Monthly Archives: March 2010

Forget the waffle about cutting £12bn of waste out of government from the  Conservatives and £11bn of efficiencies from Labour. We now have a firm policy from the Tories: to cut £6bn (or 2.8 per cent) from government departments’ 2010-11 budgets. The savings will be used to fund reductions in national insurance contributions for employees and employers. What can we say about this policy:

  • Deep, clear and immediate budget cuts. The £12bn headline reduction in “waste” is, in reality, a simple cut of £6bn in departmental expenditure limits for 2010-11

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As part of normalisation of interest rates, the central bank of Israel has raised the benchmark interest rate to 1.5 per cent. The Bank stressed that even with the rise, monetary policy remains expansionary. Annual inflation, at 3.6 per cent, is currently above the target range of 1 – 3 per cent. The rise was:

Intended to return inflation to within the target range and to keep it there, and to contribute to the further recovery of economic activity, while supporting financial stability. The path of the interest rate will be determined in accordance with the inflation environment, the entrenchment of growth, in Israel and globally, the rate at which the major central banks increase their interest rates, and in light of developments in the exchange rates of the shekel.

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Simone Baribeau

Fed leaders – past and present – have chosen today to be awfully talkative. And they haven’t at all times been in agreement with each other, either. So here are the highlights of today’s Fed speak.

Alan Greenspan, Former Fed chief, on the Bubble

Alan Greenspan, in an interview with Bloomberg TV, disagreed with SF Fed president Janet Yellen’s assessment that an increase in interest rates could have mitigated the growth of the housing bubble. He argued, as he has before, that a decrease in long term interest rates around the world led to the boom. Short-term interest rates were irrelevant.

Ok – so long-term interest rates are responsible for the bubble. We sure don’t want to encourage a housing bubble based on that again. Right?

Maybe not. Read more

Oh dear. China’s ‘big four’ commercial banks lent money so willingly in 2009 that their capital adequacy ratios are barely above the statutory minimum of 11 per cent. The Bank of China, for instance, is apparently at 11.14 per cent.

Why should this affect China’s – and, by some accounts, the world’s – largest sovereign wealth fund? Because its domestic arm is the majority shareholder of the ‘big four’*. So China Investment Corporation has asked for a cash injection from the State Council, the country’s cabinet.

That cash would head for Central Huijin Investment Ltd., the domestically orientated Read more

The central bank of Russia has cut the key refinancing rate to 8.25 from 8.5 per cent. The bank cited a lack of confidence in the recovery. The reduction aims to reduce the cost of borrowing, increase the availability of credit, and boost domestic demand, the bank is reported as saying. The rouble has also been strengthening significantly, and the reduced interest rate will make the currency less attractive to foreign investors.

The blue line on the chart shows the refi rate since January 2007 (left axis). The green line shows the basis point increase/cut per day, derived from the interest rate change and the number of days between cuts (right axis). Today’s cut – effective Monday – shows a very slight increase in the size of the daily cut (chart data).

Following Tim Geithner’s testimony on Tuesday, George Soros writes:

The business model of Fannie Mae and Freddie Mac is fundamentally unsound. These public-private partnerships were supposed to serve the public interest and the interest of shareholders. But this was never properly defined and reconciled… Read more

Robin Harding

I’ve been asking around Tokyo about views on the push in the US for a stronger renminbi. See also Kevin Brown’s excellent piece in the paper yesterday.

The basic answer is: yes, a controlled and gradual appreciation in the renminbi against the dollar would be a good thing, to sustain global growth and reduce global imbalances. Read more

Alan Beattie

The rescue package for the beleaguered Greeks taking shape in one of the usual iterative compromises between Paris and Berlin has got some interesting twists. Since Greece is in the eurozone, the International Monetary Fund, which is being wheeled in to lend an air of credibility to the whole affair, can’t ask it to do anything on the exchange rate or interest rates. The only tool the Greeks have is to grind down heavily on the fiscal deficit and hope the capital markets like it enough to take them off the path to debt default.

This is an unusual position for the IMF to be in. There have been occasions before when a borrower pretty much had only fiscal policy to rely on, as in the $30bn Brazil rescue in 2002 when the indexing of Brazil’s debt to the dollar or short-term interest rates precluded the use of monetary policy. But a country actually stuck in a monetary union? The only analogy I could think of was the CFA franc zone – an arrangement whereby a bunch of west African countries adopted a common currency linked to the French franc. But Arvind Subramanian of the Peterson Institute here in DC pointed out that the CFA franc had in fact been forced to devalue in 1994 under IMF pressure. Somehow I can’t see the ECB under Trichet, who doesn’t want IMF involvement in Greece anyway, trying to drive down the euro to help out Athens.

James Politi

There was little news in today’s prepared testimony by Ben Bernanke, Federal Reserve chairman, on the exit strategy. Mr Bernanke chose not to talk about the discount rate except to say that lasts month’s increase should not be viewed as a monetary policy shift.

And he mostly went over what he had already said last month in terms of the sequencing of the tightening, with reverse repurchase agreements and term deposits ramping up before – or alongside – an increase in the interest rate on reserves. Scant if any change there.

But one shift in tone did stand out. Read more

Simone Baribeau

During part one of the House Financial Services hearing on unwinding the Fed’s emergency liquidity programmes Ben Bernanke, chairman of the Federal Reserve, was quizzed on Okun’s law, an economic model, here-to-fore confined to the vocabulary of economics geeks.

So what is happening during part two of the hearing – when a group of independent economists will be brought together. Will it be a party with a punchbowl? Will anyone be willing to take it away? Read more

Ralph Atkins

A rare event – an European Central Bank surprise! Under Jean-Claude Trichet, president, the ECB has prided itself in its predictability (whatever the frustrations for journalists). But his announcement in the European Parliament today that the ECB was abandoning its plans to revert to its pre-crisis minimum credit requirement for collateral was unexpected. After all, he was mum on the subject as recently as Monday, when he was also in the European Parliament.

Still, those who watch these things closely had always guessed the ECB would have to back down eventually, given the pressure on Greece over its public finances. It has also become clear in recent days that the ECB saw a need for eurozone leaders to shore-up their reputation for crisis management. As the FT has reported, ECB policymakers have been upset by the intransigence of Angela Merkel, German chancellor, and the idea that Europe will have to turn instead to the International Monetary Fund. The timing of yesterday’s announcement meant that the ECB could contribute itself towards calming markets. If it had waited longer, it might have been seen as creating obstacles to the resolving of Greece’s problems.

Simone Baribeau

Snow could delay the hearing, but not the exit.

Today, after a six-week inclement weather delay, Ben Bernanke, chairman of the Federal Reserve, spoke before the House Financial Service Committee on how the central bank plans to become, once again, a standard central bank, unwinding itself from the emergency liquidity programmes it developed during the crisis and getting its balance sheet back to a more normal size. Mr Bernanke’s testimony was released when the committee was originally scheduled to meet in February.

So has the Fed developed further details in its exit strategy? Here’s what’s new from the hearing, as it happened. Read more

No country would hand the controls of a nuclear device to a third party. But that is, in effect, what the European Central Bank is doing with its repo facility for eurozone sovereign debt.

Ralph Atkins

Greece will be helped by an ECB decision to keep the minimum credit threshold in its liquidity-providing operations at investment grade level (BBB-) beyond the end of 2010 in a vital change of policy. This will help Greece because an increase in the framework to A-, which was originally planned at the end of this year, could have left the country’s banks in a perilous situation as they could have ended up ineligible to exchange Greek bonds for loans for funding purposes. Also by David Oakley. More on

Bloomberg reports an end to the crisis-time policy of excess money in Taiwan:

Taiwan said it would issue longer-dated certificates of deposit to soak up extra liquidity in the economy. Governor Perng Fai-nan and his board left the discount rate on 10-day loans to banks at 1.25 per cent, as forecast. “The central bank has exited quantitative loose policy, now monetary policy has returned to normal,” Mr Perng told reporters in Taipei.

Alan Beattie

The battle over exchange rates between Beijing and Washington is warming up nicely after a few years’ hiatus, only with a bit more urgency this time. Today’s hearing at the House Ways and Means committee canvassed proposals for what to do about it. Interestingly, there was more consensus among the experts testifying than previously that China holding down the renminbi was a serious problem. But the solutions all seemed less than forceful: call China a currency manipulator, go to the IMF, go to the WTO.

The more confrontational solutions, like imposing anti-subsidy duties to combat currency undervaluation, didn’t get much support. Sandy Levin, the Michigan Democrat who currently chairs the committee, has a reputation as a sceptic of free-trade purists, but he sounded pretty cautious about anything that might touch off a direct confrontation. Read more

James Politi

Ben Bernanke, Federal Reserve chairman, heads to Capitol Hill on Thursday for a hearing on the US central bank’s exit strategy.

With the latest FOMC statement out only a week ago, few economists are expecting any significant changes to the monetary policy outlook of “exceptionally low” rates for an “extended period”. But that does not mean there won’t be news coming out of Mr Bernanke’s mouth. One guess of several economists, such as Michael Feroli of JPMorgan, is that the headlines could be made by a discussion of the discount rate – the rate at which commercial banks can borrow from the Fed in a pinch.

References to the discount rate were notably absent from the FOMC statement last week – but that doesn’t mean the committee did not discuss it. Read more

Alistair Darling said today the Ministries would provide details on £11bn savings by 2012/13. Below is a breakdown by Ministry. But you can save yourself the detail: almost all of the departments list the same cost reduction plans (with worrying similarity). Almost all of the savings are expected to come from:

  1. Reducing the cost of procurement, often via ‘collaborative procurement’
  2. Reducing the cost of arms’ length bodies
  3. Streamlining back-office functions
  4. Reducing the use of consultants
  5. Property/estates costs
  6. Energy savings

In savings-size order:

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