$172bn is too big a number to ignore. Marla Singer has trawled through footnotes and found that the Fed may be exposed to European banks via swap agreements made by the banks with failed insurance giant AIG. It’s not definite, but it’s big if it’s true.

The argument runs as follows: (1) European banks arranged swaps with AIG to help meet capital requirements under Basel I; (2) AIG may lose money on those swaps if credit markets deteriorate or if the swaps are not terminated in Q1 2010, as expected; (3) AIG (or now the Fed?) may have to post more capital if credit markets deteriorate; (4) Implementation of Basel II has been postponed, so those swaps could last into Q2 2010. Will bailing out AIG mean bailing out its erstwhile counterparties?

Differing fortunes in the East: Australia has raised rates for the third month in a row, as expected. They are up 25 bps to 3.75%. Japan, meanwhile, spooked markets by holding an unscheduled BoJ meeting. Rumours abounded of additional QE. But in the end, all the policy board did was to make a sideshow offer of cheap three-month loans to commercial banks.

Who catches cold when Dubai sneezes? Egypt, Ireland and Greece, apparently. Egyptian stocks fell 8 per cent this morning in the first sign of regional contagion. As investors fret about sovereign default, markets are pricing Ireland and Greece as riskier. The European contagion is not down to direct exposure: it’s about state protection. Dubai rejected extending a debt guarantee to Dubai World - and the EU is expected to let Ireland and Greece fend for themselves as well.

The US commercial mortgage default is the highest for 16 years at 3.4%. UK mortgage and credit card defaults are up highly too (see chart). And two UK datapoints could signal turning points: house prices are rising, but at a slower rate than in the summer, and the manufacturing recovery has also slowed. Morgan Stanley warns of sovereign debt issues for the UK as early as 2010, especially if there is a hung parliament at the next election.

And why has the WTO not changed in light of the financial crisis? The organisation has neither restructured, nor changed its approach: “The so-called Doha round of trade negotiations is so deadlocked that it is not even on the formal agenda – the rough equivalent of holding the 1919 Versailles conference without talking about the war.”

Tags: bail-outs, CDS, commercial real estate (CRE), dubai, interest rates, liquidity, WTO

December 1, 2009 1:33pm in Global, bail-outs, bank lending, digest, interest rates, liquidity | Comment