Getting better
The money markets are finally improving, but the improvement are stronger in the US than in Europe. We will have to see whether this is a temporary or persistent gap. The improvement in money market conditions, even in the US, is still slow, and we are still way above even the normal “crisis level” we have had for most of the year. Here are the latest European data from Thomson/Datastream
| Euribor 1 month | Euribor 3 month | Euribor-Eonia Spread |
19-September | 4.631 | 5.005 | 0.755 |
8 October | 5.197 | 5.393 | 1.661 |
20 October | 4.685 | 5 | 1.651 |
This is roughly a month of data. The Euribor 1 month has been coming down, but there has been an 0.5pp rate cut. The three month rate is down from its peak on Oct 8, but hardly from a one month earlier, when both actual rates, and expectations were higher. The right hand column is the difference between 3-m Euribor and Eonia, which is a swap that measures expectations of policy rates 3 months down the line. This gap, equivalent to the Libor-OIS spread used by the Fed, shows only few signs of narrowing. Our reading is the most of the improvement is due to the rate cut, and a small element due to slightly improved money market
Calculated Risk has the following data for the US
3-m US Treasury yield: up from 0.72% to 0.93%
TED spread: down from 3.59pp to 3.04pp (just a reminder: In the past, we considered a TED spread of more than 1pp as a crisis indicator!)
These are clear improvement, but we are still in deep trouble. This will have to continue for several weeks before we get back to normal.
Bernanke backs stimulus
It could not happen to a European central banker, but Ben Bernanke yesterday went to Congress to demand an economic stimulus. Monetary policy has pretty much run its course. There will be more rate cuts, but this is not going to make the big difference now. Fiscal policy is now the best, and only, tool left. The Wall Street Journal reports Bernanke calling the economic outlook “exceptionally uncertain”, and economic weakness to persist for several quarters. A fiscal stimulus, currently proposed by the Democrats in Congress, is thus an appropriate policy response. He said a package should be balance, to boost spending and economic activity in general, but also offset severe credit tightening – i.e. relief to home owners and business.
Some bad news on US housing
Calculated Risk has the latest estimates by Fitch Ratings about house price declines. Fitch notes that the 29% rise in prices between 2004 and 2006 has now been reversed. Furthermore, Fitch expects a further 10% decline in the next 18 months. After that, it expects declines to moderate. House price will continue to fall in nominal terms for probably more than two years, and in real terms probably for a lot longer. This analysis would suggest that Fitch is now forecasting the housing market to overshoot.
More bailout news
Germany
Frankfurter Allgemeine has the details of the German bank rescue scheme. The ceiling for recapitalization is €10m, for guaranties it is €5m, and guarantees should be preferable (which is complete nonsense in our view, given that there is a need to recapitalize Germany’s banks). So it is important to note that this package cannot deal with a hypothetical failure of Deutsche Bank. There will be limits on salaries when the state recapitalized, and limits on golden parachutes, and no dividends. German finance ministry said investors should complaining about this. “The alternative would be for their shares to go down the toilet,” a spokesman was quoted as saying.
Italy
Giulio Tremonti said the Italian government has no intention to become a permanent shareholder in banks, and that state recapitalization should be regarded as a necessity, not an opportunity. He was speaking at discussion organised by Corriere della Sera with Mario Monti, and Lorenzo Bini Smaghi, whose new book about the euro was the orginal reason for this event. Tremonti also said that the government had policy to save banks, only a policy to protect savers and companies.
France
The French government said it would inject €10.5bn into France’s six largest banks in an effort to shore up their balance sheets and ensure they continued to provide credit to consumers and businesses, reports the FT. Finance minister Lagarde said Crédit Agricole would receive €3bn, BNP Paribas €2.55bn, Société Générale €1.7bn, Crédit Mutuel €1.2bn, Caisse d’Epargne €1.1bn, and Banque Populaire €0.95bn. The government will subscribe to subordinated loans issued by the banks at base rate plus 400 basis points and won't acquire voting rights. The loan is repayable after other debts have been met. The plan is still subject to approval by the European Commission’s competition authority.
Francois Fillon also announced yesterday that banks wishing to access the government’s €320bn loan guarantee or the recapitalization fund will have promise to increase their stock of credit at an annual rate of 3-4% to qualify. Les Echos reports that in each “department”, the prefect would meet with representatives from the bank and the central bank to assure the national commitment,. The FT writes that so far banks have shown little interest in the government’s €40bn recapitalization fund.
Austria
Capital injections are also planned in Austria. The government could inject up to €15bn to its five biggest banks, Bank Austria, Erste Bank, RZB, Bawag and Volksbank. Yesterday, the Austrian parliament adopted a €100bn rescue package. Der Standard writes that the state offered guarantees that could under an extreme scenario reach the value of the Austrian GDP, around €270bn. The government is to grant an unlimited deposit guarantee for private and savings accounts (budgeted at €10bn); for small enterprises guarantees up to €50000 (budgeted at €9.6bn), an insurance for the interbank market up to €75bn and €15bn capital injections in exchange for shares. There will be conditions attached to it, but the details are not yet out.
And another bailout in Belgium
In Belgium, meanwhile, the federal government together with the two regional governments - the Flemish and the Wallonians – took over the insurer Ethias for a total of €1.5bn. Each of the parties contribute €500m for a 25% share, a blocking blocking minority, reports Le Soir.
Czech government weakened ahead of EU presidency
The Czech government suffered heavy losses in regional and senatorial elections. Le Monde writes that it weakens the government two months ahead of its EU presidency and before the parliamentary vote on the Lisbon treaty in December. In the regional elections, the party of prime minister Mirek Topolanek (23.5%) lost out to the pro-European Socialists (36%),Communists (15%) come in third. At the senate the government coalition stands to lose its absolute majority to the Socialists, which would facilitate the pass through of the Lisbon Treaty.
A new role for the IMF
The IMF is currently in the news for different reasons, while Michael Bordo and Harold James have an excellent piece in the FT this morning, in which they outline a new role for the fund as managing global capital flows. When the IMF was conceived at the Bretton Woods conference in 1944, global capital markets were small. But today, the IMF could perform a useful function by managing part of the reserve assets of the new surplus countries. It could take bets against speculators, and thus ward off speculative attacks on countries and financial institutions.
Why unregulated financial markets are a good thing
Hats off to Romain Rancière, Aaron Tornell and Frank Westermann for making a totally unfashionable argument in Vox, namely that the multi trillion dollar bailouts are a small price worth paying, considering the huge benefits liberalized financial markets have brought to the US economy. The first point they make is that the size of the bailout is within historical and international norms. Second, financial liberalisation and innovation contributed to higher growth in the US relative to the EU, particularly in high-tech sectors. Third, they blame policy intervention for paving the road to the financial crisis. (That argument is baloney conspiracy theory stuff. But a long-term cost-benefit analysis of financial market liberalization would be interesting, but somewhat premature. Any such analysis would need to consider that the US now will live a longish period of reduced growth, during which it will raise the private sector savings rates.)
Philip Stephens on Gordon Brown
Philip Stevens has a brilliant, and contrarian, comment in the FT on Gordon Brown. He says don’t buy all the hype of the transformation of the British prime minister. This is one type of crisis which he would handle well, but we should also remember, for example, that the enthusiasm he now has for the IMF as the global economic custodian was only only ever matched by his contempt for IMF when it warned about British house price increases. Stevens says once the imminent crisis is over, the really important issue is the economic downturn, and voters will be reflected upon how Britain got in this position in the first place. This is what the next election will be about.
Eurointelligence wishes to thank the Collegio Carlo Alberto for their support to help us maintain eurointelligence.com a free public service.