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