The last injections for the UK?

The big black hole

Banks globally seem to have become black holes for cash injections. The latest wave in the cascade of cash injections is England's plan to inject £39 billion into select financial institutions. RBS, HBOS and Lloyds TSB all stand to receive their share of this cash and guarantee their liquidity; in addition the UK government stands to end up with a lion's share of RBS shares.

This plan is nothing compared to the US $700 billion plus bail-out, but still adds on to the ever-growing list of cash injections into the financial system. The Fed and European Central Bank have been continuously supplying funds to the system, but somehow increasing amounts seem to be required on a continuous basis. Where are all these floods of money going?

As the liquidity of the financial system has frozen over, banks are constantly in dire need of recapitalizing to meet their liabilities. As their business models are built to rely on ample availability of cheap credit, these banks are now struggling to find alternative sources of capital. Credit has become so expensive or hard to obtain that the lenders of ultimate resource, central banks and governments, are being forced to keep the system afloat. How long this frenzy of lending of ultimate resort can be sustained is a different matter altogether.

When the turmoil reached Siberia and beyond

The small country of Iceland has become headline news on a global scale. Nationalizing Glitnir, Landsbanki and Kaupthing shows what a struggle the tiny island is going through. Simultaneously, there seems to be much ado about wether Iceland nationalizing a bank provides the same security as England doing the same. The prime minister has even threatened the press with national bankruptcy.

The British investors have understandably got cold feet, and would be performing a bank run if the Icelandic culprits would be any closer. Now they have been subjected to complaining on BBC News and on the Q&A of the Financial Times about their frozen accounts. With the currency sinking faster than its cod fishing industry, the 15% interest rates don't seem so appealing any longer. How did investors not realize that such a phenomenal interest rate is bound to carry risk?

Today, the Iceland has resorted to suspending trading citing "unusual market conditions" - indeed true when the country is being threatened by a law suit from England over British savings. Wether or not the British where foolish to expect such high interest rates without risk is now irrelevant; the icy grip of excessive leverage is now not only choking the financial sector of the tiny economy, but threatening its very existence. Back to cod-fishing by the looks of things.