Monthly Archives: March 2011

Bank regulators attacked amid push for higher capital - FT

Poor suffer as wealthy Americans pay off debts – FT Read more

Ralph Atkins

The sums involved in propping-up Ireland’s banking system are so great – and the chances so small of them falling dramatically any time soon – it was inevitable the European Central Bank would want to find a better, longer term solution.

Currently, the total amount of ECB liquidity and “emergency liquidity assistance” provided by the Irish central bank, both essentially on an ad-hoc basis, is not far south of €200bn.

Hence news at the weekend that the ECB is looking at some kind of facility for eurozone banks in restructuring is not surprising. We have known for some time that the ECB was looking at ways to deal with “addicted banks” – those totally reliant on its liquidity and unable to fund themselves normally in financial markets. Ireland’s banks clearly fall into that category. Read more

Against expectations, Bank Rossii held rates on Friday, though it did raise reserve requirements. Following similar moves for February and March, Russia’s central bank raised reserve requirements by a percentage point for banks’ liabilities to non-residents (charted, right) and half a point for other liabilities. The proportions of deposits banks need to keep with the central bank now stand at 5.5 per cent and 4 per cent, respectively.

While there are signs that inflation is rising less quickly than previously, prices have still risen 3.6 per cent since the start of the year according to weekly data, making the annual 6-7 per cent target tough to achieve. Most view further rate rises as likely. Read more

Chris Giles

Rarely do central bankers make pledges like that this morning by Adam Posen, external member of the Bank of England’s Monetary Policy Committee. In an interview with the Guardian, he said if he was wrong to believe inflation would fall backbelow the 2 per cent target by the middle of next year, he would not seek a second term on the Committee.

“If I have made the wrong call, not only will I switch my vote, I would not pursue a second term. They should have somebody who gets it right and not me. I am accountable for my performance. I’m holding my nerve because it is the right thing to do.” Read more

I said previously that any eurozone bail-out should ideally happen after 2013. Events have overtaken me. It would be best, now, if vulnerable euro member states could hang on for a couple more years. And all because of domestic German politics.

Angela Merkel’s coalition partners, the Free Democrats, resisted the idea of paying in so much capital to the eurozone rescue fund so quickly. As a result, the eurozone rescue fund will be capitalised later, and more slowly.

 Read more

Chris Giles

I am currently engaged in an entertaining tussle with the Office for Budget Responsibility, the newish and independent fiscal watchdog. I am sure our disagreement will be resolved quickly. I have no reason to doubt the independence of the OBR staff, nor their stated desire for transparency. But at the moment they are being surprisingly secretive over the most important judgment in their forecast.

The OBR’s remit is to determine whether the government has a greater than evens chance of meeting its binding fiscal goal to balance the structural current budget deficit by 2015-16. Regular readers of this blog will know that I am boringly consistent in thinking this goal is useless because it relies upon splitting the forecast for borrowing into structural and cyclical components, a task which is so difficult as to make it not worth bothering.

But we live in a world where a public body – the OBR – has been given this difficult task and so its judgments need to be scrutinised. Your taxes and the level of public spending literally depends on the OBR’s assessment. Read more

Eurozone

Other news

The ESM term sheet claims its first casualty. As predicted, Standard and Poors rating agency has downgraded Portugal by two notches to BBB, leaving the rating on creditwatch negative, meaning another downgrade is likely within three months if there is no improvement in the country’s financial prospects. A further downgrade could place Portugal’s rating below investment grade: S&P’s rating is now just two notches above junk. But by then, the country will have passed or failed two significant tests: refinancing its debt in the markets in April and June.

S&P’s move is likely to be more significant than recent downgrades by Moody’s and Fitch. That’s because, first, S&P is leading the rating descent, having downgraded Portugal to its current Moody’s/Fitch level of A- in May of last year. (Moody’s and Fitch have only just downgraded to this level.) Second, the downgrade is significant because of timing. With a key vote on Portugal’s austerity package yet to pass and the PM stepping down, fiscal discipline will be further delayed. (This is one reason given by S&P for the move.) More than that, general elections are expected in a few months, and it would be very tempting for a new government to restructure its debt, laying the blame with its predecessors. Similar temptations must be present in Ireland.

Ralph Atkins

The eurozone debt crisis re-erupts. Bond market tensions soar over the escalating problems faced by Portugal and Ireland. But there is no sign of the European Central Bank intervention today.

Surprising? It should not be. The ECB would not want to be seen helping governments overtly, especially with a European Union summit just beginning in Brussels. Only once politicians have acted has it in the past seen the case for an appropriate ECB response.

Most famously in May last year, Jean-Claude Trichet, president, said the governing council had not even discussed bond purchases at its meeting in Lisbon. Then a day later, came the Brussels summit that drew up the original eurozone rescue package. Only afterwards did the ECB launch its purchasing programme.

Now, there are other reasons for the ECB to hold back. Read more

Chris Giles

In a speech titled “MPC in the dock” this morning, Spencer Dale, Bank of England’s chief economist, provides both the best defence of the Bank of England’s monetary policy stance I have read in a long time and a much more coherent explanation of recent poor UK economic performance than the Office for Budget Responsibility in yesterday’s Budget.

The title shows the pressure the Bank finds itself in and Dale’s embrace of humility rather than the usual hubris is welcome. When Bank officials – and the governor in particular – take a leaf out of their chief economist’s book and stop saying they have nothing to learn and they have been entirely consistent, people will be much more willing to listen to their argument.

Mr Dale was clear that inflation was set in the UK and not imported, as many MPC members have recently suggested. He was honest that he probably would have voted for different monetary policy had he had better information about the coming price shocks rather than taking the absurd stance the governor took that of course he would not have done anything differently. He pointed out where the MPC was learning from its mistakes, particularly on the issue of import price pass through.

To summarise the speech Mr Dale posed four clear questions. Read more

Cast your mind back to the good old days, when a high yield meant 6 per cent and nervous market talk might culminate in whispers of a bail-out. Compare and contrast with the situation now, where two states have long since passed the point of bail-out and there is real and present danger of a default.

Much focus is on Portugal, lined up somewhat unwillingly for the next cash injection. It must make an unappealing prospect as two already-medicated patients have just taken a sharp turn for the worse. Yields on Irish bonds rose nearly an entire percentage point during trading yesterday to touch 10.7 per cent. As a reminder, Irish yields were about 8 per cent at the time of the bail-out. And it bears repeating: Irish yields are above bail-out levels even though Ireland has been bailed out. Ditto Greece.

Eurozone leaders are due to begin a scheduled meeting in Brussels about now. They’ll have plenty to discuss. A possible bail-out of Portugal will certainly be on the agenda but it might not make the top of the list. After all, Read more

Fitch has just downgraded Portugal two notches to A-, placing the rating on credit watch down, meaning that further downgrades are likely. It’s not great news for the Iberian nation, which faces increasing pressure for a bail-out as yields rise and domestic politics worsen. But the bigger ratings news is yet to happen and it is likely to come from Standard and Poors.

Fitch’s downgrade just brings its Portuguese government rating in line with those of its peers: all three main agencies now hold equivalent ratings. Moody’s downgraded Portugal two notches to A3 (=A-) about a week ago, leaving the rating with a negative outlook. S&P was quicker off the mark, lowering its rating in April 2010 and placing the rating on watch down on November 30. Read more

UK Budget
A fiscally neutral UK Budget produced amid tight constraints claims to chart a course to growth by focusing on increasing the supply of land, labour and capital rather than productivity. Broadly pro-business, the Budget sticks to the government’s longer-term plan to secure market confidence, long-term growth and Britain’s Aaa rating via austerity. Private sector growth should be given a boost in 21 low-tax enterprise zones set in urban areas. Meanwhile, state workers are set to pay more on their pensions as the government quietly drops claims that the Budget is progressive. Overall, Osborne has made the best of a bad hand, barring a poor decision on housing finance. The real challenge, though, is to lift the UK’s productivity growth, and it is unclear that a Budget – especially one deemed “forgettable” – is a suitable vehicle for achieving this. For more, see this Q&A.

The Bank of England’s chief economist has warned that UK inflation could remain high for some time, and called for a rise in interest rates to avoid the risk of cost pressures becoming entrenched.

Spencer Dale, who joined two external members of the monetary policy committee in voting for a rate hike in February, admitted that the Bank had got its forecasts for inflation badly wrong in part because it had massively underestimated how much the weakness of the pound would be passed through to consumers via higher inflation. Instead of a 40 per cent pass through of higher import prices to consumer prices, he said, the UK had seen something closer to a 100 per cent pass through of the price rises. Read more

Manila has raised its key policy rates quarter of a point – as signalled – to combat rising prices and manage inflation expectations. The overnight borrowing rate now stands at 4.25 per cent and the overnight lending rate at 6.25 per cent. The interest rates on term repos, reverse repos, and special deposit accounts were also raised accordingly.

Inflation is running at the high end of the 3-5 per cent target range, and deputy governor Diwa Guinigundo said it would have averaged 5.2 per cent this year without today’s interest rate move. The central bank indicated further upward inflation pressure lay ahead, and that appropriate policy action would be taken. Analysts expect another one or two such rate rises this year, though some observed that domestic interest rate rises would have limited impact on imported global food and energy inflation.

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”. Read more

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.) Read more

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

 Read more

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. Read more