Monthly Archives: September 2010

Ralph Atkins

As eurozone leaders cheered Ireland’s attempts to bring its crisis under control, banks across the 16-country region provided a separate display of reviving financial market confidence. The European Central Bank reported it had rolled over much less than expected of €225bn in three-to-12 month loans to banks that expired on Thursday.

The news was a boost for the ECB, marking a significantly reduced reliance on the unlimited liquidity it has been pumping into the banking system since the collapse two years ago of Lehman Brothers investment bank. Read more

On Monday, the IMF cannot contain its enthusiasm the UK’s harsh austerity plans. On Thursday it releases research warning fiscal consolidation “will hurt” and “are likely to be more painful if they occur simultaneously across many countries, and if monetary policy is not in a position to offset them”.

The IMF finds that, “fiscal consolidation equal to 1 percent of GDP typically reduces real GDP by about 0.5 percent after two years”. Does the IMF left hand talk to its right hand?

Sadly for journalists, the answer is “yes”. Both IMF documents hype-up their conclusions to give the appearance of deep contradiction. They are, in fact, consistent.

How so? Read more

Robust growth, rising global prices and expanding credit have prompted Taiwan’s central bank to increase its key rates by 12.5bp. The move, effective Friday, takes the discount rate to 1.5 per cent, 50bp above its record low and equal to its 2003-4 low (see chart).

Easy credit has fuelled real estate and land speculation, which is clearly troubling the Bank: five of the 11 paragraphs are dedicated to the subject. Interest rates are only part of the Bank’s toolkit: several “targeted prudential measures introduced by the CBC are an integral part of the efforts to enhance risk management for real estate loans.”

The general reaction to Adam Posen’s speech on Tuesday has been to predict a 1-7-1 vote at next week’s Monetary Policy Committee with Mr Posen voting for a resumption in quantitative easing and Andrew Sentance voting for higher interest rates. I have no idea how the MPC will vote. But I do know that Mr Posen is not necessarily alone on the Committee in his central view that if demand is too weak, the risk is not just a temporary double dip but a persistent loss of output which can blight lives and an entire economy.

In fact, Mervyn King, the Bank of England governor made the same point at the February inflation report.

“I think if anything we’re more uncertain about how much spare capacity there is. It’s an extraordinarily difficult judgement to make, and I think the Committee – we had a long discussion of this – we were more inclined to think that this is a reduction in effective supply in the short run that could be reversed. So I don’t think we are confident that this reduction in supply capacity will necessarily persist. And indeed we are in a position where, if growth in demand were to be rapid, I suspect that much of the capacity which has been, quote, “lost”, would come back and be able to be used again, whether in the labour market or on capital stock.

 Read more

Ralph Atkins

Paradoxically, given its obsession with the subject, eurozone inflation looks the least of the European Central Bank’s worries at the moment. September’s annual inflation rate was 1.8 per cent (up from 1.6 per cent in August) according to Eurostat, the European Union’s statistical unit. That was exactly within the ECB’s goal of an annual rate “below but close” to 2 per cent. Energy and food prices probably accounted for the latest increase.

Although prices are generally considered “stickier” in the eurozone than in the US or UK, the region’s inflation rate is not often so on-target, even if the average since the euro was launched in 1999 is also more-or-less spot on (as Jean-Claude Trichet, ECB president, does not tire of reminding audiences).

The latest figure will further convince the ECB that it not need worry at this stage about deflation, Read more

As expected, Moody’s has downgraded Spain, three months after placing the sovereign on downgrade watch. Fitch and S&P downgraded Spain’s debt in late Spring, and S&P still rates Spanish debt below its peers.

Spanish debt is still rated above the rest of the PIIGS by Moody’s. PIIGS sovereign debt runs from Ba1 for Greece to Aa1 for Spain. Moody’s order runs: Greece, Portugal, Italy = Ireland, Spain. Fitch and S&P rate PIIGS’ sovereign debt in the same rough order, though at different levels. Click on the graphic to play with our interactive sovereign ratings graphic.

Robin Harding

The four voting members of the FOMC from regional Federal Reserve banks change every year. That may create an awkward situation for Fed chairman Ben Bernanke in 2011 if the central bank does restart large-scale asset purchases.

The four regional Fed voters this year are:

James Bullard, St. Louis
Thomas M. Hoenig, Kansas City
Sandra Pianalto, Cleveland
Eric S. Rosengren, Boston

 Read more

Robin Harding

Chris has an excellent post about optimists and pessimists on the UK economy and how you tell the difference.

As Chris puts it:

The Treasury, the IMF, the Office for Budget Responsibility and most in the Bank of England are the pessimists. They believe one of the two following possibilities: either that lots of capacity was lost permanently in the recession, or that the economy was fundamentally unsustainable before the downturn, as shown in this graph. I understand the IMF’s latest estimate is that the output gap is only 3 per cent.

 Read more

Robin Harding

Sometimes what is not in speech is more interesting than what is there. Three speeches today by Boston Fed president Eric Rosengren, Philadelphia Fed president Charles Plosser and Minneapolis Fed president Narayana Kocherlakota (and that of Atlanta Fed president Dennis Lockhart yesterday) were all interesting for their content – but also for what was missing.

All the Fed presidents talked about the effectiveness of further asset purchases; some touched on whether they think such asset purchases are a good idea. What none of them talked about is the appropriate size or modality of further asset purchases if they were needed. Read more

Falling Portuguese and Irish bond prices of late will have been hurting whoever is holding them. But who?

If the stress test result data is anything to go by, German banks are the most exposed of Europe’s larger banks. Caution is required here, as the stress test sample excluded medium and small banks, plus this is trading book data and positions will have changed. Caveats in mind, nine of the 14 German banks to be stress tested had exposure to Irish and Portuguese sovereign debt, totalling €4.1bn.

WestLB, Espirito Santo, Santander and RBS were easily the most exposed to the sovereign debt of both countries combined; each had more than €1bn in exposure, mostly for Portugal. Caixa Geral, Credit Agricole, HSBC and SocGen each had more than $750m.

These data should be seen in context: Read more

Ralph Atkins

They could call it “waffle Wednesday”. Eight days before an European Central Bank interest rate-setting meeting there is usually a flurry of activity before the week-long purdah period starts. So it has been today with a series of speeches by governing council members in Brussels, Milan and Bolivia (yes, really, José Manuel González-Páramo, executive board member, is attending a conference there). The ECB has also put out a report on the future of European banks - and there was also a lot of attention on today’s open market operations, where banks had the chance to roll over €225bn in three to 12 month liquidity.

Actually, “waffle Wednesday” would not quite be fair. Speaking in Brussels Vítor Constâncio, the ECB vice-president, made some interesting comments dismissing the idea of “currency wars”. And Lorenzo Bini Smaghi, another executive board member, used a conference in Milan to point out how Basel III could make a lot of difference to central banks as they conduct monetary policy. The new rules could affect demand for central bank liquidity and the types of collateral put up, as well as increase demand in longer-maturity refinancing operations. Mr Bini Smaghi did not suggest this was going to be a big problem for the ECB. But it added to the long list of issues the ECB faces – which will continue to give its policymakers plenty of material for their speeches.

The People’s Bank of China repeated its commitment to increasing its currency flexibility on Wednesday, the day before the US votes on a bill that would allow American companies to ask for tariffs on Chinese imports to compensate for a perceived undervaluation of the yuan.

From Business WeekRead more

The reporting  of the International Monetary Fund’s assessment of the British economy and the important speech by Adam Posen has given the impression that the Fund is optimistic about UK prospects while Mr Posen is pessimistic. That is the inevitable consequence of news reports focus on downside risks to policy (the IMF gushed while Posen fretted). In fact, the reverse is true.

The argument, once again, hinges on the assessment of the UK’s potential for growth.

  • The Treasury, the IMF, the Office for Budget Responsibility and most in the Bank of England are the pessimists. They believe one of the two following possibilities: either that lots of capacity was lost permanently in the recession, or that the economy was fundamentally unsustainable before the downturn, as shown in this graph. I understand the IMF’s latest estimate is that the output gap is only 3 per cent.
  • Mr Posen and Ed Balls, shadow schools secretary, are optimistic. They believe that output is fundamentally below potential and significant spare capacity exists, at least for now. That means growth can and should be higher.

What follows from this distinction?

Everything. In monetary policy, Read more

Excerpted from Martin Wolf’s column:

In an era of deficient demand, issuers of reserve currencies adopt monetary expansion and non-issuers respond with currency intervention. Those, like Brazil, who are not among the former and prefer not to copy the latter, find their currencies soaring. Read more

James Politi

Survey data always needs to be taken with a grain of salt. What people say they will do – or how they feel – does not always correspond to their actions.

But there is little doubt that many Americans, including both average consumers and business leaders- are notably less confident about the economic outlook than they were earlier in the year.

The Conference Board today released its monthly report on consumer confidence, showing a plunge in September from 53.2 to 48.5, its lowest level since February. Meanwhile, the Business Roundtable also published its quarterly CEO outlook, and many American business executives expressed caution about hiring and investing.

Data from the regional Federal Reserve Banks have added to the downbeat mood in recent days, particularly when it comes to one of the drivers of economic growth during this recovery: manufacturing. The Richmond Fed today said manufacturing activity in the mid-Atlantic region pulled back for the first time in seven months, Read more

The premiums investors demand to hold Irish or Portuguese bonds instead of German have now passed the levels that precipitated the Greek bail-out.

Bond spreads reached 453bp for Ireland and 441bp for Portugal in trading today – higher than Greek bond spreads were in late April, just before they headed toward 800bpRead more

More fuel on the flames of the “currency war” from Brazil: Henrique Meirelles, its central bank governor, warned on Tuesday that his country “is not going to pay the price” for economic imbalances driving forex markets.

Those imbalances – in large part to do with the sickly US economy – are causing a weakening of the dollar and the appreciation of emerging market currencies. Increasingly urgent efforts by Asian and Latin American governments to hold down their own currencies have led to an “international currency war”, Brazil’s finance minister said on Monday.

Speaking to journalists on a visit to London, Meirelles, the central bank governor, said: “I would say there is a very serious currency problem that should be addressed.” Without naming anywhere in particular, he said some countries’ currencies were weakening for economic reasons, some due to policy actions, and some due to deliberate measures being taken to weaken currencies in order to remain competitive.

 Read more

Ralph Atkins

Greece’s government faces angry protests over budget cuts; Germany’s faces them when it spends a lot of money. According to Bloomberg, Angela Merkel, chancellor, has just renewed her support for the controversial “Stuttgart 21” rail project, which at a cost of about €4bn and using lots of drilling machinery, will change the southern Germany city’s main railway station from a terminus into a through station. The protestors’ objections are multifaceted but one of them is that it is a waste of public money.

Ms Merkel argued in Berlin that the project was a test of German reliability. If the protesters succeeded in halting Stuttgart 21 then “my Greek colleague” would argue he could not carry out planned deficit cuts because of the protests in his country, the chancellor said. Read more