This is going to get ugly faster than I thought . . .

I’m going into the City tonight for a banking gig. Should be interesting.

good point

The question of whether the agencies can go bankrupt came up in this blog a couple of weeks ago. My view of this has changed a little in the wake of Northern Rock. I still do not believe that the agencies can go bankrupt because of borrower defaults. A firm cannot just be declared bankrupt without an opportunity to realise its assets, and since in the case of the agencies this would involve mass foreclosures, I think that bankruptcy in this way is politically impossible. In the light of Northern Rock however, I suppose that an agency could be shut down because it could not fund itself.

Do you know if China has a rule similar to the Japanese: that official holdings of assets with a maturity of more than five years are not counted in the published reserves? If they do, it would help account for the gap about which you have commented.

I tend to agree that the Saudis haven’t taken the decision yet to move off the dollar peg, but may have held their interest rate for dual purposes. Domestically the higher rate helps rein in high inflation. As domestic capital markets are largely closed to foreigners, they can hold off inflows pretty well. At the same time the Saudis may be signalling to Bernanke not to cut again in the near future. Saudi patience and generosity are not infinite when their hard earned oil revenues go to subsidize Wall Street bonuses. Their oil has real negotiable value. They must be unhappy that their dollar assets have much less value as of today.

It will be interesting to see what happens to credit spreads in the next few days. The central banks have pretty well exhausted their biggest guns. If interbank and commercial paper rates creep higher now - reflecting a distrust of the dollar and the risk profile of counterparties - there is little more the central banks can do.

Already there is scepticism about the quality of earnings being reported this week. Lehmans level 3 earnings (mark to make believe) rose from 8 percent to 11 percent of earnings, and the CFO refuses to detail the underlying nature of the $700 million loss or how it was measured. I’d be surprised if they benefit from the Fed’s rate cut when they go to the market for cash.

I would still bet though that the Saudis haven’t quite taken the decision to move off the peg — and the most likely outcome right now is that they will end up reducing rates rather than revaluing. that said, the odds of a shift are growing.

i just wouldn’t rule out the possibility that this just amounts to a policy mistake by the central bank governor, who may think the saudis have more room for an autonomous policy than they really do.

The euro is soaring against the dollar this morning on the Saudi interest rate hold.

It’s no longer just the Telegraph speculating about them shifting away from the dollar peg.

http://www.afxnews.com

“This signals the oil-rich kingdom is preparing to break their dollar peg and with 3.5 trln usd in dollar denominated reserves in the region any stampede out of the US unit would hurt,” said Matthew Foster-Smith at Thomson IFR.

I’ve been saying since December 2006 that the dollar peg in Saudi and UAE couldn’t hold in the face of massive imported inflation.

The Fed’s cut could be seen in retrospect as one of the greatest misjudgements of all time if it leads to the rapid de-dollarisation of the Gulf. With 80 percent of exports going to Asia and only 10 percent of imports from the US, selling precious oil for increasingly worthless dollar scrip and tying their economies in knots to do it doesn’t look very attractive. The cut in rates might have been the last straw.

When Kuwait left the dollar peg earlier this year, it did so without readjusting its reserves dramatically. It just specified a putative basket of currencies for its peg without dumping dollars from its reserves. Saudi could try to do the same, minimising the immediate impact for dollar investments. Unfortunately, the signal that Saudi would send would be a hundred times stronger in the current fragile credit environment than the signal from Kuwait while the market was still robust.

When we read something like the below (from UK telegraph) its alarming. What is ur gut feeling on US Bond market and more importantly USD hegemony ? Is it all set for a collapse. ??

There is now a growing danger that global investors will start to shun the US bond markets. The latest US government data on foreign holdings released this week show a collapse in purchases of US bonds from $97bn to just $19bn in July, with outright net sales of US Treasuries.

Cheers