As news goes, it’s so 2010. European bond yields are rising again, with Portugal passing 7 per cent. Greece is at another new high, having passed its bail-out peak yesterday. But there is something different about it this time. In the 2011 version of the story, is the cost of government debt rising on worries about bank debt? Government debt, after all, is pretty much covered by the EFSF.
The Irish crisis was arguably prompted by some ill-timed comments from Angela Merkel. She suggested that bondholding rules be rewritten so that in the event of a default, bondholders would share the pain. Understandably, markets reckoned bonds were worth less than before, so prices fell and yields rose. After all, a change to bondholder rights is no small matter: it’s rather like saying new cars will no longer be sold with a warranty. If something goes wrong, you’re on your own.
Rather than clarify the bond issue, ministers
Do we need a new acronym? It is now more expensive to insure against a Belgian default than it is against an Italian one. The comfortably distant notion adopted by richer European countries of a “eurozone periphery” should be deeply challenged by troubles in Brussels. According to MarkIt data, it now costs $240,000 to insure $10m Belgian debt – nearly five times the cost this time last year.
The “periphery” used to mean the PIIGS – Portugal, Italy, Ireland, Greece and Spain. Increasingly it has been used to mean PIGS – as above but without Italy. But more importantly, perhaps, it meant “somewhere else” to those using the term in the more prosperous north of Europe. The “periphery”, we thought, may be recklessly run or deeply unlucky, but at least it’s somewhere else.
As if that weren’t enough CDS-gloom, the cost of insuring Spanish debt has gone up today, despite China’s pledge
Banks betting that the real will go up have 90 days to comply with a new reserve requirement from the central bank aimed at weakening the real. The measure is the latest in a series of tools emerging markets are adopting to slow currency appreciation.
Financial institutions with short dollar positions must deposit cash – which will not earn interest – at the central bank. According to the release, the amount is worked out by formula (via Google Translate):
financial institutions should collect the Central Bank in the form of compulsory deposits, 60% of the value of the sold foreign exchange position that exceeds the lesser of: $ 3 billion, or heritage reference (PR). This compulsory deposit will be collected in kind and will not be paid. Institutions will have 90 days to fit the new rule.
Germany’s heavyweight Frankfurter Allgemeine Zeitung is the voice of the country’s conservative establishment. So it is interesting to see almost the entire front page of Thursday’s “Feuilleton” (arts features) section devoted to a piece on Germany’s relationship to the euro by Werner Plumpe, an economic historian at Frankfurt’s Goethe university.
Headlined “The euro is not our destiny,” Plumpe takes issue with the claim by Angela Merkel, Germany’s chancellor, that Europe’s future is bound to the fate of the eurozone.
For those following the UK’s economic recovery, there is little to cheer in today’s closely-watched indicator of the services sector. For the Bank of England, there is every reason to be pleased.
The CIPS services purchasing managers’ index fell sharply from 53 in November to 49.7 in December, a level associated with stagnation or contraction in the sector. New business was down too, as was employment. Since surveys do not intrinsically matter, the reason to worry about the CIPS survey is that it has a better record than most at foreshadowing the actual output of the private services sector – the area of the UK economy which needs to grow reasonably strongly if the recovery is going to be robust.
As the chart shows, the latest reading on the official index of services also dipped in October. Put the two together and the fourth quarter of the year starts to look rather weak.
Why is this excellent news for a Bank of England?