Daily Archives: February 26, 2010

The head of the IMF is today arguing the case to redefine and expand its role.

The Fund must better detect risks that individual economies pose to the rest of the world, as well as offering liquidity early during a financial crisis, Dominique Strauss-Kahn is saying. The institution should also better monitor large, interconnected financial firms to construct a “risk map”. Read more

The Dutch central bank will focus on ‘conduct and culture‘ at banks, rather (presumably) than focusing solely on reserve ratios and other capital requirements. This came out on February 8 (apologies) but a full English translation is not yet available.

So, ample room for weekend speculation on how the central bank intends to achieve their aim. Improving the integrity – not just of individuals within the system, but of the system itself – is the holy grail. Capital ratios are poor proxies toward this end. Read more

US GDP has also been revised up this month, to 5.9 from 5.7 per cent (annual). As Calculated Risk observes, however, most of the improvement came from inventory change. Stripping those out would have seen a decline in GDP from 2.2 to 1.9 per cent over the same time period.

UK GDP was also revised upwards today, though markets were unimpressed and sterling continued its fall.

Credit to household and non-financial corporations continues to shrink in Ireland.

Private-sector credit declined by €3.2bn in January. Last year, most of the declines were explained by debt revaluation. Not this year. The €3.2bn is transactions related – i.e. the difference between repayment and draw-downs. Read more

From Moody’s:

Moody’s Investors Service said today that the breakdown in the talks between the governments of Iceland, the United Kingdom and Netherlands to resolve the Icesave dispute puts the Icelandic government’s Baa3 rating under downward pressure. This is because Moody’s believes the failure to reach a new agreement is likely to lead to an extended delay of the IMF programme, a weaker economic recovery and potentially, political instability. Overall, Moody’s believes that Iceland’s path out of the crisis now appears more difficult.

Currency markets are unmoved by today’s upward revision in Q4 GDP figures: sterling is still falling. Jonathan Loynes of Capital Economics said the growth was driven by a slowdown in the rate of inventory unwinding, hardly the basis for a strong recovery.

Thursday’s business investment figures haven’t helped. They were sharply down – 5.8 per cent – against an expectation of a rise of 0.1 per cent. Read more

Eurozone inflation has ticked up slightly, from 0.9 per cent on an annual basis in December, to 1.0 per cent for January. But do not be fooled by apparent stability.

Inflation has slowed, or indeed dropped, for most Eurozone countries this month, offset by steep rises in Malta and Cyprus. Inflation has also risen in Ireland, Luxembourg and Belgium, although by less than their average monthly increase over the past four months. Read more

China is carrying out stress tests on labor-intensive industries to gauge the effect a stronger yuan would have on earnings, reports Bloomberg (itself reporting local paper the 21st Century Business Herald). Consequent speculation on the yuan has pushed forward prices up.

The yuan’s value has been kept at about 6.83 per dollar since July 2008, following a 21 per cent advance over three years, as policymakers intervened to help exporters weather a global recession. Read more

Talks have collapsed between Britain, the Netherlands and Iceland about repayment of £3.4bn (€3.8bn) lost by depositors in the failed online bank Icesave, raising fears that the country will fail to meet its obligations.

On Monday Iceland rejected an offer to soften repayment terms, British officials said. It dismissed a proposed reduction in interest rates as insufficient and failed to win support for a counter-offer that one negotiator described as “fanciful”. Read more

Required reading this morning from Gillian Tett:

Somewhere in the bowels of the mighty European Central Bank, there is a number that many investors would give a lot of euros to see.

It refers to the volume of Greek government bonds that are now sitting in the ECB’s coffers, after being lodged there by European banks through central bank repo operations.

Sadly, the ECB considers this number far too “sensitive” to release, even after a delay. Nevertheless, as fears about sovereign risk rise, those hidden data are assuming ever-greater importance.

In an increasingly illiquid secondary market for bonds, it matters greatly who is holding the Greek stock. They might have trouble reselling – especially if ratings downgrades continue, imperilling the eligibility of Greek bonds for the ECB. Read more

Chris Giles

Ever since I wrote on this blog that the Bank of England’s Inflation Report fan charts are “rubbish” and do not reflect the underlying forecast or message the Bank wanted to give, insiders have said the post was undiplomatic and peevish. I would have to plead guilty to this criticism, but in mitigation would say that the outburst was born out of frustration after five years of quiet and private suggestions had absolutely no effect.

The challenge is to find a way of presenting the Bank’s economic forecasts in a way that reflects the the full range of possibilities and uncertainties in its  economic predictions, is consistent with the decision-making by the Monetary Policy Committee, is possible to present relatively simply so that it can be widely understood and is taken at face value by those outside the Bank.

Without going into the reasons why the fan charts fail again, the consequences of their inadequacy are pretty serious for the Bank and the Monetary Policy Committee. Informed, intelligent people with no axe to grind no longer understand the Bank’s thinking and have begun to suspect its motives. Over the past week or so, two examples stand out. But these are far from isolated example. Read more