing loans between banks to thaw money markets. The G-7 refrained from endorsing the approach two days ago. The U.K. leader may renew his push today. The U.K. plans to recapitalize its biggest banks including Royal Bank of Scotland Group Plc and provide 250 billion pounds of bank loan guarantees.

Draft Statement: Europe Guarantees Bank Debt

YahooFinance has a Draft summit statement says euro nations would guarantee bank debt.

Countries that use the euro will temporarily guarantee future bank debt to encourage lending and ease the credit crunch, according to a draft statement under discussion by European leaders Sunday.

The declaration says the governments would guarantee "for an interim period and on appropriate commercial terms" new debt issued by banks for up to five years.

"This scheme would be limited in amount, temporary and will be applied under close scrutiny of financial authorities until Dec. 31, 2009," it says.

The leaders of the 15 euro-zone nations held an emergency summit Sunday night in Paris to seek European solutions to the financial crisis engulfing markets worldwide. The meltdown dominated summits around the world this weekend.

The statement also says that one way governments could save banks would include buying big stakes.

British Prime Minister Gordon Brown, who met with France's President Nicolas Sarkozy before the euro summit, said the plan "would involve not only more cash in the financial market but also a recapitalization of our banking system.

"And allied to that -- something that I believe is absolutely crucial -- to begin again the funding of businesses and mortgages with a guarantee given by governments. That can happen and will happen in the next few months," he told reporters.

Guarantees for 5 years, Close Scrutiny For 1 Year

Notice the discrepancy between the length of guarantees and the scrutiny over them. Also note that the UK has upped the guarantee ante to include mortgages. Wonderful.

Guarantees Creep Up

Notice how the length and scope of the guarantees is creeping up. It started with 1-2 years, went to 3 years, and now the EU is proposing guarantees for up to 5 years and that "no financial institution of systemic importance" can be allowed to fail.

Hells bells, why pussyfoot around with this stuff? Let's just have every country guarantee everything forever. And if it comes to that (which it rapidly seems to be doing), one must stop and think about the value of those guarantees.

Let's step back for a moment and consider the share price of Ambac, a company in the guarantee business.

Ambac Monthly Chart



click on chart for sharper image

Ambac (ABK) is in the guarantee business. It kept guaranteeing more and more and more stuff and profits soared. All it took to collapse Ambak was sinking asset prices.

One quick look at the above chart shows that the market now thinks Ambac's guarantee is worthless. There are a number of other guarantee companies whose guarantee is equally worthless, most notably MBIA (MBI).

It is a waste of money buying guarantees from companies that offer a snowball's chance in hell of honoring those guarantees when times are bad. In good times guarantees are not needed, in bad times the claims cannot be paid.

Worthless Guarantees and Printing Presses

Of course governments have something that insurers don't. That something is a printing press. However, there is theory and there is practice. There is a price to pay for those government guarantees. We have already seen the complete collapse of Iceland's currency.

Blanket guarantees of everything will eventually end in a collapse of some major country or some major currency, the breakup of the EU, or a global depression of some sort, perhaps all of the above.

All those government guarantees, just like the guarantees of Ambac and MBIA , are totally worthless, just in different ways.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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