BIS blames central banks for credit crisis
The annual report of the Bank of International Settlements is a highlight in any year. This year’s report is a break with the consensus view according to which the credit crisis was a purely financial event. The BIS argues that this crisis was caused at least in part by global central banks that kept monetary policy too lose for too long. Excessively low interest rates caused both the credit bubble and subsequent inflation. See the front page report of Financial Times Deutschland for example. Furthermore, the BIS advocates a rise in global interest rates despite its prediction that the world economy is on the brink of a much broader based downturn than previously imagined.
Euro area Inflation at 4%
It’s now at over twice the target level, so this is clearly an inflation overshoot, and there is no surprise that monetary policy is going to react with a rate rise of 0.25 percentage points, now considered as certain, according to Frankfurter Allgemeine. Like some more scary numbers? Well, oil almost hit $144, now twice as high as a year ago. The yield on the two-year German bond shot up from 4.44% to 4.6%, and the inflation rate will almost certain go up again in July and August. Analysts are talking about a peak of 4.2%. The article also quoted Commerzbank’s forecast that interest rates will rise to 4.5% in September (a forecast with which we tend to agree, though this is still a minority view). The article also quotes from the annual report of the Bank of International Settlements, which said that global monetary policy has to tighten to head off inflationary pressures.
Il Sole 24 ore writes that EU Commissioner Joaquin Almunia forecasts the average inflation rate for this year to be 3.2%, adding that he seriously concerned about the inflation developments.
In defence of the ECB
The ECB does not have many supporters these days. But it can count on the loyal editorialists of Frankfurter Allgemeine Zeitung who say that this week’s expected interest rate increase is fully justified (though interestingly they did not call for an interest rate increase before Trichet hinted that one was on the cards). The argument in the editorial is that a fall in economic growth is no guarantee that inflation will subside, as was indeed the case in the 1970s.
Even the Financial Times supports the ECB’s now certain decision to raise rates as inevitable, having previously fiercely rejected such a move. But the FT says the central bank must be ready to slash rates if and when inflationary pressures subside.
Spanish housing crisis widens
El Pais has an interesting article on how fast expectations have changed in the Spanish real estate market. Not too long ago, there was a consensus that the price of city apartments or of new houses cannot conceivably fall. But they did, and there are more falls coming. Look at same of the figures quoted in the article, the actual recorded house price falls in those market segments believed to safe is still relatively modest – some 1.2% in nominal terms since the beginning of the year. (But these are probably a significant underestimate as the beginning of a housing downturn shows in terms of falling sales, not falling prices.)
France starts six-month presidency with attack on the Czech Republic
They let Kouchner out again, and this time he berates the Czechs. The FT has the story that France is putting on maximum pressure on the Czechs not to delay or block ratification of the Lisbon Treaty. “What use is it to take, say, three more countries into the EU, if we’re blocked and can’t proceed with political integration? They’ll be persuaded in the end,” he said confidently about the Czechs according to the FT.
The article quoted another French official as saying that the Czech had better behave, since they are taking over the EU presidency in January. Otherwise they would have to pick up their own mess.
Some thoughts on demographics
The blog A Fistful of Euros has picked up on a NYT article on demographics in Europe, in which an interesting explanation is given for why France and Sweden have much higher birth rates than Germany or Italy, for example. A sociologist quoted in the article pointed out that the factor favouring high fertility are either flexibility or generosity. France and Sweden have strong welfare states, the US is flexible, while Italy has neither.
Some bad advice for Barack Obama
Bill Gross of Pimco has some truly bad advice for Barack Obama if he became president: double the budget deficit to $1 trillion, and do so “real quick”. (This is about 7% of GDP. Complete madness in our view, and very likely to lead to massive economic and financial instability. Larry Summers is also going down the same route. The main purpose of this fiscal loosening is to avoid a short-term recession at all costs, and prevent the economy from adjusting). For more on this ludicrous idea see the Wall Street Journal Economics blog.
Is Mervyn King getting too powerful
Philip Stephens has an interesting column in the FT about Mervyn King, effectively accusing him of overplaying his hand in the dealings with the government. He retells the story of the unfair ousting of Sir John Gieve, a deputy governor in charge of financial stability, who has been made a scapegoat for some of the recent disasters. Stephens says King may have won his power battles, especially the one with the government over the appointment of Charlie Bean as the new deputy governor in charge of monetary policy. But King lacks the sure touch for financial markets, which his predecessor had.
Is Lehman next?
The markets appear increasingly convinced that the future of Lehman Brothers as an independent bank are numbered, with takeover rumours everywhere. The Naked Capitalism blog has some details about the rumours, after a day in which the bank’s stock fell by 11%, and Lehman CDS went up 10bp to 285bp.
Eurointelligence wishes to thank the Collegio Carlo Alberto for their support to help us maintain eurointelligence.com a free public service.