Cyprus is showing signs of stress. Credit ratings, yields, the banking sector and sentiment are all signalling distress. This tiny island economy, roughly a tenth the size of Portugal, might defy the PIIGS acronym by needing help sooner than its eurozone peers Spain or Italy.
Redrawing the sovereign ratings map clearly showed what the ratings agencies thought. See the blue circle on the map, right. This heatmap colours countries that have been heavily downgraded since the start of the year more red, and those that have been more heavily upgraded, green. Spain and Ireland are reddish. But Cyprus is clearly in the Portugal-and-Greece camp of dark red (high downgrades).
Next, yields. Bond yields are the cost of debt to the government, so rising yields are bad news. And they are certainly rising in Cyprus. Compare two auctions of six-month debt, one in January and the other in March. Yields rose from 2.02 per cent to 2.74 per cent in those two months. This level is higher than yields on the last two-year debt offering in January of 2010. Read more
In order to maintain its currency peg, Denmark’s central bank has raised rates 0.25 per cent, matching the earlier increase from the ECB. Danish monetary policy is aimed at keeping the krone pegged to the euro. All four key rates were raised, now standing as follows:
Serbia also raised rates today, taking the highest rate in Europe 25bp higher to 12.5 per cent. The quarter point increase, announced before the ECB’s announcement, is the third this year, but represents a slowdown in tightening. Serbia has been raising rates since mid-2010, typically by half a point or a full percentage point, while the most recent two raises are smaller and follow a long pause.
No-one can say they weren’t warned. In what must be the most trailed rate rise in history, the ECB has increased key rates in the eurozone by a quarter of one per cent. As of April 13, key rates will stand at:
- Marginal lending facility – 2 per cent;
- Main refinancing operations (fixed rate) – 1.25 per cent;
- Deposit facility – 0.50 per cent.
Eurozone inflation rose to 2.6 per cent in the year to March, according to a flash estimate last week. This is up from 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. Read more
As expected, the UK’s central bank has kept the bank rate at 0.5 per cent and held the stock of assets at £200bn. The last change in the rate was a half point cut in on March 5, 2009, while the most recent change in the asset scheme was November 5, 2009. Consumer prices rose 4.4 per cent in the year to February, more than twice the Bank’s inflation target.
Banks in the quake-affected north-east of Japan will soon be able to borrow longer term from a new scheme worth ¥1,000bn ($11.7bn), offering one-year loans at 0.1 per cent.
The scheme comes on top of ¥21,800bn ($265bn) liquidity made available immediately after the quake and a doubling of the Bank’s asset purchase programme from ¥5,000bn to ¥10,000bn ($121bn). Tokyo has also been involved in an internationally co-ordinated effort to prevent the yen appreciating too sharply. So far, though, the BoJ remains unwilling to buy government bonds, a measure adopted in several other countries since the crisis.
In addition to such measures, at today’s meeting, the Bank judged it necessary to introduce a funds-supplying operation that provides financial institutions in disaster areas with longer-term funds in order to support their initial response efforts to meet the future demand for funds for restoration and rebuilding.