Daily Archives: February 15, 2010

Israeli interest rates are likely to remain on hold for longer, after data showed an unexpected drop in the inflation rate from 3.9 to 3.8 per cent. In a Bloomberg survey, none of 11 economists predicted a fall. Consumer prices dropped 0.7 per cent in the month.

The Israeli central bank was one of the first to raise rates following the financial crisis. Since August of last year rates have risen three times from a record low of 0.5 per cent to 1.25 per cent. 

The new Greek government is “beginning to change the course of the Titanic”, the Greek Finance Minister told journalists today, in a rather unfortunate turn of phrase. George Papaconstantinou admitted the country was in a ‘terrible mess’, but said his government had the backing of the public to push through its package of austerity measures.

Public relations experts might rue the terms chosen by Mr Papaconstantinou, but most of what he said was reassuring. Importantly for the eurozone, he stressed that cutting the Greek budget deficit four percentage points this year was of “paramount importance”. 

Apparently, the Spanish intelligence agency has been enlisted to help find out what is behind recent “speculative attacks” in the financial markets.

The Economic Intelligence Unit – created to defend the economic, commercial and industrial sectors in Spain – wants to know whether investors’ behaviour and “Anglo-Saxon media aggression” can be explained by market fundamentals, or whether something more sinister is behind the moves. 

Are banks a safer bet than government entities in the United Arab Emirates? Three pieces of news today suggest so.

First, the cost of insuring against sovereign Dubai default has shot past its November 2009 levels – i.e. when the Dubai World/Nakheel problems were afoot. 

The central bank of Belarus will cut the refinancing rate by 50 basis points to 13 per cent, effective February 17. Last year, the bank lowered the rate once in December – to 13.5 per cent from 14 per cent. The bank has said it expects further falls, to 9-12 per cent, in 2010.

Many emerging economies are cutting rates – or, indeed, devaluing their currencies – because of large inflows of capital strengthening their currencies and harming exports. Investors have been, until recently, braving the risk to benefit from higher interest rates. This does not appear to be the case in Belarus. Following an IMF-imposed 20 per cent devaluation of the ruble last year (chart, circled), the currency has weakened further against the dollar.

The Ghanaian central bank has all but declared war on the high interest rates charged by banks to consumers, and is threatening measures such as interest rate caps to bring them down.

Although the central bank’s base rate is 18 per cent – down 50bp in November – the country’s banks are charging average rates of about 30 per cent. The central bank has criticised the stickiness of the interest rates – banks are quick to raise them but slow to let them fall.

Mauro Grande has been upgraded. The director of the Directorate Financial Stability and Supervision has just been made Director General as the Directorate itself has been upgraded to a Directorate General. Ah, the machinations of the ECB. The change is effective today.

Yikes. Hot on the heels of a similar American proposal, the UK government is considering issuing bonds to finance infrastructure projects.

Purchase of these so-called ‘green bonds’ would see the British public lending the government money for infrastructure, including low-carbon energy production. It is unclear at this stage how the bonds would pay. If they were performance-related, and infrastructure projects were loss-making, they would of course be a very poor buy. 

Sovereign debt in Dubai is seen as riskier now than it was last November, during the Nakheel crisis. The cost of insuring Dubai debt is now 6.62 per cent*, meaning it costs $662,000 to insure $10m Dubai sovereign debt against default. A month ago today, it cost $415,000. But current rates are some way off their highs a year ago, when it cost $940,000.

Markets are pricing in more risk after news emerged that creditors of Dubai World might receive just 60 per cent of their investment back. The rising cost of insurance is not due to illiquid trading: Dubai CDS volumes are high and increasing (see chart).