Daily Archives: January 14, 2010

By Michael Mackenzie

Investors and dealers are bracing themselves for greater volatility around the sales of US Treasuries following a marked increase this week in direct buying of debt from the Federal Reserve, bypassing the big Wall Street banks that underwrite bond issuance. Read more

Simone Baribeau

On the heels of Sheila Bair’s earlier comments, the Fed has released a statement to the Senate banking committee arguing that it should continue its supervisory and regulatory role.

In it, the Fed makes at least one obvious statement: “We recognise, of course, that bank supervision, including ours, needs to be more effective than in the past.” Read more

Simone Baribeau

AIG is back on the House’s radar.

Earlier this week, Edolphus Towns, the Chairman of the House oversight committee, said he would subpoena the NY Fed for documents related to AIG counterparty payments and today he said that Tim Geithner had confirmed that he would speak before the committee later this month.

And separately, in a tersely worded response to Spencer Bachus, the Republican Ranking Member on the House Financial Services Committee, Barney Frank, the committee’s Democratic Chairman, said the Fed’s role in the AIG bail-out would be back on his committee’s agenda.

It is not, of course, the idea of looking into Chairman Ben Bernanke’s role that has Mr Frank up in arms. Mr Bernanke was, after all, a Republican appointee, and the decision to bail-out AIG and its counterparties came while Mr Bush was still president. It’s that Mr Bachus is continuing to focus on Tim Geithner, then head of the NY Fed and now Treasury Secretary.

But enough background, here’s the statement: Read more

Simone Baribeau

In the wake of the financial crisis, the Federal Reserve has made much of the dangers of using interest rates to “lean against” asset bubbles, such as the one in the housing market whose collapse brought the US economy to the brink. Fed governors have implied that this was their only practical tool. (There have been quieter on the influence they may have wielded by warning of the bubble). The problem, several Fed governors have said recently, lied in a failure of regulation.

At today’s Financial Crisis Inquiry Commission hearings, Sheila Bair, chairman of the FDIC, had a response: the Fed, she said, should have regulatedRead more

Update: Redrado says ban not lifted
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A US judge has lifted the freeze on Argentine central bank accounts held at the Fed, Argentina’s finance secretary told Reuters. Finance Secretary Hernan Lorenzino said Judge Thomas Griesa “lifted the measure so both sides can come to an agreement.” Read more

The European Central Bank has been forced to delay an ambitious project to streamline Europe’s fragmented securities settlement systems. Slower-than-expected progress on initial stages of the project will mean delays of up to a year.

The development means that investment managers and broker-dealers across Europe will be forced to wait beyond 2013 for the relatively high cost of settlement to fall. Such costs, combined with the costs associated with clearing, are estimated to be up 10 times higher than in the US.

The central bank of Turkey has left its overnight borrowing rate at an historic low of 6.5 per cent, reports Bloomberg. Last month governor Durmus Yilmaz kept the rate steady, ending a 13-month series of cuts that reduced the benchmark by a total of 10.25 percentage points. The rate is the lowest since the bank started setting it in 2001. Minutes will be released within eight working days.

Ralph Atkins

There was little new on ECB monetary policy from Jean-Claude Trichet, president, at his press conference – confirming that its main interest rate is firmly on hold. The introductory statement was virtually word-for-word the same as in December.

That left lots of time for questions on Greece, which clearly has a long way to go before it is back in favour in Frankfurt. Mr Trichet put the emphasis on Athens itself putting its finances back on course. He dismissed as “absurd” financial market chatter about Greece ever leaving the eurozone, and sidestepped questions about whether other European Union countries might help Greece out. “The problem is not to get help but to help oneself,” he argued. Read more

The Danish central bank cut its key lending rate by 10 basis points to 1.05 per cent to ease strengthening pressure on the krone, in a surprise move just a week after its last cut. The new rate is effective tomorrow.

Last week’s cut was also prompted by a strong krone. The bank changes interest rates to keep the krone in a narrow band to the euro and since “money-market rates in the euro are still very low … the spread to the equivalent Danish rates has tended to strengthen the Danish krone.” Today’s cut was explained as “a consequence of purchases of foreign exchange in the market,” suggesting the bank has intervened in forex markets to soften the currency. Read more

The European Central Bank has kept its main refinancing rate on hold at 1 per cent. No increase is expected before Q4 2010. The marginal lending facility and the deposit facility will also remain unchanged at 1.75 per cent and 0.25 per cent respectively. More on this after 2.30pm, when Trichet holds a press conference in Frankfurt to explain the decision.

The Latvian central bank has agreed to keep interest rates and reserve requirements unchanged. The Bank of Latvia said that substantial rate reductions had already taken place and lending rates were close to those set by the Bank. Liquidity was also seen to be sufficient, and had in fact “been high in recent months”. The Bank said: “The low lending activity is currently determined not by interest rates but by the cautious lending policies of banks in the complicated economic circumstances as well as by the low demand for loans both from households and businesses.”

Rates are as follows:

Taiwan plans to set a limit on the total value of securities Chinese investors can buy under new rules due to come into force on Saturday.

Wu Tang-chieh, deputy chairman of the Financial Supervisory Commission, told this to Bloomberg but did not provide a figure and would not comment on a report in the Commercial Times that the central bank is proposing a ceiling of $500 million shares in Taiwan-listed companies. The ceiling in the current memorandum is $1bn. Read more

California’s $20bn budget deficit and looming cashflow problems have led Standard and Poors to downgrade the state’s general obligation bonds to A-. The ratings agency has given the bonds a negative outlook, suggesting further declines are possible. The cut brings the S&P rating more in line with that of Moody’s (Baa1) and Fitch (BBB) – and closer to that of Greece, which could help to explain the paradox Ralph outlined in December.

The Bank of Thailand has agreed to keep the one-day repurchase rate unchanged at 1.25 per cent. The bank saw continued recovery ahead, driven by exports, tourism and consumption but noted that: “Asian economies are likely to recover sooner, giving rise to policy differentials which may lead to more volatile capital flows going forward.” The bank expects inflation to rise in 2010 although upward pressure from demand currently remains low.

Part of the Chinese central bank has scrapped a controversial proposal to allow Chinese citizens to buy shares listed in Hong Kong. The State Administration of Foreign Exchange, a body under the central bank, said the potentially groundbreaking proposal was one of 19 documents that were invalid as they had expired. The Taiwanese will be paying close attention: they want to limit stock purchases by Chinese citizens under new rules due to come into force on Saturday.

Robin Harding

Following on from yesterday’s post about the chances of a Japanese sovereign debt crisis (possibly ending in hyperinflation) – given that the national debt is almost all owed domestically – can anyone think of a comparable historical episode?

We’re looking for a case where sustained fiscal deficits led to a bond market/currency crisis – but where almost all of the national debt was held by the country’s own citizens, the country was a net creditor to the rest of the world with a positive trade balance, and the national currency had no hard currency link (to gold or the dollar). Read more

Simone Baribeau

Bloomberg has an interesting article about the Senate looking to hold a confirmation vote on Ben Bernanke before his term ends at the end of the month. The piece notes that a delay in the vote would probably result in Donald Kohn, the Fed’s Vice Chairman, serving as acting chair until the Senate confirms Bernanke (who would continue serving as a governor).

Mr Kohn’s temporary succession would hardly be a coup for Mr Bernanke’s Senate critics. The vice chairman, closely aligned with Alan Greenspan, showed no greater concern for the risk of a recession than did Mr Bernanke (he saw inflation as a greater worry in October 2006), nor was he faster to recognise the extent to which homes were overpriced (saying the evidence suggested that overbuilding in 2004 and 2005 would be worked off without a significant decline from 2006 building levels). Read more