Daily Archives: January 18, 2010

Ralph Atkins

Might the global economy all go horribly wrong again?

Lorenzo Bini Smaghi, an ECB executive board member, has just warned that those who think the world will return to where it was before the economic crisis are “deluding themselves”.

Addressing a crowded Frankfurt reception hosted by the city’s chambers of commerce, he said: “If the world economy were to return to the pre-crisis situation, within a short timespan a new crisis would be likely to occur because the same imbalances that led to the crisis would build up again.”

In what I thought was a pessimistic comment – even by ECB standards – he went on: “Considering some recent developments and behaviour, and considering the way certain policies are being discussed and the thinking of some key players, such a scenario does not seem that unlikely.” Read more

The European Union’s new member states should not rely on foreign currency lending in the belief they will join the euro currency soon, says ECB Governing Council member Ewald Nowotny: they should instead create markets in local currencies and wean themselves off lending in euros or Swiss francs. Mr Nowotny told Reuters: “I think the mistake in some of these countries was the idea that they would join the euro soon and therefore did not care about creating these markets.”

The financial crisis has delayed euro adoption plans. With Estonia seen as next in line Read more

Ralph Atkins

Germany’s Bundesbank strikes a cautious tone in its latest monthly report, noting a “noticeably weaker dynamism” in fourth quarter data for Europe’s largest economy. But these things are relative. The German central bank says the recovery had continued – which is more upbeat that the country’s statistical office. It last week noted “stagnation” in the fourth quarter. The weakness, the Bundesbank argues, was largely the result of the ending of subsidies for new car sales. Look at export expectations and orders levels in sectors not dependent on the automobile industry, and the underlying recovery appears “intact,” it concludes.

The European Central Bank has, meanwhile, provided another sign of things getting back to normal. In joint announcement with the Swiss central bank, it said it would not longer be providing emergency Swiss franc liquidity. (NB. Switzerland, Hungary and Poland are also to stop trading Swiss-franc denominated forex swaps.) Read more

A survey of 100 economists predicts Brazil’s Selic target rate will rise to 11.25 per cent by the end of 2010. The target rate is currently 8.75 per cent.

The previous survey, last week, forecast a year-end rate of 11 per cent. The survey, commissioned by the Brazilian central bank, predicts a fall to 11 per cent in 2011. “Food prices, the pace of economic activity and stimulus measures put gasoline in an already heated environment,” Fabio Akira, economist at JPMorgan, told Bloomberg. “We see the central bank raising rates as soon as March.”

Excerpts from an excellent piece by Clive Crook:

“Anger is a poor basis for policy. The prevailing idea that greed plus deregulation explains this mess is wrong. Punishing the banks and turning back the clock is not the answer.”

 Read more

Anger is a poor basis for policy. The administration is assuming that if banks object to the levy, it must be good. This is only half right. Arousing protests from the banks is a necessary condition of intelligent reform, but not sufficient. Banks would howl about serious proposals for higher, and cyclically adjusted, capital ratios, for example – but that change would actually affect their future behaviour. – Clive Crook, FT

Just as China raises its reserve ratio for banks, Vietnam has lowered theirs. The State Bank of Vietnam has lowered the mandatory reserve ratio from 7 to 4 per cent for deposits of less than a year, and from 3 to 2 per cent for longer deposits. (China raised its ratio from 5 to 5.5 per cent, effective today.) The Vietnamese change will be effective from February.

The change suggests increased confidence and risk appetite by the Vietnamese central bank, as banks will have a smaller capital buffer in difficult times. The extra cash at banks’ disposal will permit greater lending. The new ratios will not apply to the Bank for Agriculture and Rural Development, Vietnam’s largest bank by assets, for which ratios of 3 and 1 per cent will apply instead.

Apparently, the Transitional Federal Government in Somalia has today reopened the Somali Central Bank, which collapsed after civil war erupted at the start of 1991. The reopening has been a stated aim of the transitional government for some time. News reports suggest the governmental Bank will help international donors to assist the Transitional Federal Government in Somalia. Currently donations pass through neighbouring countries such as Kenya.

Swiss central bank governor Phillip Hildebrand has taken a somewhat political stance, defending the universal banking model in an interview with Swiss daily Le Temps. A form of the Glass Steagall Act would not work in Switzerland, he said: wealth management and commercial banking should not be split.

The former banker explained: “The universal banking model represents a form of risk diversification,” quoting difficult periods in the 1980s when one side of the bank had been able to bail out the other. He added that ultra-rich customers needed the full range of investment banking services, for instance to help with mergers and acquisitions involving companies they owned. Read more

The Mexican central bank kept the target for the overnight interbank funding rate at 4.5 per cent, as expected, hoping to target inflation of 3 per cent by the end of this year. The decision was the first under new bank governor Agustin Carstens.