Publication date: 5 July 2009 | Covering: April – June 2009
Quarterly Briefing
- Bank stress tests: May 7 US Treasury “Supervisory Capital Assessment Program” results; 10 of 19 banks need US$75bn more capital; market confidence restores
- GM bankruptcy: June 1 General Motors files Chapter 11; government takes 60% stake; largest industrial bankruptcy in US history; Chrysler emerged April
- TARP repayments: Major banks including JPMorgan, Goldman begin repaying bailout funds; signal of returning health
- S&P 500 rallies 40%: From March 9 lows to end-June; fastest recovery in decades; credit spreads narrow dramatically
- North Korea: May 25 underground nuclear test; long-range missile launches; UN sanctions; geopolitical tension
- Iran election: June 12 disputed presidential result; Ahmadinejad declared winner; “Green Movement” mass protests; brutal crackdown
- Fed holds: Zero to 0.25% funds rate maintained; QE1 mortgage securities purchases ongoing; housing market stabilising
- Jamaica: Economy contracting; tourist arrivals declining; fiscal deficit widening; IMF discussions in background
Stress Tests Restore Confidence; GM Enters Bankruptcy
The second quarter of 2009 was the quarter in which financial market confidence began to return in earnest. The critical turning point was the 7 May release of the US Treasury’s Supervisory Capital Assessment Program results — the bank stress tests that subjected the nineteen largest US financial institutions to hypothetical severe economic scenarios. Ten banks were found to need approximately US$75 billion in additional capital, a result that was actually less alarming than many feared, and which provided a clear roadmap for recapitalisation. Banks that needed capital had six months to raise it. The announcement allowed investors to distinguish between weaker and stronger institutions and removed the tail risk of surprise bank failures. Stock markets, which had bottomed on 9 March, rallied sharply through the quarter, with the S&P 500 rising approximately 40% from its lows — the most dramatic quarterly rally in decades. Credit markets followed, with corporate bond spreads narrowing substantially. On 1 June, General Motors filed for Chapter 11 bankruptcy protection, with the US government taking a 60% equity stake as part of the restructuring that had been prepared over the preceding months. Chrysler had already emerged from a shorter bankruptcy in April. The industrial restructuring, while painful for workers and communities, removed the acute systemic risk of uncontrolled auto industry collapse.
Iran Protests; North Korea; Geopolitical Tension
The quarter was marked by two significant geopolitical developments. North Korea conducted its second underground nuclear test on 25 May and fired a series of long-range ballistic missiles in the weeks around the test, provoking UN Security Council condemnation and additional sanctions. The tests represented a significant escalation in the North Korean nuclear programme and underlined the limits of the international community’s ability to halt the proliferation. In Iran, the June 12 presidential election — in which incumbent Mahmoud Ahmadinejad was declared the winner over reformist candidate Mir Hossein Mousavi by a margin that many observers considered implausible — triggered the largest mass protests in the Islamic Republic’s history. The Green Movement’s demonstrations in Tehran and other cities were met with severe repression, including the killing of protesters, arrests of journalists and activists, and internet and communications blackouts. The episode significantly damaged Iran’s international standing and complicated nuclear negotiations.
Jamaica: Economy Under Pressure; Mortgage Conditions
Jamaica’s economy contracted in 2009 under the combined pressure of the global recession’s impact on tourism arrivals, a fall in remittances from the Jamaican diaspora (who were themselves affected by unemployment in North America and the United Kingdom), and the fiscal adjustment required by the government’s unsustainable debt trajectory. Tourist arrivals declined significantly, affecting hotel occupancy and the wider tourism-dependent economy. The construction sector, which had seen some activity in the preceding years, slowed. In the mortgage market, the NHT continued to function as the primary affordable lender — its 0%, 2%, and 4% subsidised rates on loans up to J$6.5 million individual (J$13 million jointly) remained well below commercial alternatives — but the underlying economic contraction reduced the number of Jamaicans able to qualify even for subsidised finance. The IMF programme discussions proceeding in the background held the promise of macroeconomic stabilisation that would eventually benefit the housing market.
Looking Ahead to Q3 2009
The market rally and improving financial conditions suggest the acute crisis phase is passing, but the “jobless recovery” risk is real — GDP may return to growth while unemployment remains high for an extended period. For Jamaica, the IMF pre-programme discussions will be the key development to watch through the second half of 2009, as the framework for fiscal consolidation and debt restructuring takes shape.
Mortgage & Housing Finance Disclaimer: This publication is for general information only and does not constitute mortgage, financial, legal or investment advice. Mortgage products, lending criteria, interest rates and borrowing costs vary between lenders and may change without notice. Readers should obtain independent advice from a qualified mortgage adviser, financial adviser or legal professional before making financial or property decisions.
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