Daily Archives: February 3, 2010

Simone Baribeau

Ben Bernanke was sworn in today for his second term as Fed chief after last week’s controversial Senate vote. He ended up being confirmed with 70 votes, well over the number needed, but still far fewer than even unpopular central bankers are used to receiving.

So, are we looking at a new Fed chair, one humbled by his actions in the lead up to the financial crisis?

It’s hard to say. But he is willing to make at least one concession. Mr Bernanke called for the Fed to become more transparent.

The Federal Reserve is already one of the most transparent and accountable central banks in the world, providing voluminous information and explanation concerning all of its activities. However, I believe that we should be prepared to do even more, to become even more transparent. It is essential that the public have the information it needs to understand and be assured of the integrity of all our operations, including all aspects of our balance sheet and our financial controls.

Of course, he doesn’t want to go overboard. Read more

Zimbabwe’s central bank owes mining companies “a substantial sum of money” that it is unable to repay at the moment, the Mines Minister says. Zimbabwe “empathises with the mining companies and feels obliged to make good,” Obert Mpofu said at a presentation in Cape Town today. (from Bloomberg)

Standard and Poors have raised the outlook for the Lithuanian Republic from negative to stable, and affirmed the country’s BBB long-term rating and A-3 short-term rating. The ratings agency praised Lithuania’s fiscal consolidation, saying: “The outlook revision reflects the government’s successful and still ongoing implementation of substantial budgetary consolidation in the face of a severe external shock.”

The Norwegian central bank is to keep its key policy rate at 1.75 per cent, and the executive board plans to keep it between 1.25 and 2.25 per cent until the publication of the next report in March. This comes in spite of bubble warnings from Nouriel Roubini.

Among the factors listed are a stronger-than-expected krone – although since mid-January the krone has been falling against the dollar – and has been falling against the euro since December. A rise in interest rates would tend to further strengthen the krone. Read more

Britain’s two premier economic think tanks disagree on the speed and scale of the necessary fiscal tightening. That is no surprise: the issue is genuinely difficult.

Early this morning, the National Institute of Economic and Social Research called for economic stability before cuts in public borrowing. The Institute for Fiscal Studies has followed this with a demand for faster cuts in budget deficits in the next Parliament.

There is no doubt of a difference of emphasis. Ray Barrell of NIESR says:

“There is no reason for tightening fiscal policy now. People are worrying about long-term debt problems when they should be worried about short-term output problems.”

While Robert Chote of the IFS argues:

“Whoever forms the Government after the forthcoming general election should put in place a fiscal tightening more ambitious over the next Parliament than that set out in the Pre-Budget Report”.

But the difference really is one of emphasis. Both organisations insist Read more

The Russian central bank isn’t discussing any kind of capital controls, Sergei Shvetsov, head of financial operations at Bank Rossii, said in Moscow today. With Russian inflation falling year-on-year and static month-to-month (data from Q3), this is unsurprising. The rouble is also falling against most developed and emerging currencies (see chart).

The European Commission will stand over and watch the Greek government implement fiscal cuts and overhaul their statistics, according to their much-awaited assessment out today. But they have issued no threat should Greece fail to comply.

The EC wants the Greek budget deficit brought below 3 per cent of GDP by 2012. To achieve this will require reliable statistics, a “comprehensive structural reform package”, and significant budget cuts to hit economic targets along an “adjustment path”. Greece needs to submit an action plan and calendar by mid March, and also needs, by May 15, to legislate to enforce monthly budgetary reporting and most importantly, ‘effective personal responsibility’. (There are few governments that wouldn’t benefit from that.) The EC is also starting ‘infringement proceedings’ against Greece for ‘failing in its duty to report reliable budgetary statistics’ – this is the strongest wording in the text.

The recommendations – drastic cuts and numbers we can trust – are sensible. But there are a few issues. The first is apparent toothlessness: Read more

Ralph Atkins

George Papaconstantinou, Greek finance minister, has the highest approval rating among the country’s political leaders – a fact which might surprise outsiders who imagine Greece is on the brink of a social implosion.

One explanation is that voters – like global financial markets - actually agree on the need for sweeping reform of Greece’s financial crisis-hit economy, which is riddled with inefficiencies and corruption.

Interviewing Mr Papaconstantinou this morning, I can imagine other reasons for his relative popularity. When I have visited the Athens finance ministry before it has had the appearance of something like a bazaar, with endless people crowding the corridors and seeking the minister’s ear.

Perhaps there has been a security clampdown – or Mr Papaconstantinou has become good at saying “No” – but the building had an air of calm.

Mr Papaconstantinou’s message was of reassurance. Read more

The Romanian central bank has cut the monetary policy rate from 7.5 to 7.0 per cent, effective tomorrow. It’s the second time this year the rate has been cut by half a point. The bank has also pledged to maintain adequate liquidity in the banking system and minimum reserve requirements in both leu- and foreign-denominated currencies. All these things suggest Romania is still in the grip of its crisis. Unlike many emerging markets, its currency has not begun to appreciate. There is some good news, though: last week, an IMF team recommended a resumption of payments from the country’s €20bn loan.

Robin Harding

Takuji Aida, senior economist at UBS in Tokyo, has a note out today with a cryptic metaphor for Japan’s economy that made me think of Eric Cantona.

Provoking long-term growth expectations is like filling a container with water. The water is the first factor, i.e. monetary loosening. The container is the second factor, i.e. growth strategies. These are in place. Japan currently lacks the third factor, i.e. a device for pumping water into the container.

Unlike the footballer, however, Mr Aida provides some explanation: Read more

It’s a bit like a prenup: the European Central Bank is encouraging the Irish government to grant its central bank a veto over its intended life partner, the financial regulator.

Legislation is currently being drawn up that will effectively re-merge the central bank and the regulator. But the ECB says the central bank governor should be granted an “explicit” right to veto the regulator’s funding and budget decisions, if they infringe his independence.

Draft legislation may be reviewed this month. Finance Minister Brian Lenihan has yet to work out how the board would be arranged, and precisely how incumbent governor, Dr Patrick Honohan, and regulator, Matthew Elderfield, would work together. Read more

Simone Baribeau

Largely in response to a Nouriel Roubini analysis published in the FT that argued that there was a bubble in emerging market stocks, the Richmond Fed put out a report highlighting fundamental factors that may have resulted in a sustainable rally.

The report isn’t arguing that a bubble doesn’t exist, mind you, just that it may not exist. And, they say, it may be that there’s no way to tell if it exists or not.

“The purpose of this Economic Brief is not to provide quantitative evidence disproving the existence of an asset bubble in certain markets, but rather to posit some factors that could contribute to a fundamentals-based explanation for the recent rally in certain risky asset markets.”

The bubble argument is essentially this: Read more