The balance of Ben Bernanke’s testimony to Congress today – not just the actual words but the amount of time he devoted to given subjects – was pretty dovish.
The weak prospects for inflation got a length airing:
Recent data show consumer price inflation continuing to trend downward. For the 12 months ending in November, prices for personal consumption expenditures rose 1.0 percent, and inflation excluding the relatively volatile food and energy components–which tends to be a better gauge of underlying inflation trends–was only 0.8 percent, down from 1.7 percent a year earlier and from about 2-1/2 percent in 2007, the year before the recession began. The downward trend in inflation over the past few years is no surprise, given the low rates of resource utilization that have prevailed over that time. Indeed, as a result of the weak job market, wage growth has slowed along with inflation; over the 12 months ending in November, average hourly earnings have risen only 1.6 percent.
National daily Jornal de Negocios reports that Portuguese debt ceased to be accepted by the Swiss National Bank as collateral in January 2009. The basic story has been confirmed by the FT, and an article will be published shortly with details (linked when available). It is unclear at present what types of debt have been excluded and for what purposes.
This will be a further knock to confidence in Portugal, a country facing high and increasing costs of debt, which needs to raise more debt in the near future. Yields on Portuguese government bonds – a proxy for the country’s cost of debt – today touched 7.125 per cent in intraday trading today, close to peaks during Ireland’s crisis.
The financial impact should be small since the exclusion seems to have been in place for a year, but given the febrile state of the markets, the psychological impact could be significant. The SNB’s move might prompt further credit rating downgrades, which would make debt even more expensive for the government and could imperil the debt’s eligibility elsewhere. Recent downgrades have left Moody’s, S&P and Fitch ratings for sovereign debt at A1, A- and A+, respectively. Moody’s A1 rating is roughly equivalent to A+, but the rating is on review for downgrade. Read more
Jean-Claude Trichet has called on eurozone leaders to step up their efforts to combat the region’s debt crisis, including slashing government deficits even more. The ECB president’s comments highlighted widespread fears that the crisis that last year rocked Europe’s 12-year-old monetary union could re-escalate in coming weeks as eurozone governments and banks raise funds in tense financial markets.
“In 2011, we must strengthen our efforts even more. We need to see further significant progress on the reduction of excessive fiscal deficits,” Mr Trichet told a gathering of Germany’s Christian Social Union, the Bavarian sister party of chancellor Angela Merkel’s Christian Democrats. Read more