The Jigsaw Puzzle

Posted October 21, 2008

The world was taken by surprise when the Swiss government announced it would be taking a 9% stake in UBS. Hungary faces a financial crisis due to financing debt with foreign currency loans.


The world currency markets are like a big jigsaw puzzle.  The various government financial markets including the banks are intricately intertwined.  This became painfully apparent when the US mortgage meltdown began.  Take out one stable banking system and the picture becomes incomplete.  Take out another large financial system and it’s just a matter of time before others follow.

Currency traders often focus primarily on the top 10 currencies, yet the top 10 affect the remaining world currencies.  The most recent example is the crisis which has hit Hungary.  Hungary has a lot of debt and that debt was financed primarily with loans made with foreign currencies.  Those currencies include the Swiss franc and the euro.  As the Hungarian currency value drops in relation to the values of the foreign currency used to make the loans, the cost of the loans is rapidly becoming more expensive.

The Hungarian currency value began dropping rapidly because investors began to reduce the amount of foreign currency available for making loans.   

As a result, Hungarians are finding their debt payments are rising.  The Hungarian government is now also experiencing a credit problem and has had to turn to the International Monetary Fund for assistance.  The European Central Bank has also gotten involved.  The goal is to stabilize the Hungarian currency which is called the forint.

So what about Switzerland?  Switzerland has always been considered one of the wealthiest and most stable financial systems in the world.  So it was a big surprise when the country announced it would be taking a 9% stake in UBS which is one of its largest banks.  The bank financial stability was threatened by the mortgage meltdown.  The Swiss government is injecting 6 billion Swiss francs into the financial institution.

In the meantime, the US is still grappling with the fact there is no real evidence yet the $700 million bailout is going to work.  In fact, many financial experts are saying this amount is not going to be nearly enough.  The financial crisis is spreading into other markets including auto and credit cards.  The question remains as to whether the 9 financial institutions that were provided $250 million in equity will use the money to loosen up credit markets.  As of right now the indications are these firms will sit on the funds so there is a cushion as the recession unfolds.

The dollar continues to decline against some currencies.  The dollar weakened against the yen and the euro.  The yen closed the week at $.0098 against the US dollar.  The euro declined to $1.3412 against the US dollar.    The Great Britain pound was valued at $1.7315 against the US dollar; the Canadian dollar was valued at $.8454; the Australian dollar was valued at $.6973; the New Zealand dollar was valued at $.6156; the Switzerland franc was valued at $.8796.

There is a global conference in the making.  The USA, France, and the European Commission have invited world leaders to attend summits concerning the global financial crisis. The first summit would be held in the US.  The goal of the summit is to prevent the possibility of a global financial crisis of this magnitude from happening again.

There is so much that still remains to unfold concerning the global recession.  But at least the governments are now recovering from the initial shock and are willing to begin looking for global solutions and inter-country regulations in order to maintain stable currencies.