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
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 Week: Read 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
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 800bp. Read more
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