Credit Crunch Contagion Appears in Moscow

| October 11, 2007

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As most of you know from my earlier posts, I have been watching the stresses build in the global currency and credit markets. While most people have little idea what they are and why they are there, suffice to say in a world that is increasingly outsourcing things to each other, the exchange of money between countries is very important. The more exchange there is, the more the economies become inter-linked.

This promotes peaceful, trade based relations that can ensure that wars don’t happen (Wars would hurt the export business). However it has also set the stage for global impact for problems that might have been more limited in earlier decades.

Case in point – Russia: (from FXStreet)

Russia’s central bank lowered the interest rate on roubles used to carry out currency swap transactions to an annual 8 pct from 10 pct, effective today, in an effort to stabilise short-term rates on the currency market, Interfax reported.

The central bank also said the move should help regulate the liquidity of the banking system. Banks actively use currency swaps during unstable periods on currency markets and also when experiencing problems with liquidity.

This is akin to my description in “Iron Sunrise” where the financial markets are consuming anything they can to keep trying to expand the money supply, much like a star’s dying phases where it runs out of “good” fuel and has to burn any elements if can find until the physics runs out.

The above article describes a financial system that is breaking down under the burden of deflation. Money is evaporating from the system at an amazing rate and the people holding the bad debt are working hard to hide these facts. Every bank or investment house suspects everyone else is in trouble too, so they don’t want to lend short term money to each other, suspecting they will be left holding the bag.

The London Financial Times offered an inside look at a devolving Russian financial system back in late September:

A senior Russian banker warned on Wednesday of debt defaults as the liquidity squeeze in Russia tightened following the global credit crunch and interbank lending rates climbing to a two-year high. “If debt markets remain closed until the end of the year the situation is going to get very difficult for many banks,” said Oleg Vyugin, chairman of privately owned MDM Bank and former head of Russia’s financial markets regulator.

“There could be some defaults. The Russian rouble bond market is not working.”

Overnight lending rates in Russia climbed to 10 per cent, the highest since mid-2005, even after the central bank on Wednesday pumped an additional $2.56bn into the banking system via two one-day repo auctions.

“Banks are not lending to each other,” said Alexei Yu, a fixed income trader at Aton brokerage. “But it is largely due to internal reasons. Tax payments are falling due at the end of the month and at the end of the quarter, banks must bring their accounts in line with the regulations of the central bank. By the beginning of October, the situation will ease.”

I will state again, we are in a new era of highly inter-connected world economies. No body know where this one is going.

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Category: Economics, Geopolitics

About the Author ()

Bruce Henderson is a former Marine who focuses custom data mining and visualization technologies on the economy and other disasters.

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