Daily Archives: June 17, 2010

Robin Harding

One line intrigued me in Federal Reserve chairman Ben Bernanke’s speech yesterday, which was otherwise a bland recap of Fed positions on financial reform. In his comments on improving information about risks to the financial system he said that:

…the Federal Reserve is expanding its already-extensive commitment to the collection and analysis of financial data. For example, efforts are under way to construct better measures of counterparty credit risk and interconnectedness among systemically critical firms.

In particular, to better identify potential channels of financial contagion, supervisors are working to improve their understanding of banks’ largest exposures to other banks, nonbank financial institutions, and corporate borrowers. We are also collecting data on banks’ trading and securitization exposures, as well as their liquidity risks, as part of an internationally coordinated effort to improve regulatory standards in these areas.

New Fed measures of credit risks Read more

Has anyone noticed how Europe’s fiscal sinners aren’t faring too well in the World cup, while fiscal saints enjoy a winning streak? Well, a back of the envelope calculation has shown a 70 per cent correlation. By this logic, Estonia should have made it to the final.

Switzerland’s win is best described as reward for prudence, while England’s dismal draw against the US is divine retribution for years of overspending. Who said there was no justice? Read more

Ralph Atkins

The European Central Bank is obviously uncomfortable at having been forced to intervene in eurozone government bond markets, which has caused such controversy in Germany. Its proposals for the future governance of the eurozone, just released to coincide with the European Union summit in Brussels, include the suggestion that a future European crisis management institution should be given powers to buy sovereign bonds to “address disruptions in markets”. In other words, if it got its way, the ECB would not have to take such steps again.

Among the ECB’s other suggestions are that the possibility of a country being expelled from the eurozone should be ruled out “because the very existence of this option would put the viability of the common currency into question”. Read more

Greece was so last month. As attention shifts to Spain, one argument runs that the country will receive greater concern from ‘core’ European countries than Greece. But why? Read more

Ralph Atkins

More surprising effects of the global economic storms on labour markets. Money Supply has looked before at the relatively modest effects on eurozone unemployment. The table below, taken from today’s European Central Bank monthly bulletin, shows the effects on growth rates in labour market participation rates.

Perhaps counter-intuitively, the rate increased slightly overall last year, but the rise was concentrated among women and older workers (where the increases in participation rates were faster than population growth). The obvious explanation is that households’ tightened economic circumstances persuaded more women to go out to work and more workers in older age groups to stay in employment. Read more

Expect a stronger Swiss franc: the central bank has dropped a key phrase about countering “excessive appreciation” of its currency after several hints (see 1,2). Forex interventions by the SNB are rumoured to have been numerous (see 1,2,3 to name but a few) – but with the euro falling, the franc has been rising in spite of them.

The table below compares today’s monetary policy assessment with its immediate predecessor in March, highlighting key differences. In a nutshell; the franc reference has gone; growth and inflation forecasts are up; as are ‘downside risks’ following the shenanigans in the eurozone. Table after the jump: Read more

UK regulatory change

Other news

Ralph Atkins

Jean-Claude Trichet has long made clear that the European Central Bank is not over-worried about the impact of fiscal austerity measures on growth, even in the short-run (whatever Washington thinks). The ECB’s latest monthly bulletin has a special section with a lengthy list of reasons why fiscal austeriy need not be so painful. Among its main points, which apply in varying degrees to eurozone countries, are:

(1) the short-run negative impact is lower when “the fiscal starting position is particularly precarious and thus confidence in the sustainability of public finances is rather low,”  and when fiscal consolidation is part of a credible reform strategy.

(2) The impact is also less when Read more

Ralph Atkins

Are eurozone governments insolvent? That is a question the ECB appears to be asking in its latest monthly bulletin. A special section calculates eurozone average net government debt – debt minus governments’ financial assets – has hovered around 50 per cent of gross domestic product in the past decade and increased to 53.4 per cent last year. Those high figures, it concludes, “impl[y] that the financial assets held by governments do not constitute a sufficient buffer, especially as some of these assets are illiquid.” (emphasis ours)

Scary? Possibly, but the ECB does not say whether the position is any worse than elsewhere in the world. More crucially the financial assets of governments are only part of their total assets. “Ideally, it would also be interesting to measure government net worth,” the section says. “However, this is currently not feasible given the unavailability of data on government non-financial assets.” Quite right too – how would Greece ever put a value on the Acropolis?

“Monetary policy must be set in the light of the fiscal tightening over the coming years, the continuing fragility in financial markets and the state of the banking system,” Mervyn King said last night, offering a rare insight into the interplay between monetary and fiscal considerations at the Bank. The spirit of co-operation between Threadneedle Street and No 11 was also evident as Mr King welcomed Mr Osborne’s commitment to reduce the deficit.

Deficit cutting might harm growth, Mr King acknowledged implicitly: “If prospects for growth were to weaken, the outlook for inflation would probably be lower and monetary policy could then respond.” Quite what that response would look like – further cuts to the base rate or an increase in QE – was not clear.