Daily Archives: July 13, 2010

James Politi

Barack Obama has finally made his choice. Jack Lew will replace Peter Orszag as director of the office of management and budget, a key administration position which has become even more crucial amid rising pressure for the US to curb its rising budget deficit.

Mr Lew was not the the most widely circulated name for the job, which seemed destined to go to Gene Sperling, an adviser at the Treasury department, or Laura Tyson, the Berkeley economist. But there are certainly many reasons why Mr Obama would want him in the job. And there is one possible complication. Read more

Top brass in the OECD will be meeting with George Osborne and others tomorrow, to lay out a roadmap to “new growth” in the UK economy.

In United Kingdom: Policies for Sustainable Recovery, recommendations range from regulation to education, and from workers’ health to the green economy. The report recommends continued fiscal consolidation, while protecting areas such as R&D. Choice excerpts from the recommendations include: Read more

Chris Giles

With all the furore over the OBR’s tweaked Budget forecasts, scrutiny of the Bank of England’s fallible forecasts has been more limited than usual. So David (Danny) Blanchflower, former Monetary Policy Committee member and scourge of Mervyn King, Bank governor, has just tried to redress the balance.

Writing for Bloomberg Businessweek today, he says, “it is time to reveal a dirty little insider’s secret”.

“During my time on the Bank of England’s Monetary Policy Committee, which makes quarterly economic prognoses, Governor Mervyn King controlled the hiring and firing of the forecast team, who did his bidding. They had to produce a result that was consistent with King’s views, or else they would be history. A patchwork of arbitrary fixes and prejudices frequently drive forecasts, which for the uninitiated are hard to see.

 Read more

July 23: stress test result day, right? Wrong. Consolidated results are now to be released on that date, with individual banks’ results delayed by two weeks. Cue a fortnight of frenzied speculation in the markets, as investors try to work out which banks are at the vulnerable end of anonymous bar charts and scatter plots. Presumably this has been done to allow banks more time to raise equity. But then, after two weeks of volatility, even some banks that have fared well will be needing it!

This decision seems to miss the point that stress tests are all about shoring up market confidence. Even bad results can be taken well by markets if investors believe the scenarios are accurate, transparent and really do consider the worst possible situation. Indeed, equity markets rose after the SCAP results from US stress tests last year. But then US markets could have the ultimate confidence in their banks, because the US government had pledged to bail-out any banks subsequently unable to raise funds through the markets. European banks – at this point – come with no such guarantee.

The ECB has given a dressing down to the Hungarian government over plans to cut central bank salaries – and for failing to give the ECB enough notice to scrutinise the bill. A precedent was set a week ago, when the ECB scolded Romania for cutting its central bank staff salaries.

Two-thirds of the ECB’s strongly worded legal opinion reminded the Hungarian government about good time-keeping. The consulting authority, reads the document, may flag an issue as ‘urgent’ but “even in such cases a minimum one-month deadline applies”. Hungary apparently allowed less than three weeks for the process. The section ends: “The ECB would appreciate the Ministry for the National Economy giving due consideration to honouring its obligation to consult the ECB in the future.” Read more

Britain’s economy has turned out better than expected a year ago, when rate cuts were being made and quantitative easing extended. This from Bank of England MPC member Andrew Sentance, who voted last month for a 25bp rise in the base rate.

Gently does it, argues Mr Sentance. In a speech in Reading today, he sets out the case for a gradual increase in the base rate. But he is not in favour of a rate ‘hike’: the word implies suddenness but the increase must be gradual. For the same reason, he’s not keen on the word ‘tightening’ to describe his suggestion: Mr Sentance wants to see a gradual removal of loose monetary policies, and it will take a long time before the base rate will be called ‘tight’.

There are four ways in which the outlook is brighter than expected a year ago, argues Mr Sentance. “The world economy has bounced back, demand is recovering in the UK, there is less spare capacity than we feared and inflation has been higher.” But monetary policy must be forward looking, so these factors alone do not add up to a “compelling case for change”. The question, he says, is how the growth and inflation outlooks have changed. Read more

Ratings news

Chris Giles

It’s been a bad two weeks for the Office for Budget Responsibility and today was the day Sir Alan wanted to repair some of the self-inflicted damage.

Although there was no apology given for tweaking the assumptions underlying the forecasts in the week before the Budget, nor for releasing the OBR’s forecasts for public sector jobs less than an hour before prime minister’s questions, Sir Alan did regret the consequences of his actions and any naivety on the OBR’s part.

The most important action of the OBR today is not in the public theatre of the OBR’s discomfort in front of the Treasury Select Committee, but in the release of the changed assumptions made shortly before the Budget and revealed by the FT. As shown below Read more

Ratings agency Moody’s has downgraded Portugal’s debt issuer rating from Aa2 to A1; the outlook is now stable. The short-term issuer rating is affirmed at Prime 1 with stable outlook. The action concludes a downgrade review that began on May 5. The level remains above the (temporarily lowered) BBB- required by the ECB to accept a sovereign’s bonds as collateral.

The rationale, straight from Moody’s: Read more

Ever wondered what sovereign ratings ‘Made in China’ might look like? You know, the kind of ratings that China president Hu Jintao might have had in mind when he called for a more accurate ratings system at last month’s G20 meeting? Well, here’s your chance.

Over the weekend, Dagong Global Credit Rating Co., a Beijing-based rating agency and one of four dominant agencies in the PRC, published its first ever sovereign risk assessment. And as Dagong noted in its press release:

On the morning of July 11, 2010, Dagong Global Credit Rating Co., Ltd., a professional rating agency of China, released its sovereign credit risk reports of 2010 and for the first time the sovereign credit risk ratings for 50 Countries in Beijing. As a non-western rating agency, this is not only the first one in China, but also the first one in the world, that releases information on sovereign credit risks.

The results of Dagong’s assessment have been making headlines early this week, since they, err, diverge somewhat with those of western rating agencies like Moody’s, Fitch, Standard & Poor’s et al. Spot the differences in the table below: Read more