Proposals to wean eastern Europe off the euro may be misguided.
Plans are afoot to foster local currency wholesale funding: by giving banks local currency credit, the theory goes, they will be able to pass local currency loans on to consumers. Doing this would reduce FX risks for homeowners, who earn in local currencies but often pay back debts in the euro or swiss franc.
Slovakia’s refusal to back the Greek loan for Greece set a bad example, and the ECB should not support euro entry to applicants that may behave similarly, Reuters is reporting. (NB. We are unable to confirm these quotations, and the ECB, when asked, had no comment to make.)
BRATISLAVA/BRUSSELS, Sept 10 (Reuters) – Slovakia set a bad example by refusing support for a loan to Greece, and the European Central Bank will not support euro entry by others unless sure they will not take similar steps in the future, ECB President Jean-Claude Trichet was quoted as saying.
A memo from this week’s meeting of euro zone finance ministers, seen by Reuters, said Trichet was outraged at the refusal by Slovakia to participate in the Greek bailout.
Several EU officials said privately Slovakia could be snubbed by some of the 26 other EU member states because its decision is likely to complicate talks on the bloc’s budget, making the rich net payers less willing to grant aid to poorer countries.
“Trichet was outraged at the last Eurogroup by Slovakia’s refusal of a bilateral loan to Greece and said that had the ECB known Slovakia would behave like that, it would not have endorsed Slovakia’s euro adoption,” the memo summarising the discussion said.
The value of a Big Mac is everyhere equal: that’s the premiss of this index from the Economist. Using the burger price as an identity allows us to compare the relative value of countries’ currencies.
Norway comes out most overvalued versus the dollar; Argentina the least. In dollar terms, a Norwegian Big Mac is a meaty $7.20, almost double the American value ($3.73) and nearly four times the Argentinian price ($1.78).
Compared with the past few monthly press conferences, Jean-Claude Trichet had a smooth ride today (maybe the sweltering heat in Frankfurt added to the slightly soporific atmosphere).
In Lisbon in May, the European Central Bank president faced awkward questions on the ECB’s concessions to Greece and just how it was reacting to fast-moving financial market conditions. This time the message was clearer: the ECB is on standby and keeping its emergency measures in place.
The main news was about additional offers of unlimited three-month liquidity, which will cover the period until the end of the year. On the controversial government bond purchases, there was no additional detail. Just as it would with foreign currency intervention, the ECB is maintaining an air of mystery. But there are other benefits from its policy of silence: those (in Germany) who worry about the inflation impact can hope there’s a good chance of programme being unwound, while those (everywhere else) who think the programme will have to be stepped up, can also keep their hopes alive.
On the euro, Mr Trichet was also in “keep calm” mode.
Investors may wonder why the euro is not trading even lower given the almost universal bearish sentiment on the single currency. The answer could lie in Switzerland.
The Swiss National Bank shocked the market on Tuesday by announcing that, as a result of its intervention in the foreign exchange markets, its currency reserves leapt more than 50 per cent last month from $145.6bn in April to $261.9bn in May.
Which reserve currencies are left for central bankers, concerned first about the dollar, and now the euro?
Peter Garnham, the FT’s currency correspondent, points out that the likely beneficiary of the more recent euro crisis has been the dollar, “simply because other destinations – Canada and Australia for example – are simply not large enough for them to use as significant diversification destinations.”
Will this dollar-euro ping-pong continue, and, even if it does, are the combined euro-dollar fortunes of the past two years meriting ever smaller reserve allocations?
The FT reported last week that China was reviewing its holdings of eurozone debt in the wake of the crisis that has swept through the region’s bond markets.
China subsequently denied that it was set to change its diversification policy.
In a follow up piece, Reuters spoke with officials in Brazil, India, Japan and South Korea, who told the news agency that their central banks will also continue to invest in the euro.
Evidence is growing that the European Central Bank sees the euro’s weakness positively. Christian Noyer, governor of the Banque de France – who always chooses his words carefully – has just told French TV that the currency is now trading at a “more normal” level. “Certainly, we are benefiting from it in terms of exports,” he added.
Earlier, Ewald Nowotny, Austria’s central bank governor, had told a news conference in Vienna that the euro’s fall would be welcomed by industry (although Mr Nowotny added: “We’ll have to see how long this development will be seen as acceptable by the US.”)
… and the Aussie dollar is set to crash, relative to the greenback. This is the surprising implication of analysis from a former chief economist at Wamco.
Scott Grannis has essentially compared currency movements with the ‘true’ value of that currency. He’s done this by picking one exchange rate he considers fair, and then adjusting both currencies for inflation and working out the resulting exchange rate over time.