Tuesday, November 25, 2008

OECD Forecasts Four Quarters of Contraction; US Treasury Announces Another $800 Billion Credit Program

OECD forecasts four quarters of contraction

By Norma Cohen, Economics Correspondent
November 25 2008 11:13

The US and the eurozone are set to suffer four consecutive quarters of contracting output that will not come to an end until the middle of 2009, according to the Organisation for Economic Co-operation and Development.

The OECD, which only a few months ago forecast that most eurozone area economies would experience flat growth in the second half of this year – and that the UK would experience a mild technical recession – is now forecasting four consecutive quarters of contraction for the US, countries using the euro, and OECD nations as a whole.

“Many OECD economies are in or are on the verge of a protracted recession of a magnitude not experienced since the early 1980s,” the think tank for the 30 rich countries said in its latest Economic Outlook, published on Tuesday.

Over the next two years, the number of unemployed in those economies could rise by 8m. However, inflation is likely to abate in all OECD member states and some face a small risk of deflation.

The UK – for which the OECD forecast as recently as September a technical recession in the second half of 2008 – is now likely to see real gross domestic product growth of 0.8 per cent year on year, down from 1.2 per cent less than three months ago and half of the growth rate it was forecasting six months ago.

For 2009, UK growth is likely to contract by 1.1 per cent. Recovery will begin in the second half of 2009 but will remain insipid, with 2010 seeing GDP expansion of 0.7 per cent.

The Paris-based organisation emphasised that the uncertainties associated with its latest forecast were “exceptionally large”. The most significant of these relate to the speed at which the financial market crisis – which the OECD regards as the prime driver of of the downturn – is overcome.

Recent OECD research has drawn attention to the greater severity of economic downturns precipitated by a financial crisis, as has been the case for the past year. In pinpointing countries that will experience a severe downturn, in addition to the UK, the OECD lists Hungary, Iceland, Ireland, Spain and Turkey.

The financial crisis is not the only driver of the projections; others include housing market adjustments, which the OECD said had “a long way to go”, based on past housing cycles. Moreover, these come on top of negative wealth effects from falling equities markets.

Copyright The Financial Times Limited 2008

Fed moves to boost consumer lending

By Joanna Chung in Washington
November 25 2008 15:57

US officials on Tuesday opened a new front to fight the financial crisis with two new programmes aimed at boosting lending to consumers and small businesses and supporting the market for mortgage-backed securities.

The US Treasury said that it would allocate $20bn to back a new lending facility for the consumer asset-backed securities market, an important source of liquidity for institutions that provide small business, auto and student loans and which has essentially shut down during the credit crunch.

The Term Asset-Backed Securities Loan Facility will be operated by the Federal Reserve, which will extend up to $200bn in non-recourse loans to holders of ABS backed by loans that have been newly or recently originated.

The $20bn contribution from the Treasury will come from its $700bn Troubled Asset Relief Program.

In addition, the Fed said it would buy up to $100bn of debt from mortgage financiers Fannie Mae and Freddie Mac and the Federal Home Loan Banks through a series of competitive auctions starting next week. It will also buy up to $500bn mortgage-backed securities backed by those entities, hopefully by the end of the year.

“This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally,” the Fed said in a statement.

Hank Paulson, speaking at a press conference after the moves were announced, called for patience as authorities moved to deal with the current crisis.

The Treasury secretary said: “It is naive for any of us to think that when you’re dealing with a situation of this magnitude that a bill could be passed or a single action taken to make all the issues go away. Our focus is on stability and strengthening the financial system and we now have the tools and powers we need to work with others.’’

The latest initiatives, in which the Fed is committing another $800bn, underscore the extent to which policymakers are turning to unconventional methods to thaw lending activity. They also signal yet another twist to the $700bn Tarp programme which passed after a tumultuous battle in Congress.

The Treasury said the new TABSL facility was intended to assist the credit needs of consumers and small businesses – by facilitating the issuance of ABS and improving ABS market conditions – but added that the facility “may be expanded over time and eligible asset classes may be expanded later to include other assets,” including commercial mortgage-backed securities, non-agency residential mortgage-backed securities or other asset classes.

Less than two weeks ago, the US Treasury had dropped its plan to buy toxic assets, which has been the centrepiece of the original plan, much to the dismay of the markets.

Under the new facility, the Federal Reserve Bank of New York will lend up to $200bn on a non-recourse basis to holders of newly issued AAA-rated ABS for a term of at least one year.

Copyright The Financial Times Limited 2008

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