Daily Archives: January 13, 2010

Simone Baribeau

The mixed reaction to Venezuela’s currency devaluation continues, with investors and ratings agencies cheering the move, and Venezuelans concerned the move will exacerbate already steep inflation.

But one move likely to cheer Venezuelans – at least those with enough dough to buy bucks – Venezuela today started issuing dollar denominated bonds at a rate of 4.3 bolivars, the new exchange rate for non-essentials. Read more

Krishna Guha

The new US bank levy will fall on uninsured debt – ie assets minus insured deposits minus equity. That makes a lot of sense.

Banks paid a premium to insure the insured deposits – these liabilities were always supposed to be insured against loss by the government via the FDIC. Read more

Simone Baribeau

The Federal Reserve’s “Beige Book”, an aggregation of anecdotal evidence of economic activity in the 12 districts, showed ten of them reporting an improvements, compared with eight in the last report.

But, no big surprise, the improvements are typically modest. Holiday spending was up in 2009, but still well below 2007 levels. Labour markets were still “generally weak,” though some hiring was reporting in a few districts. “Modest” wage increases were seen in only a few districts.

Among the interesting items: Read more

Krishna Guha

If I heard him right, Jamie Dimon, the head of JP Morgan, just told the Congressional inquiry into the financial crisis that in the pre-crisis years his firm never stress tested what might happen if there was a big fall in house prices. Remarkable.

Dimon is a tough risk manager and JPM came through the crisis in relatively good shape. Heaven knows what the others failed to consider.

Now everyone is stress-testing like crazy. But how long will this private sector discipline last? Read more

Someone trading credit default instruments is getting a bad deal.

Governments are riskier than corporates, apparently. The cost of insuring against government default is pricier than the equivalent for companies, if credit default swaps are anything to go by. The news comes hot on the heels of a question posed by Michael Gordon last week: namely, whether government bonds should really be considered risk-free.

This should seem crazy. Governments and companies are not equivalent financial actors. Governments can raise tax, and go to war. But financial products whose value derives from these actors may be similar. This apparent disconnect should act as a warning to those who genuinely want to insure against default. The question is: are you interested in the default of a government/company, or are you just speculating? Read more

Britain’s recession ended towards the end of last year. So said the National Institute of Economic and Social Research, a few minutes ago.  In fact, the respected think-tank believes the trough of output was rather earlier in August and the economy has grown 1.6 per cent between August and December, not bad.

NIESR’s estimates are based on the industrial production numbers and, with the notable exception of the third quarter, are usually very accurate in front-running the official preliminary estimate of GDP. They suggest the official figures will show 0.3 per cent growth in the final quarter.

So if Britain has been out of recession for nearly half a year, what does this imply for monetary and fiscal policy? Read more

Ralph Atkins

A wintry gloom has spread across Germany this morning. I’ve just got back from snowy Wiesbaden - half an hour by Autobahn from Frankfurt - where the country’s statistical office was briefing on 2009′s gross domestic product. Strangely, it produces full-year results before giving a fourth quarter number, but officials there said they believe growth stagnated in the final three months of 2009.

That took economists by surprise, if only because forward looking business optimism surveys have pointed to further growth (building on the third quarter’s 0.7 per cent rise). Read more

In short, no. The new proposal would shift some responsibility for bankers’ risk-taking onto bank management. And that idea is bang on time.

Banks offering big bonuses for high risk trading would have to pay more to insure deposits, under a proposal passed by a US regulator yesterday. Banks with more cautious pay policies, such as bonus clawbacks, would pay less. Read more

Structural uncompetitiveness, coupled with the constraints of monetary union, mean Portugal will ‘bleed’ economic potential and tax-raising capacity.

So says Moody’s in their European Sovereign Ratings Outlook for 2010. On the upside, Moody’s says the risk of a ‘sudden death’ – a balance-of-payments crisis – is small. On the downside, the risk of a ‘slow death’ is high. Death in either timeframe is presumably unwelcome. Read more

Robin Harding

Dylan Grice of the Societe Generale strategy team put a punchy note out yesterday on the Japan-national-debt-default-or-hyperinflation theme that occurs when one looks at forecasts of 2010 government net and gross debt of 115 per cent and 227 per cent of GDP.

Here’s a taster (the note has also been written up in apocalyptic tones today by Ambrose Evans-Pritchard of the Telegraph).

Japan’s government borrows from Japanese households and has done for decades. But Japanese households are retiring, and traditionally retirees run down their savings. So who will fund Japan’s future deficits, which are already within the range identified by inflation historian Peter Bernholz as hyperinflation ‘red flags’? Twenty years ago, who could predict long-term JGB yields below 1%? Who sees uncontrolled inflation as the primary risk facing Japan today?

Government debt cannot rise indefinitely as a share of GDP, while the greater the stock of debt and the greater the flow in any given year, the greater the chance of a crisis. I don’t agree, however, that (a) Japan is about to run out of domestic savings to fund its deficit or that (b) the most likely nature of the final crisis is hyperinflation.

As Mr Grice argues, Japan’s household savings are in decline as the population ages. Governments that need to borrow from overseas – most seriously those that need to borrow in a currency they cannot print – are in much greater danger of a debt crisis.

Japan is still very far from that position, however. Read more

Yes, Moody’s misery index is out again. It has a similar, but more comprehensive, line-up to the last one we showcased. Spain is the most miserable, Bulgaria the least, with the UK nearly as miserable as Greece, and the US more miserable than Jamaica.

The misery index is a crude addition of 2010 forecasts of unemployment and the fiscal deficit (as a percentage of GDP). Read more

Simone Baribeau

The Fed has been hard at work interpreting Congress’ May 2009 Credit Card Act, which overhauls the rules for the consumer credit card industry, ahead of issuers’ February 22 deadline for implementation.

Today the Fed approved its final rules, after its statutory comment period, and among the changes, a consumer win, says Josh Frank, Senior Researcher at the Center for Responsible Lending.

After February 22, credit card companies will no longer be allowed to use floors in variable rate credit cards, a common practice where rates rise when an index (such as prime or libor) rises, but can’t fall below a certain level when the index falls. Read more

Simone Baribeau

Edolphus Towns, the Chairman of the House oversight committee, today said he would subpoena the Federal Reserve Bank of New York for documents related to AIG counterparty payments.

“To help the Committee’s investigation of payments made by AIG to its counterparties, I am issuing a subpoena today to the Federal Reserve Bank of New York. This subpoena will provide the Committee with documents that will shed light on how and why taxpayer dollars were used for a backdoor bailout.”

 Read more

By Jude Webber

With Argentina mired in an unprecedented crisis sparked by government plans to use central bank reserves to pay off debt, a New York judge has frozen $1.75m of the bank’s assets held in the US Federal Reserve at the request of two so-called vulture funds. Read more