Daily Archives: May 10, 2010

Simone Baribeau

What’s neither fish nor fowl but carries a begging bowl?

Fannie Mae and Freddie Mac, of course.

The two US mortgage giants were put under government conservatorship in mid-2008 after nearly collapsing under the weight of their deteriorating loans.

And still they struggle. Today, Fannie asked the federal government for another $8.4bn in bail-out funds, following Freddie’s request for $10.6bn last week.

They have little reason not to ask. The Treasury uncapped the two agencies’ $400bn credit line last December, allowing the groups to tap as much as they need over the next three years. Thus far, the groups have been given about $148bn, so still have a long way to go before running over the previous limit.

Which begs the question: to what extent is this a “backdoor bail-out” with Fannie and Freddie able to buy bad loans off of banks’ books at taxpayer expense now that the Fed has stopped? Otherwise stated, if they don’t have to worry about running out of aid, how careful are they being about their new loans?

As it turns out, only modestly more than they were being before the collapse. 

Chris Giles

Known for its wonderful timing, Switzerland is playing host to an International Monetary Fund conference on reforms to the international monetary system tomorrow. The great and good of central banking are present along with a few others like me.

Sessions include sources of instability, the supply of reserve assets, volatile capital flows and alternatives to self insurance. All pretty relevant after the past week. 

Chris Giles

Britain has watched Europe’s sovereign debt crisis from the sidelines without a clear government, without a credible fiscal policy and without contagion from the markets.

This luck will not last if fiscal policy remains unchanged for long. 

James Politi

One of the more curious elements of the Federal Reserve’s announcement on Sunday night regarding the re-establishment of dollar liquidity swaps with foreign central banks was that the Bank of Japan was not on the initial list of counterparties. But the Fed did say that the BoJ would consider “similar measures soon”.

Indeed it did. Twelve hours later, the BoJ approved its participation in the swaps. Like all the counterparties except the Bank of Canada, which is capping the size of its facility at $30bn, the Bank of Japan has placed no upper limit on its size. But like the Bank of Canada, the BoJ is not expecting to start currency swap operations this week, as the Bank of England, Swiss National Bank, and European Central Bank are expected to do.

Ralph Atkins

Has Axel Weber, head of Germany’s Bundesbank, just blown his chances of becoming European Central Bank president next year? In an interview with the country’s Börsen Zeitung newspaper, to be published on Tuesday, he warns of the risks to monetary stability involved in buying government bonds and says he saw this part of the ECB’s actions “critically”.

His opposition is not surprising. What is, is Mr Weber’s decision to make his view public. Open dissent is viewed dimly within the ECB – and the Bundesbank president’s comments risk undermining the effectiveness of yesterday’s package. 

The minimum rating on assets accepted as collateral at the Bank of England is Aa3 — but they can accept lower ratings whenever they please. That is the message of a Bank “clarification” issued today.

Conspiracy theorists might spot a pattern here. The ECB reduced its minimum threshold from A- to BBB- during the crisis, and recently extended this temporary measure into 2011. 

Morgan Stanley expects the Fed to keep rates on hold until 2011 in the wake of the sovereign debt crisis in Europe. Their previous estimate was September of this year.

The investment bank said it expected the target rate on fed funds to climb to 2.5 per cent by the end of next year, and forecast the 10-year Treasury yield to be 1 percentage point lower, at 4.5 per cent, by year end. “The European sovereign credit crisis, its threat of contagion beyond Europe, and its effect on inflation expectations is the key reason for these significant changes,” said the research note.

Eurozone crisis

Other news

… and keeps the asset purchase programme at £200bn, as expected.

Ralph Atkins

So, just like the US Federal Reserve and the Bank of England, the European Central Bank has bitten the bullet and launched an outright asset purchase scheme (it is called the Securities Market Programme). But the ECB is rejecting the idea that its buying up of government and private debt is ”quantitative easing”.

Why? First, on technical grounds, because the liquidity injected will be re-absorbed through other ECB operations. Second, because the programme is not intended to have the effects of classic “quantitative easing” — that is, to stimulate economic growth and inflation, or both. The ECB says the SMP’s objective “is to address the malfunctioning of securities markets and restore an appropriate monetary policy transmission mechanism”. It will be “intervening” in government bond markets, rather than buying to hold.