Daily Archives: March 23, 2011

Chris Giles

It’s now quite late on Budget day and my fingers are hurting. I have probably moved far too far into cynical mode, but here is a fun fact.

Q1: Who was it who made his name in 2005 criticising Gordon Brown’s decision to lengthen the definition of economic cycle to make the public finance figures add up?
A:
It was Robert Chote, then director of the Institute for Fiscal Studies, who memorably said it was “less of a cycle than a stretch limo”. 

Sovereign bondholders received the worst news possible from eurozone policymakers yesterday: a dire combination of confirmation and uncertainty about the key issue of bondholder rights from the ESM term sheet, which sent yields up on all sovereign debt seen likeliest to restructure (read: Greece, Ireland and Portugal).

(Note: All that follows is subject to a rubber-stamping confirmation at meetings Thursday-Friday. It is unlikely any details will change.)

First came confirmation that the eurozone would in theory allow a member state to restructure their debt. (You’d have been forgiven for thinking eurozone bail-outs to date, such as Greece and Ireland, were specifically intended to prevent such an outcome.)

Second came confirmation – at long, long last – that sovereign bondholders will lose protection on their investments. (It is likely in practise that this means a sovereign bond will become worth less if its issuing government receives aid. It is hard to see what other forms of “involvement” – emotional support? – would be expected of bondholders.) 

Chris Giles

I am sure George Osborne’s second Budget will soon be forgotten. The public will not thank him much for avoiding the scheduled rise in petrol duties – being hit by a bullet is more noticeable than dodging one. And the growth agenda – laudable though it is in its intentions – is hardly new for British chancellors.

In the minutes after an admirably clear speech from the chancellor without last year’s duplicitous use of numbers, the striking thing about the newish and independent Office for Budget Responsibility is the number of times it has taken the approach – “We hear what you are saying, but forget it”.

  • Growth: The OBR had the opportunity to endorse the “plan for growth” by raising its estimate of the long-term potential growth rate of the economy. It said forget it:

“We do not believe there is sufficiently strong evidence to justify changing our trend growth assumption in light of policy measures announced in Budget 2011″.

  • Growth forecasts: The OBR downgrades

 

Ankara has sharply raised the proportion of short-term deposits lenders must keep with the central bank, while holding policy rates steady.

Turkey’s reserve requirements differ by maturity of deposit, and the central bank’s strategy has been to tighten requirements for potentially destabilising short-term deposits, while loosening them to encourage long-term deposits. The chart, right, shows how the structure of reserve requirements has changed since the new policy began in December (dark blue line), at which point all ratios were 6 per cent. 

Minutes just released show that all members of the monetary policy committee maintained their vote from the previous month. Andrew Sentance voted against the motion to hold rates, preferring a half point rise; Martin Weale and Spencer Dale preferred a quarter point rise; and the remaining six members voted in favour of holding rates. Adam Posen, as before, voted against maintaining the Bank’s asset purchase programme at £200bn, preferring a £50bn increase.

Some of those voting to hold rates acknowledged that “the case for an increase in the base rate had strengthened in recent months,” but preferred to wait for clarity on several uncertainties. Many think MPC opinions will be greatly influenced by the second quarter growth estimate, due out before the May meeting. On the “key question” of growth, the Bank seemed optimistic. “The most recent indicators of output had tended to support the view that growth had resumed in the first quarter,” read the minutes, citing surveys and indices of business output and sentiment.

Indicators of consumer spending were “much weaker”, however.