Monthly Archives: April 2010

James Politi

Barack Obama, US president, is set to nominate Janet Yellen, president of the San Francisco Fed, to replace Don Kohn, the outgoing vice-chairman. Mr Obama is also expected to fill two additional vacancies on the seven-member Fed board of governors with Sarah Raskin, a state banking regulator in Maryland, and Peter Diamond, an economist at the Massachusetts Institute of Technology.

More on

Simone Baribeau

Dun dun DUH!

And the Fed has decided to… Read more

Ralph Atkins

Whatever love there was left in Brussels and Frankfurt for ratings agencies, it has almost evaporated.

Standard & Poor’s may have had some good arguments. But its downgrading of Greece and Portugal - and now Spain - has not exactly helped calm financial markets as officials try frantically to put together a rescue package in Athens. For the European Central Bank, the downgrading of Greece to junk status has created particular complications. If other agencies followed S&P, Greek assets would become ineligible for use as collateral in ECB liquidity operations for which the minimum requirement is BBB-. Read more

Here is a simple calculation. The German Green Party is saying Dominique Strauss Kahn told parliamentarians in Berlin that Greece might need loans of up to €120bn or nearly four times its 2009 budget deficit. Apply the same ratio to Britain, and you soon see, the UK could never go to the IMF if it cannot finance its public debt. The sum required would be £652bn or roughly $1,000bn – more than the Fund’s funds.

If, as the Conservatives suggest, anything other than a Tory victory would see Britain banging on the IMF’s door, think again. Default and restructuring is much more likely than going “cap in hand” to the Fund.

Greek-related news

Rest of World

Ralph Atkins

Jürgen Stark has warned of a “full-blown sovereign debt crisis” unless governments take ambitious steps to bring public finances under control, saying the UK, US and Japan face even greater challenges than the eurozone.

His comments were sparked by the escalating crisis over Greece’s public debt, but he played down the idea of the ECB offering Greece a lifeline in an extreme scenario by buying its government bonds. This was not an issued being “discussed at present,” he told journalists. Read more

Brazil’s central bank is expected to raise its core interest rate by as much as a full percentage point this evening as the unexpectedly fast pace of economic growth puts increasing pressure on prices.

Predictions for economic growth, inflation and interest rates at the end of 2010 have all risen sharply in recent weeks, adding to near-certainty among economists that the bank will raise its target overnight rate, known as the Selic, for the first time since September 10 2008 – less than a week before the collapse of Lehman Brothers and the ensuing global crisis took the pressure off an economy that was showing dangerous signs of overheating. Read more.

Simone Baribeau

Barack Obama, US president, and Ben Bernanke, Fed chairman, both spoke today at the first meeting of the National Commission on Fiscal Responsibility and Reform.

Notable was their focus on Medicare and Medicaid, rather than Social Security, as a culprit behind US budget deficit woes. Read more

The UK election is dominated by the ramifications of no political party gaining a parliamentary majority and the cross-party co-operation that might follow. A different form of future co-operation was raised by Sir John Gieve, former deputy governor of the Bank of England, today – that between the Bank of England and the Treasury.

I am deeply indebted to my colleague James Mackintosh, the FT’s investment editor, who heard Sir John this morning. It certainly makes interesting reading and goes a lot further than Sir John went in his final speech as deputy governor last year. Read more

S&P has been slashing ratings. The Greek credit rating has been cut three notches to a non-investment grade of BB+ with negative outlook. Portugal’s long-term debt rating has been cut two notches to A-, also with negative outlook. In both cases, Moody’s > Fitch > S&P. And by quite some margin.

Greece: Read more

Alan Beattie


… Remarkably, the way that the eurozone authorities have managed the Greek crisis has pulled off the difficult trick of incurring the stigma cost of the IMF’s presence while squandering much of the benefit. The unhappy combination has arisen from the eurozone’s mulish insistence in taking charge despite an iterative, not to say convoluted, decision-making process…

 Read more

Ralph Atkins

Back from a trip to the US, Jean-Claude Trichet, European Central Bank president, hurries on Wednesday to Berlin, where he will brief German parliamentarians on Greece. Here is what he might want to say – but probably will not.

Sehr geehrte Damen und Herren Abgeordnete,

Forgive me if I switch to English. My German is much improved, but not yet to an extent where I can speak it on such an occasion – even though scenes of Wagner’s Götterdämmerung come to my mind when I think how we Europeans have handled the Greek crisis in recent weeks.

Let’s be frank. We have repeatedly got it wrong. As my governing council colleague Yves Mersch, Luxembourg’s central bank governor, told Belgian newspaper L’Echo in an interview on Tuesday: Greece has become ”a lesson in what not to do.” We have failed to react quickly and with sufficient conviction, and allowed financial market pressures to get out of hand. Greece has become a much bigger problem as a result – for the whole eurozone.

The sequence of failures was set out in a candid speech earlier this month by another of my colleagues, Lorenzo Bini Smaghi, an ECB executive board member. He highlighted the dangers of underestimating the self-reinforcing nature of financial markets. “Vague statements that some event, such as a default, will not occur, are not sufficient to calm the markets. Concrete actions are needed,” he concluded then.

At the ECB, we know the importance of acting fast – as I like to remind audiences. If the ECB had not Read more

I am at the Institute for Fiscal Studies launch of their election analysis. It is a pretty dismal affair; not because the work is bad, but because all three main parties’ plans are woeful compared with the necessary repair job for the public finances and the tax system.

The differences between the parties on the public finances is small, IFS says and, as the FT demonstrated yesterday, all parties’ “public spending plans are particularly vague”. The big row over the speed of fiscal tightening makes “a relatively modest difference to the long term outlook for government borrowing and debt”. Read more

Reining in property speculation is not enough to combat inflation. An advisor to the Chinese central bank has said there is a fundamental problem with the PBoC mandate.

Zhou Qiren said there was “conflict” between the bank’s forex intervention and its job to manage liquidity and control inflation, reports Bloomberg. Speaking of the record levels of lending in 2009, he said: “Unless there are very forceful measures, that large amount of money will flow through the market. Even if you put lid on in one place, it will emerge somewhere else.” Read more

Simone Baribeau

The FT has just reported that “Republicans want checks on a proposed consumer financial protection bureau and the crisis powers of regulators as the price for supporting a landmark regulation effort.” Republicans criticise the proposed bureau, which would be housed in the Federal Reserve, for having too much independence.

Democrats have championed the consumer protection bureau in the strongest possible terms. Barack Obama told banks last week, “Unless your business model depends on bilking people, there is little to fear.” And Elizabeth Warren, chairman of the Congressional oversight panel told the Huffington Post last month: “My first choice is a strong consumer agency…My second choice is no agency at all and plenty of blood and teeth left on the floor.” Read more

Simone Baribeau

Who’s afraid of depressing asset prices by raising overnight rates?

Alan Greenspan has repeatedly said that raising overnight rates wouldn’t have been effective in mitigating the housing bubble. But it turns out that at least one member of the FOMC worried in a 2003 meeting that that was exactly what would happen should the Fed raise rates too quickly. Read more

UK politicians looking to slash public spending or increase taxes should reduce losses from fraud in the public sector instead, estimated at a whopping £38bn. So says a report by accounting firm MacIntyre Hudson LLP, in conjunction with the Centre for Counter Fraud Studies at Portsmouth University.

Fraud* – “where someone intentionally or recklessly obtains resources to which they are not entitled” – is grossly underestimated in the UK, argues the report. Of 132 investigations into fraud in the public sector in the past decade, the average loss rate was found to be 4.57 per cent of total spend. The UK Treasury, by contrast, reports just £4.2m fraud, or 0.026 per cent, though this is qualified with the admission that “the analysis does not necessarily offer a complete picture”. Read more

Growing evidence suggests a stronger yuan would not help the US economy nearly as much as thought, if at all. Even increased Chinese consumption is shown not to help much. So why do these assumptions continue to underpin politicians’ rhetoric?

First, the evidence:

  1. Yuan revaluation could cut global growth by 1.5 per cent (April 26)
  2. Chinese saving less and spending more would have very little impact on US jobs (April 25)
  3. A 15 per cent appreciation of the RMB would reduce the American trade deficit by 5 per cent by the end of next year, but would be short-lived and would not flow through to GDP (April 16);
  4. “Chinese revaluation is in the interests of China, not the US” (April 16)
  5. “People seem to ascribe a ridiculously outsized role to China’s currency policy in producing China’s trade surplus and America’s trade deficit. The level of rhetoric is simply not consistent with the impact of the peg.” (March 15)

Even large changes in Chinese currency or consumption have little effect on the other side of the Pacific: US-China trade is simply too small to transmit much of the effect, so the arguments run.

So, second, why the continued assumption Read more

Ralph Atkins

It is time for tin hats and duct tape in the eurozone. Confidence in the ability of political leaders to fix Greece is evaporating rapidly. Germany’s dithering has hit Greek bonds, and worries are spreading about other countries on Europe’s periphery, such as Portugal.

The chance has been missed for a swift, decisive response that would have ended all the alarm – Greece’s problems were pretty clear late last year, and four months on, the negotiations are still continuing. So, a note today from Royal Bank of Scotland on “last resort” options to end the crisis, fits the fatalistic mood. Read more