Monthly Archives: December 2009

The ECB wants to better understand the value of bank assets it is holding as collateral against loans made during the crisis. A consultation to achieve this may be approved today by the bank’s governing council. Read more

Krishna Guha

The separation principle is back – this time on the US side of the Atlantic. With today’s statement the Fed is basically embracing an ECB-style distinction between liquidity policy and monetary policy.

At the onset of the crisis some Fed officials thought there was something to the separation principle idea. Others thought it was complete nonsense.

As the crisis intensified Fed officials quickly reached a consensus that it made no sense to distinguish between monetary and liquidity policy in crisis conditions when both directly and substantially influence private borrowing rates and overall financial conditions. They thought the ECB was mistaken Read more

Krishna Guha

For investors trying to estimate when the Fed will raise interest rates, today’s statement was a non-event. The Fed upgraded its assessment of economic conditions, but did not radically revise its view of the trajectory of growth going forward and left its discussion of inflation unchanged.

It underscored its intention to complete its exit from unconventional liquidity policy soon – but drew a bright ECB-style distinction between liquidity policy and monetary policy. It left for 2010 the question of whether the unusually narrow discount rate spread falls into the first category or the second.

Not much to get excited about.

But for analysts trying to understand the arc of Fed policy from crisis to a new normal it was a bit more interesting. Read more

Simone Baribeau

Finally, some good news for sovereign debt. As Greece and Mexico suffer credit ratings downgrades, Moody’s upgraded Peru’s debt to investment grade. Moody’s upgraded Peru’s foreign-currency government bond rating to Baa3 from Ba1, praising the country for its increased resilience to shocks and reduced credit risks. Read more

Krishna Guha

The Federal Reserve on Wednesday upgraded its assessment of the economy and highlighted its intention to shut down most of its crisis-fighting liquidity facilities in early 2010. But it gave no hint of inflation concerns that could lead to it raising interest rates.

The Fed also said that it was sticking to its existing plan to taper off and complete its scheduled $1,425bn purchases of securities issued by Fannie Mae and Freddie Mac, the government-sponsored mortgage giants, by March 31. Keep reading

Simone Baribeau

As expected, the Fed funds rate is unchanged at 0.0-0.25% and the US central bank keeps its extended period language.

Standard and Poors has just cut Greece’s credit rating from A- to BBB+, having placed the country on credit watch on December 7. The new rating matches that of Fitch, which cut on December 8. The rating is two notches above junk grade status, and also two notches above the (temporarily reduced) ECB collateral requirement of BBB-. Greece is now one notch above Mexico, which was downgraded to BBB by Moody’s yesterday.

Ralph Atkins

Yesterday I wondered if it would end with a whimper. In fact, the European Central Bank’s last offer of unlimited one-year liquidity managed to produce a big number, after all. Almost €100bn was pumped into the financial system. The number of banks bidding was down sharply – from 1,121 in June to 224 this time. But the average amount bid was the highest yet.

So what does it all mean? Read more

Sitting in the Treasury Select Committee listening to Alistair Darling, chancellor, give evidence on Britain’s fiscal position, I am struck by a contradiction and one hopeful sign in Britain’s fiscal consolidation plans.

The current contradiction is that the chancellor insists he knows the total public spending figures because he knows borrowing will be halved, but he cannot reveal anything else because it is too uncertain. If uncertainty rules and the details of spending projections are completely uncertain, there can be no credibility in the government’s commitment to protect spending on schools, hospitals and police. He can’t be sure he has the cash. Read more

The eurozone’s annual price change was positive in November for the first time in seven months. The year-on-year inflation figure of 0.5 per cent was in line with expectations, though slightly lower than analysts’ predictions of 0.6 per cent. More soon.

Official figures show Britain’s economy has contracted by almost 6 per cent this recession; the US economy by only 3.2 per cent. Yet the employment declines have been much smaller in the UK: OECD figures suggest British employment has fallen only 2 per cent , compared with 4.5 per cent in the US. As the chart from the Office for National Statistics shows, UK employment stopped falling around May this year, some seven months ago.

We have blogged frequently on these enormous transatlantic labour market differences. Ralph has explained the European Central Bank’s concern that short-time working schemes in continental Europe explains much of the difference, but that argument does not apply to the UK, where there have been no such schemes. Read more

The Czech National Bank Board decided at its meeting today to lower the two-week repo rate by 25 basis points to 1 per cent. The Lombard rate was also lowered by 25 basis points to 2 per cent. The discount rate remains unchanged at 0.25 per cent. The new interest rate levels come into effect on December 17, 2009.

The Swedish central bank will keep the repo rate at 0.25 per cent in order to “attain the inflation target of 2 per cent and to support the economic recovery”. The repo rate is expected to remain at this level until Q4, when it is forecast to rise to 0.4 per cent. Also unchanged are the deposit rate at -0.25 per cent and the lending rate at 0.75 per cent.

Deputy Governor Lars Svensson entered a reservation against the decision Read more

The European Central Bank said it will lend banks €96.9bn in its third and final auction of 12-month cash. The Frankfurt-based ECB said 224 banks participated in the auction. The cost of the loans will be indexed to the ECB’s benchmark rate over the next year rather than fixed at 1 per cent. Economists’ expectations ranged from €75bn to €100bn demand.

There is already nearly €520bn of 1-year money in the financial system, around 80 per cent of the ECB’s outstanding open market operations. None is due for repayment until a sizeable €442bn at the end of June next year. Read more

Brazil’s central bank said on Tuesday it will exchange $892m of foreign bonds from the federal government in its portfolio for domestic debt. The bank said in a statement the move was part of a plan to eliminate all holdings of Brazilian foreign debt in its portfolio, which at one point held as much as $4 billion worth of the securities. The debt swap will have no effect on Brazil’s international reserves, the bank said.

New Irish central bank governor Patrick Honohan wants a full enquiry into who and what was to blame for the financial crisis. He has dismissed a judicial probe, saying it would have insufficient flexibility. In a largely unprecedented intervention by a central bank governor, Mr Honohan has suggested a detailed examination of the activities of banks, the civil service and key politicians.

Simone Baribeau

Fed chairman Ben Bernanke responded to Senator Jim Bunning’s written questions posed as a part of the confirmation hearing. In responses to 70 questions ranging from the transparency of the Fed to the use of Tarp funds as capital, to the Fed’s agency debt purchase programme, Mr Bernanke restated his positions and defended his tenure as Fed chief.

He also sought to dampen concern on asset bubbles, saying there was “not much evidence to suggest that the stock market is currently in a bubble” and that “it is not clear [the gains in gold's price] have been out of line with fundamentals”. But then, his first reason for reticence in using monetary policy to lean against bubbles was that “we would have to be confident in our ability to detect bubbles at an early stage in their development.”

Simone Baribeau

The Senate has confirmed Agustín Carstens, Mexico’s finance minister, as its next central banker, less than a week after Mexican President Felipe Calderón nominated him to the post.

Mr Carstens will take the post on January 1. His confirmation comes the day after Standard and Poor’s downgraded Mexico’s government debt to BBB, highlighting concerns on the country’s diminishing oil production prospects and expectations for weak overall growth. Read more

Simone Baribeau

As expected, the Central Bank of Chile left its benchmark interest rate unchanged at its historic low of 0.5 per cent and plans to hold the rate at that level until at least the second quarter of 2010.

Afterwards, the bank said, “The pace of normalization will be comparable to expectations contained in the monthly survey, and more gradual than the one implicit in financial asset prices.” Read more