Don't Worry - It's Just Nerves

ForexTV is reporting Trichet says ECB will continue to monitor money market conditions.

"I call on all parties concerned to continue to keep their composure," Trichet said in a statement, adding that this attitude has been "welcome and effective" in the recent days and will help to consolidate a smooth return to a normal assessment of risk in liquid markets.

"We have provided in particular the liquidity which was needed to permit an orderly functioning of the money market," Trichet said.

"We experience a period of market nervousness, a period in which we see increased volatility in many markets and a significant re-appreciation of risks," he said, adding that in some respects this can be interpreted as "a normalisation of the pricing of risks".

It sure is taking a lot of cash these days to calm nerves.

On August 9th the ECB lent an unprecedented 94.8 billion euros ($130.2 billion) after demand for cash in the European money markets drove interest rates higher. Supposedly this was "fine tuning", an interesting choice of words given that "BNP Paribas, France's biggest bank, halted withdrawals from three investment funds, saying a lack of liquidity meant it couldn't 'fairly' value the holdings."

And the fine tuning continued on August 10th with the ECB Adding a Further $83.6 Billion in Liquidity.

On August 14th the ECB adds 7.7 bln euros in 4th short-term operation.

The money in the one-day quick tender was its fourth special operation since last Thursday to calm panicky markets but each has been progressively smaller than the previous one. Earlier the ECB had said that market conditions were close to normal now.

I don't know about you but I'm sure glad "market conditions are close to normal now."

Canada has Bad Case of Nerves Too

Bloomberg is reporting Coventree Says Some Lenders Balking at Emergency Funding.

Aug. 14 (Bloomberg) -- Coventree Inc., the Canadian firm that failed to sell asset-backed commercial paper because of a credit crunch, said some lenders balked at providing emergency funding for C$700 million ($661 million) of maturing debt. Coventree requested funding from lenders after it was unable to refinance debt that matured yesterday as investors declined to buy the new securities.

Shares in Coventree plunged as much as 41 percent on concern that some its funds will be forced into default if they can't get emergency funding from lenders that may include Canada's biggest banks.

Coventree is one of the first companies to delay payments on asset-backed commercial paper in the U.S. and Canada in the 12 years since the debt was created. Coventree may not be the only Canadian commercial paper issuer struggling to refinance debt. DBRS, a Toronto-based credit rating company, said that 17 commercial paper trusts have requested emergency funding, including at least eight offered by Coventree.

"Failure to receive funding in a timely manner through the placement of ABCP or funding under the liquidity facilities may result in the event of default," the rating firm said in a note today.

Coventree, which administers C$16 billion in commercial paper funds, didn't name its "liquidity providers." Craig Armitage, an outside spokesman for Coventree, didn't return a phone call today seeking comment.

Bank of Montreal and Royal Bank of Canada are the largest providers of "disruption funding" for asset-backed commercial paper in Canada, Genuity Capital Markets analysts Mario Mendonca wrote today in a note to investors. He estimates the asset-backed commercial paper market in Canada is worth about C$120 billion.

"It is conceivable that the banks could argue that the current circumstances are more than a market disruption and elect not to provide the liquidity," Mendonca said.

Kevin Depew on Minyanville was also talking about Coventree, deflation and other interesting things in Tuesday's Five Things. Let's take an abbreviated look at a few of the points.

1. Oh No! Not a Return to Normalcy! Please No!

European Central Bank President Jean-Claude Trichet called on investors to keep their composure today, according to Bloomberg, saying markets are returning to normal, which is ironic when you think about it because the last thing markets need is a return to normal. That would erase the nearly five years of abnormal risk-seeking behavior, irregular credit terms and excessively loose lending policies that brought us to this in the first place.

4. The reason equities are selling off is that everyone is waiting for the "fundamentals" to come back "in line."

• So what we have is a standoff.
• No one wants to mark to market their illiquid "undervalued" securities that are illiquid and undervalued because no one wants them.
• So they are doing what they can to hold onto them until the fundamentals come back " in line."
• Join the crowd. That's what the last investors in, say, Etoys thought back in 2000.
• The problem is there are now two conflicting and competing interests playing out on Wall Street.
• On the one hand, firms such as Goldman Sachs are unhappy that certain illiquid assets they are carrying on their books are being assigned current values by what few bidders there are that in the firms' minds do not represent the fundamentals.
• On the other hand, part and parcel with those very so-called "fundamentals" must be a demand for riskier assets.
• If that demand dries up due to risk aversion, then the fundamentals have BY DEFINITION changed.
  

5. The Big Payback

• Last week's credit crunch (Wow, last week! Has it been so long already?) has set off a worldwide rush for dollars as banks and fund managers scramble to pay back loans used to buy risky mortgage securities, Bloomberg says.
• After a five-year decline that saw the U.S. currency reach its lowest level in a decade, it has rallied 1.4% against the euro and 1.2% against the pound in the last three trading days, Bloomberg noted.
• Now, isn't the economy in the U.S., led by housing, slowing? And aren't the Fed, and central banks around the world, injecting liquidity? So shouldn't that pressure the dollar?
• There are a some things to keep in mind about the dollar under these circumstances.
• First, increased risk aversion (that is, after all, what we are seeing: banks, lenders becoming risk averse, refusing to lend money under previous credit terms) actually creates incentives to save and postpone spending if those who have been borrowing to leverage assets believe those assets will be lower and purchasing power greater in the future.
• This pattern can be self-reinforcing, which is what the Fed fears the most.
• A deflationary credit unwind worsens repayment burdens for borrowers, precisely for the reasons Bloomberg's article noted, because the burden of repaying debt increases with deflation, and the dollar - because borrowers who want to repay their debts must accumulate more of them in order to do so - moves higher.
• This cycle of risk aversion and decreased time preferences is already playing out in real time.
• See, for example, Sallie Mae (SLM) facing the fact that investors have suddenly gotten cold feet about their $25.3 billion takeover.
• Risk aversion, decreased time preferences.
  

Disruption Funding

Let's return to the idea of "disruption funding" and the inability to get it. Coventree went public in November. If Coventree goes under will it be the quickest IPO to bankruptcy ever?

But I am not worried about such things and nor should Canadians because Trichet says things are normal, and Paulson says this is the strongest global economy he has ever seen.

Normalcy is a good thing too, because otherwise people might have concerns about all this talk of "disruption funding" and the first delayed payments on asset-backed commercial paper in the U.S. and Canada in 12 years. Others might be concerned that 17 other commercial paper trusts have requested emergency funding. Still others might be worried about massive percentage increases in foreclosures and/or the recent stock market decline.

But thanks to Trichet and Paulson, everyone should realize this is nothing really to worry about. It's just a bad case of the nerves.

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