Daily Archives: January 12, 2010

Simone Baribeau

The Fed paid a record $46.1bn to the US Treasury in 2009, the central bank reported today, after riskier holdings boosted its income 40 per cent to $52.1bn over 2008.

“The significant increase in holdings was primarily due to increased securities holdings as a reseult of the Federal Reserve’s response to the severe economic downturn,” the Fed said in a statement. Read more

Ralph Atkins

Almost unnoticed, dollar liquidity provision by the European Central Bank and Bank of England is being unwound. Before Christmas, the US Federal Reserve said it expected to wind down this month currency swaps with foreign central banks. Jean-Claude Trichet, ECB president, is likely to confirm on Thursday, if asked, that January’s operations will be the last.

The joint operations formed an important part of the global response to the financial market crisis as it unfolded from mid-2007 onwards. The Fed worried that many of the strains in dollar money markets reflected pressure from European banks that were structurally short of dollars. But they have now become largely redundant. An ECB offer of seven-day dollar liquidity last week attracted just two bidders, who were alloted a total of little more than $5bn – another sign of how much financial market conditions have improved.

Ralph Atkins

Signs of ECB nervousness about just how Europe’s new financial supervisory regime will work are becoming apparent. Its latest review of the proposals, while generally supportive, urges a tougher wording to ensure the unimpeded flow of information between the three planned European supervisory authorities, central banks and the new European Systemic Risk Board, which it will dominate.

To work efficiently, the ECB concludes, the new system “requires effective information sharing procedures in order to ensure a smooth interaction of supervision at the macro-prudential and micro-prudential levels and the timely access of the ESRB to all relevant information required to perform its duties”. Read more

Ralph Atkins

Greece’s fiscal problems are huge, but have been amplified because nobody can trust the numbers it produces. A European Commission report just released on the Greek statistical service is as damning you can imagine a Brussels institution preparing. It reveals how figures on the country’s public finances have been persistently mis-reported since before Greece join the eurozone in 2001 – a step it would never have been allowed to take if what is known now was known then.

Perhaps this offers part of an answer to the question of why Greece is such a big deal to the eurozone when the problems of California - a much bigger economy – are not of such existential importance to the US (see my earlier post). Athens has created such bad feeling in Brussels and at the ECB in Frankfurt, and the sense that nobody really knows what is going on with the Greek economy – except that it is bad. Read more

Special taxes on banks are catching on – but moves around the world are disparate and show few signs of coordination so far, either in detail or in ambition.

In all of this, the big effort globally is to ensure banks have greater buffers against failure (higher capital) and that the authorities work to getin tinto a position where bad banks can fail (to minimise the implicit state insurance), but also to get banks to pay for the residual insurance that taxpayers are likely to provide for future systemic crises.

The Central Bank of Nigeria hopes to pass the Assets Management Company bill within the next six weeks. Bank governor Lamido Sanusi also disclosed that the monetary authority was targeting a lending rate of between 14 and 15 per cent, assuming an improved lending environment for banks.

Imagine a world in which banks are split by region, customer base, industry and function. This is one of the suggestions made by the Nigerian central bank governor at a conference organised by The Economist.

Lamido Sanusi said: “The Central Bank of Nigeria might eventually come up with banks that will address just the middle markets, the country’s regions, specific sectors of the economy such as agriculture or just operate as investment banks, Islamic banks or specialist financial institutions.” Such categorisation, he said, would entail different operational guidelines and capital requirements. Read more

The People’s Bank of China has raised the yield on 20 billion yuan ($2.9 billion) of one-year bills by about 8 basis points (bps) to 1.8434 per cent after holding it steady in the previous 20 auctions, compared with a median forecast among traders that it would go up by just 4 bps. It also drained a record 200 billion yuan via 28-day bond repurchase agreements, ensuring it will draw net funds from the market this week.

Last week the Chinese central bank surprised the market by pushing up the yield on its 3-month bills by about 4 bps to 1.3684 per cent, sending stocks and commodities lower on worries about tougher “fine-tuning” of monetary policy.

The Bank of Israel yesterday raised its 2010 growth forecast from 2.5 per cent to 3.5 per cent. Bank forecasts are now more in line with analyst expectations: last week, Bank Leumi raised its forecast to 3.5 per cent and on Sunday, Bank of America Merrill Lynch did the same. An increase in demand for exports is driving the recovery, and the optimism.

The main assumptions underlying the 2010 forecast are that global trade will increase 7 per cent, terms of trade will deteriorate by 2.1 per cent. Unemployment is expected to fall below 7 per cent by the end of 2010. Details of the forecast and assumptions are below: Read more

Simone Baribeau

Standard & Poor’s upgraded its outlook on Venezuela to stable from poor in a show of support for the country’s recent currency devaluation.

“We revised the outlook to stable because we believe that the latest government devaluation of the currency, combined with prospects for stable oil revenues, will reduce Venezuela’s fiscal pressures,” said Roberto Sifon Arevalo, a credit analyst at S&P. Read more

Simone Baribeau

A Bank of Canada official earlier today sought to dampen concerns that the Canadian housing market be caught in the same type of bubble that threw the US into recession.

In the Bank of Canada’s view, it is premature to talk about a bubble in Canadian housing markets. Recent house price increases do not appear to be out of line with the underlying supply/demand fundamentals. Moreover, with housing starts below long-term demographic requirements, inventories are still declining. It is likely, though, that a significant part of the surge in housing sector activity is associated with temporary factors – notably the historically low borrowing costs, as well as pent-up and pulled-forward demand – which cannot continue to drive increases in house prices and activity. Thus, we see the housing market as requiring vigilance, but not alarm.

One measure of the “underlying supply/demand fundamentals” of housing is the amount home prices rise relative to rental prices. In normal times they rise at roughly the same rate. In the US, house prices rose over 100 per cent between 2000 and the peak of the housing market in 2007, according to the 20-city Case Shiller index, while rental prices grew just 24 per cent. By contrast, in Canada rental prices rose 11 per cent from 2000 to 2008, while the price of a houses in the Teranet 6-city composite index rose 85 per cent over the same time. Read more