Daily Archives: December 13, 2010

* Update Dec 16 – non-euro members pay only 7 per cent of their subscription, which has been reduced in the recapitalisation to 3.75 per cent. 

James Politi

With the political fate of the $858bn deal to extend Bush-era tax rates beginning to clear – the Senate is expected to advance the legislation in a first procedural vote on Monday -  the winners and losers of the proposed legislation are also becoming more apparent.

Victorious in the battle are clearly the wealthiest Americans, who will benefit from current tax treatment of income, as well as capital gains, dividends, and their inheritance, through 2012. There are also some strong provisions designed to boost business investment, which have been cheered by corporate America. And there is some reason for comfort to middle and lower income Americans, who will benefit the extension of a series of individual tax credits that were part of last year’s $787bn stimulus bill.  Depending on whether you talk to Republicans or Democrats – each of these provisions could be critical to strengthening the US economic recovery.

But not everyone is happy with the outcome. 

Cutting rates while increasing reserve requirements is the best way to tackle Turkey’s current account deficit, the central bank has said. The rate cut hint has sent sovereign bond yields to historic lows.

“Tightening tools other than interest rates to prevent loan acceleration on the one hand, and gradual decreases in short-term interest rates to limit the appreciating trend in the forex rate, are the ideal policy strategy against an increasing current account deficit,” deputy Governor Erdem Basci said in a presentation. 

The ECB’s controversial bond buying programme continues to increase, in spite of vocal opposition from high profile figures such as Axel Weber. Last week, €2.7bn eurozone bonds settled – thought to be almost entirely government debt of struggling economies such as Ireland and Portugal.

Perhaps surprisingly, the figure rose following the Ireland bail-out: last week, €2bn settled. The number remains modest compared to the start of the programme, during the Greek crisis, when in one week €16bn bonds were bought. 

Chris Giles

Apologies for the terrible pun. The point is that Charlie Bean’s speech today could have been delivered in mid 2008. If fact, the Bank’s deputy governor did deliver a very similar speech in April 2008. Mostly, Mr Bean is optimistic:

“As 2010 draws to a close, the good news, then, is that the recovery, here and more widely, has  remained on track, following the sharpest downturn in activity since the Great Depression.  Such an outcome was by no means guaranteed twelve months ago; for that we must be grateful.”

But he is also aware growth could disappoint in 2011 as the credit crunch still bites and fiscal tightening hits hard:

“In many developed countries, the after-effects of the financial crisis still linger, in the form of banks that are still overly reliant on official support, fragile household and business confidence, and bloated public sector deficits and debt.”

The trouble is that the deupty governor is also concerned about inflation overshooting the target: 

Banks making it harder and more expensive to borrow is the dominant force in falling lending to households and businesses, according to the Bank of England. The finding contrasts with claims by senior bankers that much weaker lending reflects less demand for credit.

Lending to the non-bank private sector has slowed dramatically during the recession and its aftermath, prompting concerns that a lack of access to credit could hamper the recovery and prolong the downturn in the housing market. 

European officials are considering measures to overhaul the eurozone’s €440bn rescue fund, including using it to buy bonds of distressed governments, say people involved in the deliberations. The changes would make it easier to aid debt-burdened economies without resorting to fully fledged bail-outs.

Buying bonds of distressed countries to lower their borrowing costs is currently only being employed by the European Central Bank, a policy that has proved controversial.