Monthly Archives: January 2011

Ralph Atkins

A debt restructuring in Europe “is not in the plan,” Jean-Claude Trichet, European Central Bank president, has just told Bloomberg Television. The ECB would certainly hope that was not the case – it would worry about contagion effects.

But Mr Trichet’s choice of words did not appear to rule out the possibility in every eventuality. Perhaps that was wise: the consensus among financial market economists is that the level of Greece’s public indebtedness makes some kind of Greek rescheduling inevitable in coming months or years.

The ECB’s thinking towards Greece etc has not necessarily changed, however. Read more

Charts accompanying today’s rate-hold decision from Norway include Belgian data in with that of so-called “peripheral” countries – Portugal, Italy, Ireland, Greece and Spain. Yield charts also now include Belgium. (A table showing debt and deficit for PIIGS plus Belgium was included in both sets of slides.)

Norway held rates at 2 per cent as expected, pointing to a fine balance between current low (core) inflation and signs that it may be about to pick up. Read more

Economists at Davos are more optimistic than expected: they think a two-speed economy is sustainable – as long as developing countries move from export-led to consumption-driven model in the longer-term. One suggests a three-speed economy would be a better description. Chris Giles reports.

Andrew Sentance has company. Minutes from the Bank of England show Martin Weale voted for a 25bp rate hike, too – and for several other members the decision was “finely balanced”. The remaining seven voters on the committee might be feeling rather pleased with themselves this morning, after yesterday’s (very bearish) GDP figures. Adam Posen continued to vote for a £50bn expansion of the QE programme.

The threat to inflation expectations seems to have prompted Martin Weale’s decision, rather than inflation itself – which the committee says is temporary:

The continued elevated rate of inflation, which was forecast to persist, posed a significant risk to inflation expectations and hence to the medium-term outlook for inflation. This made more powerful the case which had been building for some time for a gradual rise in Bank Rate.

Those committee members who were tempted to vote for a rate rise appear to have been held back by how the move would be interpreted. Read more

James Politi

President Barack Obama certainly made America’s fiscal health a pillar of his “state of the union” address, calling it a key element of his plans to secure US global competitiveness. “A critical step in winning the future is to make sure we aren’t buried under a mountain of debt,” Mr Obama said. “We have to confront the fact that our government spends more than it takes in.”

Mr Obama did indeed dedicate plenty of space to deficit reduction in his speech – but there were no major surprises in terms of specific proposals for budget cuts, and there was no push for a comprehensive deficit reduction plan along the lines of last year’s Bowles-Simpson debt commission, which proposed cutting politically explosive areas such as social security, Medicare, and individual tax breaks.

Instead, this is what Mr Obama proposed, which fiscal hawks may find underwhelming, but others may argue is perfectly consistent with a strategy designed to continue stimulating the economy now and begin to move in the direction of fiscal retrenchment at a later date. Read more

Robin Harding

Today’s UK GDP shocker once again raises the question of whether the rapid, pre-announced tightening of fiscal policy underway in Britain is wise. But at least one new academic paper suggests that chancellor George Osborne has it right.

Ignazio Angeloni and colleagues at the Kiel Institute for the World Economy run fairly comprehensive simulations on exit strategies from crisis fiscal and monetary policies and conclude: Read more

Chris Giles

Mervyn King has just delivered an important speech in Newcastle. As ever with the Bank of England governor, it is extremely well-written and his argument is tight. The speech is, however, infused with overwhelming self-belief and even arrogance in the face of difficult economic circumstances. Those, in a nutshell, are Mr King’s great strengths and weaknesses.

This is far from an attack on the governor. I think his “big picture” view is correct, but his unwillingness to concede mistakes undermines policy and damages the Bank’s credibility, making the Bank’s job of getting its message across rather harder than it need be.

The big picture should come from him.

“We must not lose sight of the big picture. Large – very large – shocks to relative prices are an inevitable part of the real adjustment vital to the rebalancing of the UK economy.

 Read more

Bank Rossii chairman Sergei Ignatiev has told reporters that rates might be raised at next Monday’s meeting, Bloomberg reports. Mr Ignatiev hinted in December that rising inflation might lead to a rate rise in the first quarter, and that he was not scared of a stronger ruble.

A rise in the discount rate would be the first since the financial crisis, taking interest rates from their near-year-long record low of 7.75 per cent. Read more

Strong demand for today’s eurozone bond issue, priced at a yield equivalent to 2.89 per cent. Hardly surprising. For exactly the same risk profile as German bonds, you get half a percentage point extra payment per annum for your money. (48 basis points, to be precise.)

The news is being greeted as a vote of confidence in the eurozone. Likewise, Japan’s pledge to buy at least 20 per cent of the bonds was treated as an offer of support. Klaus Regling, EFSF chief, said: “The huge investor interest confirms confidence in the strategy adopted to restore financial stability in the euro area.” But does it? Really?

Surely hard-headed profit-seeking is a more plausible explanation? After all, a vote of confidence would be investors buying Portuguese, Greek or Irish bonds; whereas here they are buying bonds backed in full by Germany. The legal framework of the EFSF makes clear that member states are each independently liable for debt issued, up to their maximum commitment. The only exceptions are countries currently “stepping out” (Greece; Ireland) and those that have not yet signed up in full (recent euro-joiner Estonia). See the table below. Read more