Daily Archives: December 20, 2010

The Irish cost of debt is now above the levels that prompted the bail-out. Yields on ten-year bonds closed at 8.4 per cent on Friday and rose higher today. On November 23, yields of about 8 per cent prompted the bail-out (and then rose higher…).

There are further signs of tension in Ireland, which it seems the bail-out has done little to allay. First, a £10bn swap was set up on Friday between the Bank of England and the ECB in order to provide Irish banks with sterling liquidity that they might otherwise struggle to find.

As the ECB worries about Irish bail-out legislation, and the EU rushes to raise the cash, bond yields in Ireland, Greece and Spain seem to mock these administrative efforts; the latter two again at record highs.

If the legal status of euro area bonds were the major cause of market nerves – rather than Ireland’s fiscal Read more

After reaching a modest Ireland-crisis-high of €2.7bn last week, the ECB’s bond purchases have fallen sharply to €603m. With the cost of debt in Spain and Greece again reaching record highs, is this sort of quantity enough?

Many will say not, especially after bond purchases during the Irish bail-out were revealed last week to be just €2.7bn. What with the bail-out panic and the ECB quadrupling the minimum bond purchase size from €25m to €100m, most had expected a far larger increase in the central bank’s shopping bill. Of course, bearish markets can be subdued with large rumours instead of large purchases – but it’s not a strategy that can work for long.

At the hawkish end of the consensus, the Confederation of British Industry is forecasting a rate rise in the second quarter of next year, with rates rising gently then more steeply to mid-2012, leaving rates at 2.75 per cent by Q4 2012.

“The CBI expects inflation throughout 2011 to be higher than previously forecast, reflecting greater inflationary pressure from energy and commodity prices. CPI inflation will significantly exceed the Bank of England’s 2 per cent target in 2011 for a second year, mainly due to the impact of higher VAT. This upward push to inflation will end by Q1 2012, when inflation is forecast to dip just below target before ending the year at 2.4 per cent,” argues the business lobbying group. Read more

High inflation expectations have nudged Hungary’s central bank to increase the base rate again. At a scheduled meeting, the central bank surprised markets by announcing a rise of 25bp to 5.75 per cent. The move is effective tomorrow, Tuesday December 21.

As with many countries, food prices have pushed prices up recently. Until a couple of months ago, inflation was falling in Hungary, above but toward the 3 per cent target from a recent high of 6.4 per cent in January. Now the CPI is at 4.2 per cent y-o-y, up from 3.7 per cent to August. Read more

The European Central Bank has expressed concern that Ireland’s rushed bank rescue package may interfere with the Frankfurt institution’s operations to provide funds in support of the eurozone financial system. The euro’s monetary guardian has “serious concerns” that flaws in the Irish bail-out legislation would usurp the ECB’s rights over the collateral proffered as security for liquidity, according to a position paper posted on the ECB’s website.

The warning reflects ECB fears of the risks involved in providing liquidity to Ireland’s banks. The most recent data show Irish banks having €136bn ($179bn) in loans outstanding from the ECB – a quarter of the total in the eurozone – and €45bn in emergency liquidity assistance from the Irish central bank. To obtain liquidity, eurozone banks have to put up assets as collateral. Read more