Monthly Archives: March 2011

Robin Harding

We’re working our way through the Fed’s data dump but our crack coding team have extracted enough that we have a sense of the big users of the discount window. CAUTION: We can’t vouch for the complete accuracy of this scrape.

The biggest day for the discount window was the 29th October 2008 when lending stood at $110bn. Here’s who had the money:

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Irish stress tests reveal a capital shortfall of €24bn, comprising:

  • Allied Irish – €13.3bn
  • Bank of Ireland – €5.2bn
  • Irish Life – €4bn
  • EBS – €1.5bn

Note: Anglo Irish Bank and Irish Nationwide Building Society were not included in the exercise because their loan books are being wound down. Anglo was fully nationalised in January 2009 and Nationwide is “effectively state-owned”. Both have required substantial state aid.

The headline figure of €24bn is better than many expected, particularly since about a fifth of it is for an additional capital “buffer” that goes beyond the 10.5 per cent tier one requirement in the base scenario, and 6 per cent requirement in the adverse scenario. Without this additional requirement, the recapitalisation requirement would be €18.7bn. The Irish central bank seems to have gone for the warts-and-all approach, which bodes well for the reliability of the numbers.

As well as raising new capital, banks will need to sell many of their non-core assets, following a deleveraging plan agreed with the central bank “in order to transition to smaller balance sheets and a more stable funding base”. They will separate assets into core and non-core, gradually selling off the latter. But shareholders, take heart: first, this will not be done in a hurry; second, the losses this will inevitably incur are already factored into the analysis: Read more

Taiwan has raised rates 12.5 basis points, or an eighth of one per cent, sticking to its plan to normalise rates. The move was widely expected.

Consumer prices rose sharply between January and February – the first substantial increase since October last year. Since then prices have mostly fallen or been static. The less volatile annual rate is more modest, showing a 1.33 per cent gain on the year. The CBC forecasts inflation of 2 per cent for the year. Read more

Chances of an April rate rise have risen further as the latest estimate of eurozone inflation exceeds expectations. Consumer prices rose 2.6 per cent in the year to March, according to a flash estimate by eurostat; they had risen 2.4 per cent in the year to February and 2.3 per cent in the year to January, against a target of “below but close to 2 per cent”.

Many worry that raising rates will disproportionately hurt vulnerable economies struggling to pay their debt. As Ralph points out, an ECB interest rate rise could hit countries such as Ireland – but also Spain – harder than elsewhere because of its impact on mortgage markets. But executive board member Jürgen Stark argues in today’s FT, persistent high inflation would penalise those economies more in the long run, as investors seek compensation for inflation risk. Read more

The European Central Bank’s determination to press ahead with interest rate rises has been defended by a top policymaker, even after the escalation of the eurozone debt crisis in Ireland and Portugal, two of the region’s weakest members. Writing in the FT, Jürgen Stark, ECB executive board member, argues a “one size fits all” monetary policy ultimately benefits all members. He says the eurozone’s weakest countries receive exceptional support on a scale not possible if they were not part of Europe’s monetary union.

Mr Stark’s comments will cement expectations that the ECB will react to rising eurozone inflation by lifting its main interest rate by a quarter of a percentage point next week. The move, flagged by ECB president Jean-Claude Trichet this month, will put the central bank ahead of the US Federal Reserve and Bank of England in embarking on tighter monetary policy. Read more

Compare and contrast economic sentiment across Europe, and you will see different and diverging pictures. (Divergence, of course, is not useful in a monetary union.)

Figures released by the European Commission show that confidence fell in March in the eurozone, while holding steady in the wider EU. It is the first substantial fall in confidence for the eurozone since May of last year, the time of the Greek bail-out, though levels remain far higher (see chart, right). Sentiment worsened in most European countries, with a few larger economies pulling ahead.

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They must have read our post. S&P just downgraded Cyprus by one notch to A-, keeping the outlook negative. A negative outlook is supposed to mean a downgrade is possible within two years, all else equal. But then S&P last downgraded the debt of the small island economy in November, four months ago. S&P’s rating is now the lowest of the three rating agencies, with Moody’s at A2 (=A) and Fitch significantly above the others at AA. Fitch, however, placed the rating on credit watch negative in January, meaning the review should be completed by mid-April. S&P appears to be significantly rethinking the eurozone’s creditworthiness, particularly in light of details of the rescue fund: it has not been a good week for eurozone credit ratings, and further downgrades may follow tomorrow when Ireland releases details of its stress tests.

Martin Weale, one of the external members of the Monetary Policy Committee gave a speech last night, which was fascinating for anyone interested in the presentation of monetary policy in an uncertain world.

Policy. Regarding the UK interest rate debate, he did not have much to say, save for reiterating that CPI inflation looks likely to get close to 5 per cent. He also had a powerful argument for the Bank staff who fret that its reputation might be damaged if it raised interest rates only to discover this was wrong and had to subsequently reverse the decision. Though that scenario would be bad for the Bank’s credibility, it would also be bad to use this concern to avoid an interest rate rise only to find subsequently that it was warranted, Mr Weale said.

Uncertainty. But the comments on monetary policy were a side show in the talk to the much more meaty discussion of how to present uncertainty in economic forecasts in a way that demonstrates accurately the state of knowledge about the future, which is greater than zero but far from complete.

Mr Weale’s contribution was to suggest we split the known unknowns – arguments over theory, some model parameters and judgments on things like the right future oil price assumption – from unknown unknowns – stuff that happens. Read more

Economic sentiment in Cyprus fell sharply in the month to March, helping the small eurozone nation to keep its unenviable position of second-from-last in the sentiment stakes. (Last is Greece.)

The banking sector probably isn’t helping. In a report last week, ratings agency Moody’s estimated that about €2.7bn would be needed to recapitalise the banks if assumptions made in stress tests materialised. Compare that to the €500m fund announced on Monday by Cyprus bank governor Athanasios Orphanides and your economic sentiment might dip a little, too. Read more

Many investors fear that the Fed’s impending exit from QE2 will have a very damaging effect on the financial markets. Whether they are right will depend on the nature of the exit, and its impact on bond yields. An end to the Fed’s programme of bond purchases, without any increase in short rates, is unlikely to be sufficient, on its own, to trigger a major bear market in bonds and equities. But an end to the Fed’s “extended period” language on interest rates would be a much greater threat. I still do not expect this to happen soon.

Recently, the Fed has purchased 60-70 per cent of all the bonds which have been issued to finance the US budget deficit. Some influential analysts (Bill Gross of Pimco among them) argue that bond yields will rise sharply when the Fed withdraws its life support from the bond market. But there are some powerful advocates, including the Fed chairman himself, for an entirely contrary point of view. Ben Bernanke told Congress in February that he did  not expect to see “a big impact” on bond yields when the Fed ended its asset purchases.

The Fed has hardened its thinking on this question in the past couple of years. It has  decided that QE reduces bond yields via its effect on the total stock of outstanding bonds, and not via its impact on the flow of bonds purchased in any given period. If this is the case, then

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Robin Harding

The Fed will release the details of its discount window lending from 2007 to 2010 this Thursday 31st after losing its Supreme Court appeal against a Freedom of Information lawsuit from Bloomberg.

Things are likely to be a little different to last November’s data dump on the Fed’s other crisis liquidity programmes as a result of the Dodd-Frank Act. That required the Fed to release the data, which it did in the form of spreadsheets. To comply with the FOIA request, the Fed will have to release documents. Those are likely to need quite a lot of processing in order to extract the relevant information. Read more

“Absent significant shock, notably on the currency, the SNB should be in the position to start tightening the policy rate in the near term.” This from the IMF, as it raised its growth forecast for the Swiss economy to 2.4 per cent this year, after 2010 growth exceeded expectations. The Swiss National Bank has maintained a near zero rate since January 2009, officially targeting a three-month Swiss franc Libor rate of 0-0.75 per cent.

Mortgage lending standards should also be tackled with better regulation, says the IMF, arguing: “The development of lax lending standards in the mortgage market and increasing interest rate risk call for pre-emptive measures.” While a rate rise should work to reduce mortgage lending, its effects would be “limited”, so “concerns related to mortgage lending should be addressed by macro-prudential instruments.” Read more

Deja vu? No, ratings agency Standard and Poors has cut Portugal’s credit rating for the second time in less than a week, this time one notch to BBB-, leaving the rating with a negative outlook. Last week the agency cut by two notches – the most it could reasonably cut, given an explicit indication that they would be “unlikely” to cut by more. The agency left the rating on negative creditwatch, but that is usually interpreted to mean a further cut is likely in three months, not three days.

Greek ratings, meanwhile, have been cut deeper into junk territory with a two notch downgrade to BB-. The rating remains on negative creditwatch meaning a further cut is likely if there is no improvement; typically, that would be within three months, but in the current climate, who knows?

In both cases, the downgrades have been prompted by the structure of the permanent eurozone rescue fund, the ESM, which was confirmed at the end of last week by eurozone leaders. Two things in particular. One is the issue of subordination Read more

Ralph Atkins

German inflation data just released suggest the European Central Bank will not have shock horror headlines in tomorrow’s newspapers to support its case for hiking interest rates next week. The annual rate remained at 2.2 per cent in March on a harmonised European basis. That probably means the eurozone inflation figure - to be released on Thursday – also held steady at February’s 2.4 per cent or perhaps edged up to 2.5 per cent, according to most economists’ forecasts.

No doubt such data will encourage warnings, especially from economists in London and the US, that the ECB is taking a terrible risk and that with the eurozone debt crisis not yet resolved, a monetary policy tightening step is the last thing the region needs.

Of course, that is not how it is seen in Frankfurt. Read more

Israel has raised its key interest rate for April by half of one per cent – the largest rate rise since before the financial crisis. Bank of Israel was one of the first central banks to begin raising rates, starting in September 2009 with a quarter point rise from a record low of 0.5 per cent. Since then, there have been eight quarter-point rises, but this is the first half-point rise. In April, the Bank’s rate will be 3 per cent.

The move is an attempt to slow the economy and housing market, and rein in inflation. Israel’s economy is expanding, “converging towards a situation of full utilization of the factors of production”. The stats would send most Western central bankers green with envy. Last year, the economy grew by 4.6 per cent, rising to an annualised rate of 7.7 per cent in the last quarter. Unemployment is about 6.6 per cent and improving. But there is concern over inflation and housing. Consumer prices are rising 4.2 per cent annually, against a target of 1-3 per cent. Even stripping out house prices, inflation is 3.5 per cent annually. And there is evidence that inflation expectations and real wages are beginning to rise, too. Meanwhile the housing market continues to boom, with prices rising 16.3 per cent in the year to February and no decline evident in the appetite for new mortgages. Read more

Robin Harding

I’ve been off helping in our Tokyo bureau for ten days so time to catch up on the Fed news.

The March FOMC meeting

The committee took the opportunity to do a substantial rewrite of the first two pars of its statement, which made sense, as it was starting to get pinned down by fear that any change would be seen as a signal of early changes to QE2.

The main effect of the rewrite is to focus the statement on the danger of high headline inflation – but make clear that the FOMC expects it “to be transitory”. I’m a touch surprised by the transitory line given that some members of the committee are clearly concerned that it will be otherwise. Read more

Robin Harding

…is starting to look quite convincing.

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