Quarterly Reports By Major International Banks Will Not Herald The End Of The Crisis The Financial Markets Reality

Călin Rechea

International stock exchanges - especially those in the United States and Europe - have been growing for several weeks due to the optimism generated by the flood of money freshly printed by central banks. After several banks rushed to announce positive results for the first two months of 2009, Wells Fargo, the fourth bank in the U.S. also rushed to anticipate positive results for the first quarter.

Has the markets" optimism been confirmed? Is one blossom enough to call it a spring? Even though the blossom may be a positive quarter for the major U.S. banks, it is much too soon to be optimistic. We should not forget that the Financial Accounting Standards Board (FASB) has practically removed the mark-to-market from the reporting requirements, while banks are deciding on their own what criteria they should use to measure the depreciation of their balance sheet assets.

Thus, a virtual reality has been created on financial markets that has nothing to do with the real economy. In the real economy, the industrial output is collapsing, commercial spaces are becoming empty and unemployment is hiking. This is hardly a solid foundation for the customers" ability to repay their debts to the banks and certainly not a favourable environment for reviving lending.

After the recent developments, the U.S. governmental bonds market is one of the best indicators of the success chances of the "innovative" solutions to save the economy by printing money. When the Federal Reserve announced intent to buy bonds from the secondary market, their yield collapsed (see chart, especially the 10-year bonds).

Printing money is aimed at "influencing" the entire yield curve in order to reduce financing costs for both the Government and the private sector. Not only did the Fed announcement not stop the upward trend upon which yields had embarked for several months, but it even consolidated it.

This development should not surprise anyone, as the financing requirements of the U.S. budget deficit increased exponentially in the fiscal year 2009 (i.e. which started in October 2008). In only six months, the deficit reached 956 billion USD, two times more than the deficit of the entire fiscal year 2008.

The difficulties encountered by the local administration in the U.S. have prompted Moody"s to make an unprecedented decision: the entire municipal bond sector - a market of over 2 trillion USD - has been placed under observation with a negative outlook. What"s next? Of course, an increase in re-financing costs, despite the efforts made so far by the Federal Reserve. Under these circumstances, it is almost certain that the U.S. Central Bank will announce further plans to print money.

It appears that China"s expectations are going in the same direction. The Central Bank in Beijing has started offering yuans to important commercial partners within forex swap operations, according to a Bloomberg column. "China has learned from this financial crisis that we must reduce reliance on the dollar and promote the yuan as a regional or international currency," Zhang Ming from China"s Academy of Social Sciences told Bloomberg. China is therefore taking the first steps to eliminate dollar-denominated payments for their exports. Even though they did not say anything about reducing the importance of the dollar as a reserve currency during the G20, China is acting to create its own economic "reality" while preparing for the collapse of the dollar.

Will the collapse of the global financial system be stopped by the positive results posted by U.S. banks for the first quarter? Willem Buiter, a former Member of the Monetary Policy Committee of the Bank of England, does not believe in such miracles. "The impact of the collapse of real economic activity and of the associated dramatic increase in defaults and insolvencies by non-financial enterprises and households on the loan book of what is left of the banking sector will begin to show up in the banks" financial reports at the end of the summer and in the autumn," Buiter wrote on his blog hosted by the Financial Times.

According to John Kemp from Reuters, monetary and fiscal authorities will continue to rob taxpayers and those who save money in order to avoid the bankruptcy of certain classes of investors. He recommends to sell governmental bonds and other fixed-yield securities to central banks and adopt investment strategies to protect capital from new inflationary pressures.

What is happening in some corner of Eastern Europe during all this global economic and financial storm? Taxes are increasing! Yes, it"s Romania, which has managed to reach the status of "toxic asset" in only a few months, despite all the "help" received from the IMF. In fact, it seems like the purpose of such help was rather to control the depreciation in order to avoid a violent "mark-to-market."

Lump sum taxes for micro-enterprises is simply economic suicide under the current circumstances. Micro-enterprises could be the solution to create jobs for those left jobless by the large corporations facing a severe collapse in the demand for their products.

Maintaining an oversized State apparatus is, most likely, contradictory to the requirements imposed by the IMF and a risk factor on the disbursement of the next loan tranches. What will the Government do when the budget revenue forecast is invalidated by facts? Will they increase other taxes in the name of the greater good?

Even 20 years after "the fall of communism," the Romanian State believes that companies and people exist only to serve the State through higher and higher taxes, without asking for anything in return. Throughout all these years, the State has been the most powerful factor of destroying the national wealth. Now, the State is ready to stage quite a triumphant finale.