Daily Archives: June 14, 2010

Simone Baribeau

If we are indeed facing a double dip downturn, James Bullard’s comments today on the strength of the global recovery will be long remembered.

Apparently unconcerned that the Fed (after missing the US housing bubble) would have lost credibility in its ‘no bubble!’ declarations, the St Louis Fed president said today:

While I am sympathetic to the possibility of ‘bubble’ phenomena in macroeconomics generally speaking, I do not think that we should interpret China in this light at the current juncture.

 

James Politi

Even though many economists have pushed back their expectations of the first interest rate hike by the Federal Reserve, the debate rages on about the tools the central bank should eventually use to tighten monetary policy.

In a research paper out today, Glenn Rudebusch, senior vice-president at the San Francisco Fed, makes a compelling case for not rushing to shrink the Fed’s $2,300bn-plus balance sheet, a move that some more hawkish officials have been pushing for early in the tightening cycle in order to contain inflation.

Overall, Mr Rudebusch concludes that since many predict the US economy will take “years” to return to full employment and inflation will stay low, it will take “a significant amount of time” for the Fed to exit from its current easy money monetary policy stance.

But some of his most interesting points 

Simone Baribeau

Moody’s just slashed Greece’s rating to Ba1 from A3, a whopping four notches, bringing the ratings agency in line with its peers and the country’s debt squarely into junk territory. Moody’s, along with Standard and Poor’s and Fitch, had already downgraded the debt-laden nation in April, but by fewer notches.

From the release:

Moody’s Investors Service has today downgraded Greece’s government bond ratings by four notches to Ba1 from A3, reflecting its view of the country’s medium-term credit fundamentals.
Today’s rating action concludes the review for possible downgrade, which Moody’s initiated on 22 April 2010. Moody’s has also downgraded Greece’s short-term issuer rating to Not-Prime from Prime-1. Greece’s country ceilings for bonds and bank deposits are unaffected by the review and remain at Aaa (in line with the Eurozone’s rating). The outlook on all ratings is stable.

 

Trillion-dollar mineral deposits apparently found in Afghanistan have the potential to make the country and its citizens comfortable for years to come – but only if wealth generated from the find is handled equitably. Without care, the ‘resource curse’ could trigger conflict, and make most Afghans worse off than they are now.

Ashby Monk suggests creating a sovereign wealth fund straight away, to hold and manage the revenue for future generations. 

After a couple of months of “will-they, won’t-they?” speculation, and, according to central bank minutes, increased discussion among bank board members themselves, Chile’s central bank is finally expected to begin raising interest rates when it meets on Tuesday.

Widespread expectations are for a 25 basis point rise, which would be the first increase since the bank jacked up its key monetary policy rate, or TPM, by 50 basis points in August 2008. The rate has been at a historic low of 0.5 percent since July 2009.

The bank has 

Two points stand out from the latest BIS quarterly review.

First, a warning on mismatched maturities. Ingo Fender and Patrick McGuire, of BIS, point out the continued reliance of European banks on wholesale* instruments and FX swaps. Banks forced to roll over short maturity debt risk agreeing new debt on worse terms. The authors point out that if conditions worsen, maturities will become even shorter, exacerbating the problem (p63):

Such funding patterns put a premium on contingency funding arrangements for international banks and underline the need for further diversification in banks’ funding profiles … In particular, they point to potential benefits from improvements to FX swap market infrastructure, such as the use of central counterparties to allow multilateral netting and more efficient collateral management

Second, Naohiko Baba (BoJ) and Ilhyock Shim (BIS) find 

Chris Giles

The Office for Budget Responsibility has just declared that the UK is not Greece. There are no skeletons in the cupboard. Public borrowing is expected to be rather lower than Alistair Darling forecast in his March Budget because tax revenues have been stronger. The only fiddling apparent in a first look at the forecasts is that the (notoriously uncertain) forecasts for the output gap and trend growth are more modest than the previous government assumed.

Also apparent is that short-term issues affecting revenues are much more important for the public finances than longer-term issues, such as the assumption for trend growth (revised down heavily) and for near-term growth (also revised down).

There is not a good analysis of why the forecasts have changed from the Budget forecasts. Sir Alan Budd said this was because the OBR started from scratch rather than changing all of the assumptions.

But what is most disappointing is that the OBR has completely fudged the issue of fiscal multipliers. “It’s all too complicated,” is the message and 

The Bank of England has started buying sterling commercial paper again, for the first time since Q209, indicating heightened market fears over sovereign risk (purple on the chart, right). The Bank said:

Although there were no asset purchases financed by central bank reserves, the Bank continued to purchase sterling commercial paper and operate as a buyer and seller in the sterling corporate bond market, with net purchases financed by the issuance of Treasury bills.

When market conditions deteriorated in May, demand to issue commercial paper to the Bank increased. After the end of the review period, the Bank’s corporate bond auction on 25 May also saw increased appetite to sell to the Bank. In addition, demand to borrow from the Bank via its three-month long-term repo operation increased notably on 18 May