The confidence crunch...

What I reckoned to be a useless exercise of the power of flooding the market with cash, has revealed to be a good relief for the liquidity in the euro market. The agreement between central banks to intervene on liquidity covering temporary shortfalls has been rewarded with a decreased interest rates, especially on those tenors going beyond the end of year spot.

There was no doubt, to be frank, that it would have given a relief but my argument against it was that it would have solved temporary problems, even if, calculating the forward forward rate, it was quite evident that rates on Jan 2 nd would have been much lower, around 4.15/.21 on the 2 weeks. Exactly at the same level of the periods going to Dec 31st. The turn of the year was seen around 5% and this has increased the rates on the whole curve of rates.

In Italy, more than in any other country there has been a big outrage for the very high Euribor rates and, first time in the history of this country since the Euro adoption, Fixed interest rates mortgage payers have been charged less than a variable rate debtor. This is due to the freak and extraordinary situation of liquidity crunch created after the subprime mine. No confidence of banks towards banks has led market participants to stop lending money to counterparts and this has raised the rates. But, at the same time, savers and investors have seen their wealth reducing due to the impact on the stock markets living a true rollercoaster ride. Add to this the fly to quality in the Bond Market and you end up with a concussion that makes things less and less understandable to the commoners and make them feel as if they are teased and cheated by the system.

We are assisting to an interest rate increase on the interbank rates, a reduction of the yield from AAA and sovereign bonds and a fall in the stock market… All due to… confidence!

Normally the lack of confidence is between the investors and the market now it's between the main market players themselves: Hedge Funds, Funds and Banks.

It's still unknown how much subprime crisis has hit the market and the latest number talks of 350 billion dollars which is not a huge amount considering the entity of the market but the main risk is contagion with the real economy. When it comes to housing, the market fears it greatly, even because the snowball effect is at the corner.

The Fed and the Banks in the US are trying to do as much as they can to rebuild confidence but it rather seems like trying to place a mattress to avoid injuries to a 300 pounds man falling from a 3 storey building.

The only true measure would be an act of honesty towards the market. Things have to be called by their true name and a credit crunch is a credit crunch but admitting the causes would allow the market to understand where we are heading to.

Subprime crisis cannot be the only factor making all this mess. Banks have been piling up load of rubbish in the past years because they found a way to maximize their profitability without being caught in the regulators' nets. Now that the shit hit the fan, banks tend not to call things by their true name and blame the overall market condition.

Losses should be made known and not brushed under the rug. Regulators have a duty towards people and towards those banks that have not been screwing the system to single out the wrongdoings (-ers) and help those [honest] banks that are experiencing problems in getting funds from their clients.

How can a client trust a bank if this bank is not even trusted by fellow competitors? This is the most dangerous part. A central bank intervention can reduce rates but doesn't increase the trust in the system, actually it has the opposite effect on confidence. It gives the idea of a Big Brother always there ready to intervene and change the rules when things are not going up to as it was planned due to someone cheating.

Central banks should be less hermetic and more open about their policies and in period like this shouldn't allow speculations about rates: up, down or neutral. It should be stated clearly and not left to someone interpretation. Volatility makes the market and volatility is the main factor that leads Hedge Funds to invest and make (or lose) money.

These profits normally go to those who accept the fact of being acrobats without nets and I do not understand why, when the game becomes too risky, banks are there supporting them damaging even those account holders that didn't have the money nor the spirit to enter risky operations. At the end it will always be investors to pay for the cost of this huge bullshit.

I am mesmerized by the comments I read around Financial Fora but I do understand that at the eyes of common people it seems all like a big cheat and I think that if the Financial Community wishes to gain the trust of the world, draining or pumping liquidity is not the right signal. in the most important financial forum in Italy, Finanzaonline.com, there are people that even accuse the market player of changing euribor rates published the day before as an attempt to smooth the crisis when it is evident that it was a typing mistake... Only singling out the crooks and naming the errors, for what they are, is the solution. The temporary rescue from Fed, ecb, BOE, Q8, Dubai, China and Singapore can only offer a temporary relief but it wont solve the issues on the long run and people will continue expecting a recession and the fall of this castle made of sand... People deserve more guarantees in their lives and they need to know that the State and the authorities are on their side and not on the crooks'.