Monthly Archives: November 2011

Claire Jones

Paris is again calling on the European Central Bank to act as lender of last resort for governments. From the FT’s Hugh Carnegy in Paris:

Alain Juppé, the French foreign minister, stepped up the pressure on Thursday, saying intervention by the ECB was a matter of urgency.

Speaking on France Inter radio, Mr Juppe said the market’s cool reception of Wednesday’s German Bund auction showed that the crisis “touches all the economies, including the most solid”.

“There is urgency. We will talk about (ECB intervention) today in Strasbourg. I think and hope that the thinking will evolve and that the ECB should play an essential role to re-establish confidence.”

Paris is hoping that, backed by similar pressure from other European countries, the US and even the media, Germany and the ECB itself could be persuaded to bend their hitherto rigid refusal to act, in effect, as a lender of last resort.

Regardless of the rights and wrongs of Paris’s stance, if the French want more action from the ECB, then they might want to consider thinking a little more carefully about what they say. It is not just Germany and European treaties that are barriers; no central bank in its right mind is going to agree to being a lender of last resort for governments.

But that doesn’t mean that the central bank couldn’t be persuaded to step up its sovereign debt purchases on other grounds.  

Claire Jones

As the chart below shows, banks tend to own the sovereign debt of the country they call home.

This tendency is counter-intuitive. Rather than dispersing risk by spreading their holdings of government debt over several countries, banks are raising the chances of a vicious circle developing between the health of the sovereign and the country’s financial system – a phenomenon that lies at the heart of the eurozone crisis.

Various reasons have been suggested for this in the past. But, in a note published on VoxEU.org on Thursday, economists Raghuram Rajan and Viral Acharya add another. 

Ever since Wen Jiabao, China’s premier, promised in October to “preemptively fine-tune policy at a suitable time and by an appropriate degree” markets have been waiting for monetary easing to begin.

In fact it is already under way, in the form of increased lending from China’s state-owned commercial banks and in sharp falls in China’s money market rates. But on Wednesday came the first sign of a lifting of reserve requirements. It has begun with rural banks. More will follow.

 

Claire Jones

The Bank of England’s latest forecasts show inflation falling below the Monetary Policy Committee’s 2 per cent target over the course of 2013 and 2014.

Given that the MPC usually sets policy based on where inflation will be two to three years from now, the burning question ahead of the publication of its latest minutes on Wednesday was why the committee hadn’t already announced more QE.

The minutes shed plenty of light on why that’s the case. But they do so in a way that undermines the  Bank’s ability to influence expectations of what people expect the MPC to do next. 

Robin Harding

For me, the most interesting passage in the November Fed minutes was:

“The Chairman asked the subcommittee on communications to give consideration to a possible statement of the Committee’s longer-run goals and policy strategy, and he also encouraged the subcommittee to explore potential approaches for incorporating information about participants’ assessments of appropriate monetary policy into the Summary of Economic Projections.”

A host of communication options were discussed in the minutes but these are the only two that the Chairman referred back to the subcommittee on communications (vice chair Janet Yellen, governor Sarah Bloom Raskin, Charles Evans of Chicago and Charles Plosser of Philadelphia). That’s a strong signal of the direction that debate is going. 

Claire Jones

Sir Mervyn King has a rival in the banker-bashing stakes.

Robert Jenkins, an external member of the Financial Policy Committee, on Tuesday lambasted the industry’s attempts to water down regulation as “dumb” and “dishonest”.

A few snippets: 

Claire Jones

When the Bank of England’s latest fan charts showed inflation falling way below the 2 per cent target, analysts were quick to conclude that the MPC, or at least De La Rue, “was already greasing the wheels of the money printing presses” in expectation of more QE.

The Bank’s central forecast shows inflation falling to 1.3 per cent by the end of 2013, which would suggest that further asset purchases are indeed on the way.

But, if the views of Paul Tucker, deputy governor for financial stability, chime with those of his fellow MPC members, then more QE may not necessarily be a dead cert. Or at least that the scale of the additional easing may be far smaller than analysts expect. 

Claire Jones

The Bank of England’s latest systemic risk survey is a predictably grim read.

The interim Financial Policy Committee, which meets on Wednesday, will find little to cheer them in the poll of the UK’s risk managers.

But the survey makes slightly better reading for the Monetary Policy Committee. 

Claire Jones

Austria on Monday became the first country in the eurozone, and one of only a handful across the globe, to say it would fast track compliance with the Basel III capital rules.

With a eurozone recession imminent and Austrian lenders exposed to woes further east, it appears odd to heap pressure on banks to comply with rules six years ahead of their rivals elsewhere.

To boot, Austria will also introduce an additional capital buffer early. And the buffer will be set between 2-3 per cent dependent on the risks inherent in banks’ business models, higher than the 1-2.5 per cent specified in the Basel III framework.

Is Austria getting too tough too soon? 

Robin Harding

It looks like Congress will not heed pleas from the Federal Reserve for a fiscal policy plan – see Bill Dudley’s speech last Thursday for another example – as we await confirmation that the ‘supercommittee’ has failed. This is very bad news for the coherence of US economic policy, something totally ignored by Congress, which seems to think it can have an extended philosophical argument about the correct size of government without any consequences.

As Mr Dudley noted (emphasis added):

“It would be greatly beneficial if the Administration and Congress could more effectively work together to craft a coherent fiscal policy. As I see it, this would consist of two elements—continued near-term fiscal support to underpin economic activity and long-term fiscal consolidation to ensure debt sustainability. Without action in Washington, fiscal policy will turn sharply restrictive in 2012—exerting a direct drag on real GDP growth of more than one percentage point. At the same time, the long-term path under current policy is unsustainable.”