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.

Chris Giles

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