Monday, April 6, 2009

The Debts of the Spenders: European Leaders Pressure IASB to Follow FASB M2M Changes

Hmmm. Looks like I was a bit premature in saying that IASB would get to preserve its independent status. European finance ministers are also facing pressure from banking lobbyists to game their numbers. So far, IASB is resisting the pressure admirably.

In predictable fashion, the Europeans remain divided about the best path(s) to follow. The ECB has remained traditionally cautious about inflation while the peripheral EU states are all too aware of their lack of leverage (pun intended) in the sovereign bond markets. However, that is not to say that IASB will not follow through w/a similar accounting modification of fair value rules. M2M is a convenient scapegoat for political posturing.

Any sort of modification or even suspension of accounting rules could result in one of the biggest head fakes of 2009. Although banks will be able to mark their illiquid assets higher (watch for those Level 3 asset disclosures in the footnotes) reality will bite back even more viciously further down the road.

The greater macro-economy is not improving. Housing prices continue to slide - both in the US and abroad. Commercial property values are falling. Unemployment continues to climb month after month. More starkly tax revenues are falling while public aid is rising.

The only reason why there is a period of temporary "recovery" is b/c basis point spreads have narrowed in the credit markets - and only then b/c of unprecedented government money printing.

Banks MAY be able to avoid facing further losses by transferring their debt burdens onto an increasingly skeptical and angry public but at the cost of increasing the debts of a nation.

There is a limit after all to quantitative easing - and it is called basic supply and demand. Interest rates WILL rise in the future. The only question is not "IF" but "WHEN."

[EDIT: I cut most of the newswire story over copyright concerns. If you are interested in reading the full thing or wish to comment to the writers I have left their names. ]

=DJ ECOFIN: E.U. Fin Mins Calls For New Acconting Rules
By Gabriele Parussini and Leos Rousek


PRAGUE (Dow Jones)--European finance ministers pointed to recent changes to U.S. accounting rules as a source of concern, with most clamoring that European rules also change to avoid giving U.S. banks a competitive advantage.

"We need a level playing field," said French Finance Minister Christine Lagarde. She cited an "urgent need to reexamine accounting principles."

Her colleagues at the informal two-day summit in Prague that ended Saturday agreed, issuing a statement calling for the issue to be addressed "immediately" and noting the U.S. rules "could provide (U.S.) financial institutions with much more flexiblity" to navigate the current credit crisis.

But Swedish Finance Minister Anders Borg warned that, while global accounting standards should be uniform, they should also be rigorous. "For us, it's also very important that the value of an asset is the value of an asset," he told Dow Jones Newswires.

"Accounting rules appear cold and technical but ideologies lurk within them," said Giulio Tremonti, Italy's' finance minister.

"The Americans, who were supporting the mark-to-market principle, suddenly changed their minds," he added. "Europe should follow."

France's Lagarde said that the region's finance ministers will ask the European Commission to pressure the International Accounting Standards Board, or IASB, to "examine the modifications needed for the valorization of impaired assets."

In their joint statement, the ministers said the U.S. rule changes were made "with the aim of accurate valuation of assets in illiquid markets."

Sweden's Borg, however, sounded a note of caution. "If there are problems within a balance sheet, we don't solve the problem by hiding it," he said.k "The principle of transparency is the most efficient way of dealing with this problem of impaired assets."

By Gabriele Parussini, Leos Rousek, and Christopher Emsden, Dow Jones Newswires;

(END) Dow Jones Newswires
04-04-09 0927ET
Copyright (c) 2009 Dow Jones & Company, Inc.


OSR said...

Interest rates WILL rise in the future.

Great post--these are the kind of stories that get swept under the rug. I'm not so sure about interest rates, though. My back-of-the-envelope calculations indicate that the Fed has neutered itself in that respect.

In Debt We Trust said...

The USD should remain strong short to medium term simply b/c of the safe haven trade. Other economies are not doing as well comparatively - even the yen has weakened substantially against the USD.

As for US govt debt (bonds), the results are more uncertain short term but the bond bulls certainly have an argument in the deflationary asset spirals. However, institutional buyers are beginning to load up on TIPS and other inflation indexed fixed income.

Blog Archive