Daily Archives: December 7, 2010

Just two weeks after Zimbabwe’s finance minister revealed that employment costs were absorbing more than 60 per cent of total government revenue, the state-owned Reserve Bank of Zimbabwe has announced plans to cut at least 1,600 workers.

Giving evidence to the parliamentary portfolio committee on finance and the budget, Gideon Gono, central bank governor, said the retrenchment of three-quarters of the bank’s staff would be one of the largest to be carried out in the country by a single institution. 

This might be described as an anti-riot Budget: the pain is fairly equally spread. Wealthy pensioners are penalised. Benefits are reduced by €5-€10 per person per week, across several types including maternity pay, child benefit, jobseekers’ allowance and unemployment. Buying and selling homes is encouraged with a big reduction in stamp duty across all home values.

  • €6bn spending cuts in 2011; roughly €4bn in spending cuts and €2bn from tax adjustments;
  • Of €2.2bn costed gross savings, €1.6bn will come from the Health & Children, and Social Protection budgets;
  • HOUSING: Stamp duty will be 1% on properties up to €1m; 2% on the balance (down from 7% and 9%);
  • PUBLIC SALARIES: Ministers to take €10k pay cut; PM’s salary down €14k; public sector pay capped at €250k;
  • WEALTHY PENSIONERS: Pension tax relief limit falls from €150k to €115k; maximum allowable pension fund for tax purposes more than halved to €2.3m; life-time limit of tax-free pension drawdowns reduced to €200k. All these will save about €35m next year;
  • PENSIONS: No reduction in state pension this year; reduced tax exemption for employers and employees for pay-related social insurance (PRSI, like PAYE) contributions. Due to save €80m next year;
  • TAX: Reduce the value of tax bands and credits by 10 per cent; top marginal tax rate of 52%; corporation tax to remain 12.5%; workers on the reduced minimum wage will be tax exempt.

Irish shares have risen on the announcements 

Two former rate-raisers are now holding their interest rates, meaning all of the G7 countries are now on hold.

Australia is holding its cash rate at 4.75 per cent, confirming a slow and steady approach to normalisation, following a rapid set of increases from its low of 3 per cent in late 2009. Is the RBA anticipating worsening terms of trade with China? That’s what the FT’s Lex suggested today, calling the Australians “smart” to prepare for the change ahead.

Canada, which cut rates lower and started raising later, is sticking at 1 per cent for its overnight rate and 1.25 per cent for its bank rate (graphed). The Bank cited “increased” risks, saying that weaker exports were dragging down growth. 

Ralph Atkins

The European Central Bank seems almost as divided as politicians over E-bonds, or common eurozone bonds. Jürgen Stark, executive board member, voiced opposition in an interview with Süddeutsche Zeitung. “Every country must take responsibility for their own debts,” he said. Similarly, Nout Wellink, the Netherlands’ central bank governor, said in Amsterdam that such burden-sharing would weaken the system.

But ECB policymakers who take, let’s say, a less-German view of the world, have been more sympathetic. Jean-Claude Trichet, president, last week told the European Parliament such ideas should not be ruled out. Lorenzo Bini Smaghi, another executive board member, has just told CNBC that “it’s useful to think about these issues”.

One worry at the ECB’s Frankfurt headquarters might be that Germany’s government and its central bankers are fuelling financial market concerns about an apparent lack of political will behind the European project and the continent’s 12-year-old monetary union. 

The Fed is buying more bonds; the ECB might even be considering it. But Hungary is throwing in the towel on its bond-buying programme, saying the plan has not made “significant progress” in easing long-term forint funding conditions for banks.

Hungary’s central bank introduced the bond-buying programme on February 8, 2010, intending to buy up to HUF 100bn to the end of this year. Purchases in the secondary market went broadly as planned, with HUF 30bn of nominal value bought and mortgage-government bond spreads declining from 150–200 basis points in 2009 to 80–150bp now. Purchases in the primary market, however, were “much smaller than expected”, at about HUF 7bn.