Monthly Archives: December 2009

Krishna Guha

I’ve just written a piece for tomorrow’s FT looking at five key exit strategy questions facing the Fed.

Just to be ultra clear to the best of my knowledge the Fed has only just begun strategizing on some of these issues and has not yet decided on a concrete plan. This underscores the fact that the Fed does not expect to be raising rates soon.

Here are the five questions: Read more

Rising inflation has increased speculation of an interest rate rise in India. (The speculation, in turn, has pushed 10-year bond yields to a 13-month high.) “Inflation concerns are gathering pace and this may force the central bank to tighten liquidity before the end of this month,” said one analyst. There are also rumours the Bank will increase the proportion of deposits banks must set aside as cash – the cash reserve ratio – from 5 to 5.5 per cent. Finance Secretary Ashok Chawla said yesterday the government is concerned that inflation is quickening, though there was no need for emergency rate action. Inflation will be in “the region of 6 per cent” by the end of March, he said.

Ralph Atkins

The European Central Bank’s “exit strategy” reaches another milestone: on Wednesday it announces the results of its last offer of unlimited one-year liquidity.

Alas, excitement levels are not high. Demand is generally expected to be far lower than when €442bn was injected into the eurozone bank system in June – the largest amount ever in a single ECB operation - and perhaps less than September’s €75bn. Read more

Argentina seems determined not to repeat the default of 2001. Economy minister Amado Boudou has said $6.6bn of the central bank’s international reserves will be placed into a fund this month, to help the government pay bondholders and international lenders for debts. The fund will cover about half of $13bn interest and principal payments due in 2010. The government said today it will give the central bank 10-year dollar-denominated notes, known as Letes, in exchange for the funds. Read more

Slightly off-topic for a central bank blog, but fascinating nonetheless. Professor Krugman:

“So what’s the paradox of toil? If you cut taxes on labor income, this expands labor supply — which puts downward pressure on wages and leads to expectations of deflation, which increases the real interest rate, which leads to lower output and employmentRead more

The OECD today invited Chile to become its second member in Latin America after Mexico. Chile will formally accept this invitation when an Accession Agreement is signed in the presence of Secretary-General Angel Gurría and President Michelle Bachelet on 11 January 2010 in Santiago. Read more

Chris Giles

Treasury officials have just finished giving evidence at the Treasury Select Committee on last week’s fiscal plans announced by the UK government. Three things materialised:

  • Treasury officials appear to have been told they are not allowed to reveal the government’s plans for cutting departmental spending from 2011 to 2014. Instead, they evaded the issue, obfuscated and squirmed. It was a terrible spectacle. Worse, it is absurd that ministers are too scared to tell the public what is projected for

 Read more


Moody’s sovereign risk review is best described as sobering. There’s a risk of accelerating interest rate rises in 2010. There is also a risk of disorderly market conditions. We should limit our expectations on how much BRIC can help. And there is little comfort for Greece: euro membership may help with liquidity, but it is no protection against the risk of long-term insolvency. Key points below: Read more

… in a competition no-one would want to win. In its sovereign risk review, Moody’s has compiled a “misery index” – the addition of the forecast unemployment rate to the forecast fiscal deficit, 2010. It isn’t pretty. The UK’s forecast fiscal deficit – the highest of any country on the chart – places the country in a higher state of misery than Iceland, and only just less miserable than Greece. The top five are not, perhaps, surprising – but numbers six and eight should give us pause for thought.

Agustin Carstens has advocated the continued independence of Mexico’s central bank, and promised greater openness and transparency to the senators who will vote to ratify his nomination as chief. The incumbent, Guillermo Ortiz, will apparently stop chairing the Bank of International Settlements if – as looks likely – he leaves the Bank of Mexico. Carstens is a likely replacement. Does anyone know what Ortiz will do?

Mexico has just been downgraded to BBB from BBB+ by Moody’s, following a similar downgrade by Fitch on November 23. Read more

Now there’s a refreshing approach. The Vietnamese central bank has denied a plan to bail out banks following rumours of a liquidity crisis in the sector. “The central bank is pursuing a stable monetary policy and trying to curb credit growth. No money pumping. No higher interest rates,” said governor Nguyen Van Giau. Commercial banks recently increased deposit rates in an effort to attract more capital, leading to rumours that the central bank would inject as much as 20,000bn dong ($1.05bn). Read more

An imminent rise in the interest rate is unlikely. The Reserve Bank of Australia said it was in a suitably “flexible” position following three consecutive rate increases. Indeed, it transpires there was some debate over the last increase of 25bp. Minutes of the RBA meeting on December 2 noted: “The question … was whether it was more appropriate to take a further step at this meeting or to hold the cash rate steady pending a further evaluation of developments.”

Krishna Guha

Might the Fed raise the discount rate at this week’s policy meeting? I think this is a possibility and should be considered as a risk factor. But I would not include a discount rate increase in my base case forecast for the meeting.

The Fed will I think seek to draw an increasingly sharp distinction between liquidity policy and monetary (interest rate) policy in the spirit of the ECB’s separation principle at this meeting and in subsequent communications. Read more

Austrian stress tests have shown that the country’s top banks would lack capital if the global economy were to double dip. Central bank supervisor Andreas Ittner said the Tier one ratio of the six biggest banks would drop to 5.8 per cent by the middle of 2011 under the scenario. “Our stress tests show that capital adequacy levels must be raised further in the medium term.  This applies to both the quality and the amount of banks’ own funds,” he said. The tests show Austrian banks being particularly hard hit in Eastern Europe.

Separately, the Austrian government took full control of Hypo Group today. A $2.2bn bail-out is expected, from both government and shareholder capital.

Ralph Atkins

Why is Greece such a big problem for the eurozone when the arguably far-worse financial plight of California is not raising similar concerns about the US or the dollar?

The question seems pertinent given the relative insignificance of the Greek economy – it accounts for less than 3 per cent of eurozone GDP (California provides about 13.5 per cent of US GDP). But I am not sure if I have yet heard a satisfactory answer. Suggestions I have heard include: Read more

The central bank of the Philippines is offering an incentive for rural banks to merge and consolidate. The incentive may come in the form of money or regulatory relief, and will be applicable to mergers, acquisitions and consolidations with, or among, rural banks – especially those that are capital deficient. The monetary board of the Bangko Sentral ang Pilipinas (BSP) has approved the measure in principle.

The Russian central bank will spend $1bn next week, buying 30 metric tons of gold from Gokhran, the state repository. Gokhran had planned to sell 20-50 MT on the open market, but cancelled after news of the sale leaked. The sale would have helped plug Russia’s budget deficit, and, apparently, purchase some diamonds from state-run miner Alrosa. Read more

Thanks to Big Picture blog, which keeps us posted on the weekly death count in the world of banks. The same data, viewed as a cumulative chart, shows an upward trend in US bank failures. Indeed, for the geeks among you, the bank failures (red line) so closely mirror the exponential trendline (black), the R squared is 0.9948.


That does not mean, of course, that bank failures will continue along their current exponential path. But it does mean they haven’t slowed down in any significant sense – yet.