Daily Archives: January 12, 2011

Belgium on Wednesday looked to appease skittish investors in its sovereign debt by unveiling better than expected deficit figures for 2010, promising further budgetary efforts and even hinting at a solution to its long-running political crisis.

Its 2010 budget deficit was revised to 4.6 per cent from the 4.8 per cent previously forecast, mainly due to improved economic growth. The revision means that its sovereign debt now stands at 97.2 per cent of gross domestic product, below the 100.6 per cent level forecast and some way below the symbolic 100 per cent mark. It remains, however, among the highest in the European Union, behind only Italy, Greece and Ireland. Read more

To add to the prevailing sense of deja vu, regulators in both the US and Europe are this week discussing new banking stress tests. There is a significant difference with the new tests, however: they are to be part of regular, ongoing scenario analyses, and the results in the US, at least, will remain private. The first round of stress tests were public and aimed at reassurance.

The Federal Reserve is expected to start analysing data provided by 19 large banks this week, to work out how their balance sheets would withstand a variety of new shocks. “Only banks that have repaid government bail-outs and can prove a lifted dividend will not compromise their safety will be allowed to return cash to investors,” write Francesco Guerrera and Tom Braithwaite. “The Fed will also decide whether banks are on course to meet more stringent rules on capital requirements, agreed by the international Basel committee last year.” Tests are expected to be completed by March and are expected to be similar in content to those of May 2009. Read more

Phew. Portugal can still raise money in the debt markets, €1.25bn of it today in an auction of two bonds, the 5- and 10-year. Relief all round. But the country probably had a helping hand to keep yields below the all-important 7 per cent level, despite the ECB’s public interpretation that the good result implies a market change of heart (Carlos Costa, quoted by Reuters).

Yields on the 10-year bond actually fell since the last comparable auction in November. Today the weighted average yield, which is the cost of debt to the government, was 6.719 per cent, down from 6.806 per cent in November. Surprising, perhaps. But then the bid-to-cover (demand ÷ agreed sale) picked up considerably at this auction. It has typically trailed at just under 2; today it was 3.2. It is likely some taxpayers, unwittingly, have just bought some Portuguese debt. Read more

Money Supply - Click for interest rate graphicRising inflation has prompted a unanimous decision from Thailand’s monetary policy committee to raise rates. The policy rate is 2.25 per cent, effective immediately.

“Risks to global growth have declined compared to the previous MPC meeting,” reads the statement, “[but] key risks include inflationary pressure.” Read more

Current policy rate: 0.5 per cent
Consensus expectation: no change
Inflation target: 2 per cent “at all times”
CPI inflation rate: 3.3 per cent in November

Notable special measures in operation

  • Quantitative easing of £200bn, under which money was created to buy government bonds between March 2009 and February 2010
  • Other liquidity support to the banking sector – notably the Special Liquidity Scheme – not directly relevant for monetary policy and due to expire in early 2012

Points to watch Read more