Daily Archives: January 11, 2011

Robin Harding

The Swiss National Bank no longer accepts Portugese sovereign bonds as collateral and Chris posted earlier on the Bank of England’s position.

The situation at the Fed is that it will accept euro sovereign credit if it is investment grade (i.e. BBB or higher on the S&P scale) with an 8 per cent haircut for securities with a duration of less than five years (and a slightly larger haircut if the duration is longer). 

Chris Giles

If you want to understand why it is so difficult to solve the eurozone sovereign debt crisis and why pro-euro commentators such as Wolfgang Münchau are so pessimistic, you need do no more than read today’s comments from Otmar Issing, former chief economist of the European Central Bank and highly respected economist in Germany.

It is almost a consensus view in the economic community that the eurozone needs more pooling of sovereign risk if it wants a chance of escaping the current crisis. This view stems both from the observation that the eurozone-wide sovereign debt is lower and more sustainable than that in the US, Japan and the UK and from the fact that a lower interest rate on debt for peripheral eurozone economies could transform their individual sovereign debt problem into a liquidity issue from a fundamental solvency issue.

What does Mr Issing think? Like a good creditor, he wants debtors to suffer more and believes the austerity programmes have been too weak, describing it as “disconcerting” that even Germany now supports looser systems for policing fiscal rules: 

Ralph Atkins

In the past, the first European Central Bank meeting of the year was a low-key affair. Although held in the second week of January (rather than the first week as in every other month), the Christmas and New Year holidays meant there was little fresh to say.

This Thursday’s governing council meeting will be different, of course. Since December’s gathering, inflation has risen above the ECB’s target of an annual rate “below but close” to 2 per cent, and the eurozone debt crisis has re-erupted. 

Chris Giles

Last week, the Swiss National Bank let it be known that it no longer accepted Portuguese sovereign debt as collateral in its open market operations. An official from the SNB said: “Only securities that fulfil stringent requirements with regard to credit rating and liquidity are accepted as collateral by the National Bank”.

The Bank of England has almost identical criteria for accepting euro-denominated sovereign bonds in its market operations. They have to be rated Aa3 or higher on the Moody’s scale or higher than that by at least two other ratings agencies and traded in liquid markets.

Portuguese and Irish sovereign bonds fail this test.  But the Bank does not apply a mechanical rule and, as its daily collateral list shows, it is still smiling on Portugal and Ireland, but not Greece. In a market notice from the time of the Greek crisis, the Bank asserts its discretion, insisting it “forms its own independent view on collateral it takes in its operations”. 

Portuguese and Irish government debt have again been on the ECB’s shopping list – which would appear to exclude Belgian debt, where yields are still rising. Traders report the ECB buying Portuguese and Irish debt, though there might easily be other countries. This suggests the ECB’s bond buys will rise considerably from purchases settled last week – a mere €113m.

Bond yields have been tempering in Portugal, Greece, Ireland and Italy – and also, belatedly, Spain, which bucked the trend yesterday by rising while other yields were falling. This suggests either that markets are less stressed, or that ECB purchases have been large enough and diverse enough to bring bond prices up/yields down through simple supply and demand. 

It’s a rate cut, but it’s good news not bad. That’s the message from Sri Lanka’s central bank as it cuts rates to spur growth. The repo rate is cut 25bp to 7 per cent and the reverse repo rate is cut 50bp to 8.5 per cent, both matching record lows seen in 2003. The two changes narrow the rate corridor, making it relatively attractive to borrow, so liquidity will rise.

Inflation in the country since the end of the civil war has been stable and in single digits, with annual average cpi at 5.9 per cent. The Bank says this “above favourable macroeconomic environment” allows room to encourage investment without unduly risking inflation.