Summers, Geithner and Volcker seen as frontrunners for the job of Treasury secretary
The European papers were mostly preoccupied with Barack Obama’s victory with little space left for other stories. First prize goes to Corriere della Sera, which devoted its first 20 pages to the story. We will only brief on the specific aspects relevant to us, on economic policy appointments and policies – which have yet to come. The rumours for Treasury secretary are Tim Geithner and Paul Volcker, and also Larry Summers, the latter may even be a favourite according to a Bloomberg report. It said that Obama has a lot of respects for Summers’ experience of handling crises. A decision is expect very soon. The election had not much of an effect on markets. There was some heavy volatility in the euro/dollar exchange rate, with the dollar down a couple of cents at one point, stock markets were also down, but it is difficult to attribute this to an election outcome that was almost entirely discounted. Here is the rest of the news.
French Socialists are to vote a new leader
Tonight members of the French Socialist party vote for their new leader. Latest polls suggest a tight race between the three candidates Martine Aubry, Segolene Royal and Bertrand Delanoë, the mayor of Paris. Delanoë, a long time favorite, lost his confortable lead since the outbreak of the financial crisis, an opportunity for Royal to come back from her outsider position, writes Le Monde. The smaller the winning margin, the more difficult it will be for Delanoë to build a coalition. There is also a small risk that he could end up being defeated by a coalition of his adversaries. Royal turned more radical on social policies, and now openly dismisses the merits of social democracy. In a last minute scoop Royal mobilized poorer party members promising to reimburse the party membership fee if they go to vote. Also in the last moment Martine Aubry, defining herself as “centre from the left”, seems to have given up to run for the party leadership herself preferring to play a pivotal role in the negotiations to come. Another candidate to watch out for is Benoît Hamon, the left wing choice and a defender of a “fortress Europe”.
A tight result is the nightmare scenario of the party leadership. Tedious negotiations between the different fractions of the PS are ahead. Francois Hollande calls for party discipline, warning that otherwise the Socialist party becomes ungovernable. Based on tonight scores, delegations are designated for the party conference in Reims, November 12-14, the party leader will be elected after this conference in two rounds, the first one envisaged for November 20.
EU Commission to likely to declare Commerzbank recapitalisation as illegal state aid
It was always our assumption that the German bank recapitalisation package was primarily designed to improve the competition position of the country’s banks. According to FT Deutschland, the EU Commission said yesterday it will investigate the €8.2bn capital injection into Commerzbank, criticising in particular the interest rate charged, of 8.5% and 5.5%, which is not consistent with the agreed rules (a minimum of 10%). It was further agreed that the banks repay after six months, or launch a restructuring plan.
The math of German stimulus
Frankfurter Allgemeine did the math on Germany’s economic stimulus package. The official headline number is €32bn, but €20bn were previously decided reductions in taxes in the form of higher child benefits and a cut in indirect wage costs. This leaves €12bn in new expenditure, about 0.5% of GDP – to be stretched over two years! The paper quotes experts as casting doubt that this would have much of an effect on the economy, and that it would probably not gerate the €50bn in new investments the government is predicting. This would be incredible multiple (in the sense that one should not believe it). The paper says the last US package was 1.2% of GDP (and there is a lot more to come).
IMF imposes money growth targets for the Ukraine
A Fistful of Euros has an interesting entry about the renaissance of money targeting. As part of the conditionality of the $16bn loan to the Ukraine, the IMF imposed a combination of flexible exchange rates, and the use of base money as an anchor for monetary policy, until an inflation targeting regime can be implemented. It appears that the author does not approve of this. He concluded that it was the 1970s all over again.
US suffers very sharp economic downturn in October
We reported on the fall in US manufacturing activity, and care sales in particular. The latest indicators show that the downturn is very broad-based, now having hit services, with the non-manufacturing index down some 5.8%, which is quite extraordinary. There is clearly now the risk of a major recession. See this entry in Calculated Risk for more.
Irish unemployment on the rise
Irish unemployment is on the rise, reaching 260300 (6.7%) in October for the first time in 11 years, reports the Irish Independent. The government expects unemployment to rise to 7.3% in 2009, though the Irish Independent argues that it might be too optimistic. The new figures prompted leading opposition parties to claim that unemployment is now spinning out of control. Prime minister Brian Cowen meanwhile insisted that the government had pursued policies which had boosted employment.
Why do CDS and corporate bond markets differ on their risk assessment?
A credit default swap is an insurance on the default of bonds. As we do not expect, say US Treasuries to default, one can look at a CDS price as a risk premium. In the corporate bond market, one would therefore expect a relationship to hold between CDS rates on corporate bonds, and the actual yields on those bonds. But that relationship has broken down, as the iBoxx index of corporate bonds more than doubled, while CDS indiceses also went up, but by a lot less, according to the Financial Times. That differences has been has apparently been as high as 600-800bp for some companies. How can this be? The article says the two market view the risk of default very differently. The more liquid cash markets are a lot more pessimistic, perhaps because investors are lacking the cash, while the CDS markets may give a truer valuation, as investors have to put up a lot less cash to achieve exposure.
Financial crisis and the mad cow disease
Jean Marc Vittori in Les Echos has a very interesting article arguing that the financial crisis has a common characteristic with the mad cow disease: there were some toxic products but nobody knew where they were. Both crises led to a general loss in trust and a total standstill in trade. The actors in agriculture found a remedy against it, called traceability. Each product is now identifiable back to its farm where it comes from. The outbreak of a disease in a certain farm can now be contained quickly enough without disrupting trade and thus rebuilt the trust of the consumers. Financial products need also this chain of information back to its components. There is some extra effort needed to prevent systemic crisis, it is not enough that information is known. Vittori argues that a financial system without toxic assets is illusionary. All it is needed is a system to identify the risks even if the set up is complicated. But what agriculture can do, finance could do as well.
Why Iceland should join the EU
Philip Lane, writing in Vox, highlights the advantages for Iceland to join the EU. He said while actual membership of EU and euro area cannot happen overnight, simply announcing an intention to enter would have immediate stabilising effect. It would allow the Icelandic central bank to pursue a managed float system during the transition, obviating the need to deliver a long-term nominal anchor for the Icelandic economy.
A Black man gets the worst job in America,
This is from the satirical newspaper the Onion (aka Brad Delong)
African-American man Barack Obama, 47, was given the least-desirable job in the entire country Tuesday when he was elected president of the United States of America. In his new high-stress, low-reward position, Obama will be charged with such tasks as completely overhauling the nation's broken-down economy, repairing the crumbling infrastructure, and generally having to please more than 300 million Americans and cater to their every whim on a daily basis. As part of his duties, the black man will have to spend four to eight years cleaning up the messes other people left behind. The job comes with such intense scrutiny and so certain a guarantee of failure that only one other person even bothered applying for it. Said scholar and activist Mark L. Denton, "It just goes to show you that, in this country, a black man still can't catch a break."
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