Daily Archives: May 11, 2010

Simone Baribeau

How did MBS all go so very very wrong? Here’s the visual answer.

Yes, what you’re looking at is AAA rated securities being created out of debt that, if the system were to be under financial stress, would likely be (depending on the exact structure of the security) among the last 4 per cent to be paid. You buy a AAA security, and if the default rate on subprime mortgages hits 4 per cent, the security is worthless. Read more

If we get a Conservative/Liberal Democrat government in the next day or so, pity the UK Treasury. It had been preparing to tell the new chancellor that the public finances were in a terrible shape and new tax increases were extremely difficult to avoid. That pep talk seems to have become quite a bit more difficult.

There was no doubt at the gathering of central bankers here in Zurich today that Britain was the big unanswered question when it came to the next big global risk. Read more

Three-year government bonds today sold at yields lower than March bonds, as demand picked up for assets perceived as safe. Falling yields have also been seen recently in the 1- , 5- and 7- year bonds. If the yield drop is temporary, the US stands to benefit in particular tomorrow and Thursday, when 10- and 30- year bonds are auctioned.

James Politi

A new debate is set to rage within the Fed in the wake of its decision to re-open currency swap lines with foreign central banks.

Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, today said at an event in North Carolina that the move was “not a problem” but “we’re going to think about whether we sterilise” the swaps. Read more

James Politi

After Ben Bernanke was confirmed for a second term as Fed chairman back in January, the political heat surrounding the US central bank died down a little.

But with the Fed re-establishing currency swap lines with the European Central Bank and others over the weekend to help the strains of the sovereign debt crisis, some lawmakers have ratcheted up their criticism again. Read more

Four things have struck me at today’s high-level meeting on the international monetary system, organised by the International Monetary Fund and Swiss National Bank.

The UK government has just secured £2.25bn debt to be repaid over 17.5 years at a rate of 4.472 per cent. This is pretty good going, relative to other European countries: the rate (middle dot, green line) is only fractionally higher than the Feb-Mar yield curve (red line). Maybe, as Chris said yesterday, the UK is just lucky, for now. (Source data: Debt Management Office.)

Eurozone debt crisis

Other news

China’s central bank has spoken of measuring the yuan “with reference to a currency basket”. One of the bank’s academic advisers, Xia Bin, said the change in language suggests a change to the dollar peg, reports Business Week. An economist at Morgan Stanley interpreted the shift in the wording of the report as significant, and yuan forward prices have been rising for the past two days on speculation of a rise in the currency.

Robin Harding

Apart from the Bank of Japan, the other part of my job in Tokyo is covering the electronics industry, including companies such as Sony, Panasonic, Toshiba and NEC. They don’t often overlap, but I was struck by this chart from Tetsuya Inoue, who follows Japanese monetary policy at Nomura Research Institute.

 Read more

Alan Beattie

The announcement of the IMF’s €250bn role in the eurozone crisis package always looked slightly fishy – as though a large-sounding number had been randomly plucked from the air and added on to the actual SPV and balance of payments facilities. That is probably because that is exactly what happened.

The IMF’s contribution is what it might theoretically give if (1) it maintains the 2:1 ratio of EU to IMF funding that has persisted in recent bail-outs, especially Greece, and (2) the eurozone spent all of its new fund. It isn’t earmarked, because the IMF doesn’t earmark funds, and it will only be disbursed under the usual IMF conditions.

This search for a big number to impress the markets is all a bit reminiscent of the largely fictional $1,000bn that the G20 claimed it had pumped into the global economy at the London summit back in 2009, a Gordon Brown double-counting special. (Now Mr Brown will soon be looking for a new job, btw, and Dominique Strauss-Kahn could soon be on his way back to French politics – could they play former-European-finance-minister tag-team as IMF managing director?)

Anyway, the agreement does have operational, if not numerical, importance, cementing the relationship that the IMF has built up with the EU on the basis of joint rescues in Latvia, Hungary and Greece. A precedent is now established under which the IMF essentially sets the conditions and lends about a third of the money. The IMF’s loans are senior to the rest of the money, which is kicked in by the EU or eurozone members. Read more