“October is at last ending - the worst month in commodity history,” Eugen Weinberg, an analyst at Commerzbank AG in Frankfurt, told Bloomberg. “Investors are expecting lower growth for the longer term and that is putting prices under pressure.”

The news came one day after the revelation that the U.S. economy shrank 0.3% in the third quarter, and on the very same day that the government announced consumer spending tumbled 0.3% in September - meaning the world’s largest economy is struggling…

Addressing the European Parliament, President Sarkozy implored his European contemporaries to embrace the current period of economic upheaval as an opportunity to restructure the global financial system. According to the Daily Telegraph, he also articulated the concern of many Western authorities that sovereign wealth funds, located primarily in Asia and the Middle East, could use their massive cash reserves to scoop up key foreign assets at extraordinarily…

Russia's economic growth is obviously slowing quite quickly - and evidently far more rapidly than the government anticipated - largely due to the impact of the global credit crunch, the downward movement in oil prices and investor reaction to Russia's "go it alone" attitude in international disputes.

In the present environment inflation is likely to slow quite rapidly, and in September this easing in infaltion was noted in the prices that manufacturers pay and charge, as highlighted in the VTB report: "The rate of increase in prices charged by Russian manufacturers eased for the fifth straight month to its weakest' since at least January 2003".



Oil Output Down


And just to cap it all, Russia's oil production also fell in September as companies struggled with costs and maturing fields, effectively bringing the world's second-largest crude exporter closer to its first annual drop in output since 1998. Production fell to 9.83 million barrels of crude a day (40.2 million metric tons a month), 0.4 percent less than a year earlier, according to figures released by the Energy Ministry's CDU-TEK unit.

So What Can We Expect?

Well, in broad outline I don't think the outlook has changed that much from when I wrote my last analysis two weeks ago.

As I said at that point, Russia is hardly the Baltics, so we should not expect the economy to go into a complete nosedive. A lot depends on the view you take about the future of energy prices. While the global economy is now evidently set to slow considerably - in addition to the reduction in growth rates already seen so far this year -and especially in the aftermath of the most recent bout of financial turmoil. Cleary oil prices are set to drop even further - and this will only keep pushing Russian growth down - but at some point the market will find a floor, possibly in the region of $80 a barrel. More importantly when it comes to the future of oil prices, I would not be banking on some kind of long and deep global recession. Many of those developed economies who are significantly affected by the bursting of their construction booms (and the banking issues which have gone with it) will probably have weak domestic consumer demand for some time to come, but a solid core of emerging economies may well take off again quite rapidly as we move into 2009 -and especially if energy prices drop back, and the current near panic in the financial markets settles down (people do, after all, have to put their money somewhere). So the emergent (and numerous in population terms) emerging economies should give another strong shove to what may have become a rather listless global economy. As a knock on effect this should also serve to put some life back into export dependent economies like Germany and Japan (who by and large are not reeling under the impact of the construction bust, although their banks may have been lending to people who are).

So the bottom line here, I think, is be ready for a sharp slowdown in headline Russian GDP, but don't expect to see any imminent meltdown in the Russian financial system, one way or another they have the wherewithall at this point to keep limping forward. Of course, in the longer term, well, you know......

Russia's economic growth is obviously slowing quite quickly - and evidently far more rapidly than the government anticipated - largely due to the impact of the global credit crunch, the downward movement in oil prices and investor reaction to Russia's "go it alone" attitude in international disputes.

In the present environment inflation is likely to slow quite rapidly, and in September this easing in infaltion was noted in the prices that manufacturers pay and charge, as highlighted in the VTB report: "The rate of increase in prices charged by Russian manufacturers eased for the fifth straight month to its weakest' since at least January 2003".



Oil Output Down


And just to cap it all, Russia's oil production also fell in September as companies struggled with costs and maturing fields, effectively bringing the world's second-largest crude exporter closer to its first annual drop in output since 1998. Production fell to 9.83 million barrels of crude a day (40.2 million metric tons a month), 0.4 percent less than a year earlier, according to figures released by the Energy Ministry's CDU-TEK unit.

So What Can We Expect?

Well, in broad outline I don't think the outlook has changed that much from when I wrote my last analysis two weeks ago.

As I said at that point, Russia is hardly the Baltics, so we should not expect the economy to go into a complete nosedive. A lot depends on the view you take about the future of energy prices. While the global economy is now evidently set to slow considerably - in addition to the reduction in growth rates already seen so far this year -and especially in the aftermath of the most recent bout of financial turmoil. Cleary oil prices are set to drop even further - and this will only keep pushing Russian growth down - but at some point the market will find a floor, possibly in the region of $80 a barrel. More importantly when it comes to the future of oil prices, I would not be banking on some kind of long and deep global recession. Many of those developed economies who are significantly affected by the bursting of their construction booms (and the banking issues which have gone with it) will probably have weak domestic consumer demand for some time to come, but a solid core of emerging economies may well take off again quite rapidly as we move into 2009 -and especially if energy prices drop back, and the current near panic in the financial markets settles down (people do, after all, have to put their money somewhere). So the emergent (and numerous in population terms) emerging economies should give another strong shove to what may have become a rather listless global economy. As a knock on effect this should also serve to put some life back into export dependent economies like Germany and Japan (who by and large are not reeling under the impact of the construction bust, although their banks may have been lending to people who are).

So the bottom line here, I think, is be ready for a sharp slowdown in headline Russian GDP, but don't expect to see any imminent meltdown in the Russian financial system, one way or another they have the wherewithall at this point to keep limping forward. Of course, in the longer term, well, you know......

``Refinancing of all subsidiaries including Eurohypo is centrally organized and secured over the long term,'' according to Reiner Rossmann, a spokesman for Commerzbank, Germany's second-biggest bank by assets. ``Refinancing needs for 2008 are already covered'' and the bank's deposits provide a ``stable'' refinancing source, he added.

``In a nationalization, shareholders get wiped out,'' .........``That's just the risk investors take.''

``We're absolutely confident about our position, even in this hectic market
scenario,'' Profumo wrote in a letter to employees.

Asked yesterday if Unicredit expectations for the year would be changed, Alessandro Profumo replied: "I can't possibly say given the way the market is going and the widening of spreads."

UniCredit has forecast earnings per share of 52-56 euro cents this year and a stretching Core Tier 1 ratio (this is a measure of capital held against risky assets) of 6.2 percent based on Basel II requirements, up from 5.7 percent at the end of June. In fact this is not the first time this year Profumo has had to roll-back on targets, and the pressure on shares seems to be due to market questioning of how he is going to reach the Core Tier 1 target without a further capital increase, despite repeated denials of any recourse to investors for funds. As I say, this would not be the first time Profumo has had to change course, since back in March he dropped an earnings target of 66 euro cents per share, citing market volatility.


In terms of lending against deposits, Unicredit's current ratio is 97 percent for 2008, below Intesa Sanpaolo's 104 percent. Both the Italian majors have LtD ratios below the European bank average which is estimated to stand at about 129 percent. Five-year senior credit default swaps on UniCredit were up 14 basis points at about 121 basis points yesterday, according to Markit data.

Europe Wide Response?


So what now? Well, as much of the press seems to be noting, all that "NINJA mortgage ha ha ha" stuff from the EU politicians is now starting to look pretty silly (Peer Steinbrueck may well have been the worst case scenario here - being actively seen to gloat with his "ninja loans" quip - short for "no income, no job, (and no) assets." - but I think before anyone laughs too loudly we should just wait and see what happens to the German economy if the run on the Russian financial system continues). Europe's leaders have really been extremely foolhardy in giving the impression to their electorates that the European economy was completely sound and that Europe's banks would avoid any fallout from the global housing bust. If a whole generation of new financial products are suddenly withdrawn from the market (rather like all that "tainted" Chinese milk) it should be obvious that property prices and the construction industry everywhere will feel something, and those banks who didn't have a local property boom to fund, well they simply got involved in buying securities issued by others who did, via the so called "global wholesale money markets".To take just one simple example - of the estimated $591 billion in losses and writedowns so far recorded by global banks since the start of 2007, 39 percent have been accounted for by European institutions.

Yet despite all of this, some European politicians are still at it. Italian Prime Minister Silvio Berlusconi was busying himself yesterday trying to vaunt it over the United States for just this sort of reason. While Italy's financial stability panel, which met for the third time in 10 days yesterday, discretely limited itself to saying what it was supposed to say - namely that the impact of the global financial crisis on Italy's banking and insurance system remains limited and Italian banks had enough liquidity - Berlusconi was busy proclaiming that Italy was far better placed to handle its problems than the United States was: "I am not pessimistic about the future ..." he is quoted as saying "because our financial situation is less fragile than that of the United States,". This, I think remains to be seen, and such bravado in making comparisons hardly befits a Prime Minister whose country has just enetered its fourth recession in eight years and which looks set to contract across whole year 2008.

And the President of Spain's government, José Luis Rodriguez Zapatero, doesn't seem to be much better, since he seized the opportunity provided by his recent United States trip to tell a group of businessmen that the Spanish financial system, unlike its US counterpart, was in extremely good health. Not satisfied with simply making himself look ridiculous, he went further, stating that the extent of Spain's growth had depressed Silvio Berlusconi (his traditional "enemy"), and even suggested that Spain would overtake France in terms of per capita income within three or four years. If someone else hadn't used the phrase already this week, I would have said that what we had here was a clear case of "whom the gods would destroy they first make mad", as it is I will simply have to limit myself to saying that the condition of the patient with Artemio Cruz Syndrome is evidently detiorating.

What Can The EU Do?

However, recognising that we will need some sort of concerted intervention to address the developing problem is one thing, and deciding what that intervention should be is quite another (as we can see from what is happening in the United States right now, getting consensus on any sort of major intervention is far from easy). In theory, the 27-nation EU structure should offer a ready means of coordinating policy. But while the EU has unified laws on areas like trade and labour standards (and in the near future on immigration) more broad-reaching policy harmonisation (such as fiscal coordination) has long been resisted, and the recent sorry attempts to introduce a basic constitution provide clear evidence of the difficulties which lie ahead. The EU has no institutional equivalent of the US Treasury, which is why all the initiatives which we have seen to date - for all the European "feel" about them - have been either ad hoc bi- or tri- lateral arrangements. US NBER head Marty Feldstein has long been on record as pointing out that the greatest weakness in the eurosystem architecture from the start has been the absence of a common fiscal system, and the inability to correct the problems caused by deficits in one country drawing on surpluses in another. Feldstein was thinking about asymetric recessionary processes, and I doubt was thinking about a problem of the severity of the one we now face at the time, but in the longer run he has been proved right, this sort of problem was always going to arise at some point or another.

And we also need to think about the budget deficits issue. If certain of the national governments move back on the commitment to balance the budgets by 2011 then we will only start to shift from banking instition downgrades to soverign rating ones.

At the present time the European Commission seems to be limiting itself to talking about regulatory issues for the future, and new legislation proposals are expected later this week aimed at strengthening bank monitoring across borders, but such moves will hardly serve to resolve the present issue. Up to now European governments seem to have only agreed to a concerted supervision framework which is set to come into effect in 2012, pledging themselves to cooperate as required in managing any crisis, but they have most meticulously resisted devising any kind of formula for splitting the bill in the event that a cross-border bailout should become necessary, or that the problems of one country (and Spain immediately comes to mind here) should become to great for any single member to handle alone.

Daniel Gros, director of the Centre for European Policy Studies in Brussels, in particular has come out and stated that European governments ultimately will have to put capital into their banks, which he calculates are more leveraged than their U.S. rivals.

``These are highly leveraged institutions which need to have support from the
public purse,'' according to Gros.

Daniel Gros also suggested that EU governments assign the European Investment Bank, the EU's financial arm, the job of infusing 250 billion euros to support the region's banks, in return for an equity stake. The quantity he mentions seems rather small by my calculations (I think more than this will be needed in Spain alone), but he is undoubtedly scratching around in the right area.