China’s half trillion dollar stimulus
China announced a stimulus package of $586bn, to be stretched over two years, to bolster domestic demand, the Wall Street Journal reports. This is about 16% of the country’s GDP last year. The plan includes spending on housing, infrastructure, agriculture, health care and social welfare, plus tax deductions for investments. (One has to be careful with the numbers though. Much of this is already included in older plans, so this partly an exercise of repackaging ahead of the G20 summit to ward off the inevitable accusations that China is not pulling its weight. )
EU leaders plan for the G20
The G20 presents the best opportunity to resolve the financial crisis, but given what we know so far, we are not too hopeful that leaders will use the crisis and develop a truly effective and imaginative agenda. At the EU summit on Friday, leaders agreed a five-point plan they would like the G20 to agree on – which we think is the wrong list of priorities. According to Euractiv, the five points are:
* "Submitting rating agencies to registration [and] surveillance".
* Adopt principles to ensure the "convergence of accounting standards".
* "Decide that no market segment, no territory, and no financial institution should escape […] regulation or at least oversight".
* "Establish codes of conduct to avoid excessive risk-taking in the financial sector", including on the "remuneration" of executives.
* "Give the IMF the initial responsibility" and "necessary resources" for "recommending the measures to restore confidence and stability" in the international financial system.
Nicolas Sarkozy got aggressive at the press conference in reminding the US that he expects real reforms and not mere agreement on principles. He would not participate in a meeting that only produces superficial results. He was also indirectly referring to the responsibility of Wall Street by saying that while the crisis is global it is also clear where it all started. Sarkozy’s ambition to restrain international finance though not necessarily shared by his European colleagues, is supported by WTO president Pascal Lamy, who called in an interview with Le Monde for a new regulation with constraining rules and a mechanism for supervision and sanctions.
In addition, the summit should also address the deteriorating economic situation, and the European Commission has been instructed to issue concrete proposals in that direction by December.
And as we reported last week, Zapatero can go along to the summit after all. He will take the EU presidency seat – as Sarkozy and France are represented in any case.
Here is a very funny picture from last week’s summit (aka Willem Buiter). It looks as though EU leaders are getting increasingly desperate in the search for a solution to the global crisis.
Frankfurter Allgemeine reports from Brazil that President Lula da Silva demands that Brazil, India and China should be central players in the future financial architecture discussion, and no longer just be invited for coffee.
Credit conditions worsen in France
Credit conditions in France are expected to worsen further despite government initiatives writes Les Echos. According to a recent poll for the Banque de France, further tightening of credit conditions is expected for the whole banking sector with higher margins, more guarantees or shorter maturities. Since mid September credit conditions already got worse for smaller and medium sized companies but it is now expected to hit large companies as well.
Baldwin and Eichengreen on the G20
This will not be out until Wednesday morning. Richard Baldwin and Barry Eichengreen are about to publish another of their instant books on www.voxeu.org, this time about the priorities of the G20 in which they will list their priorities for the upcoming G20 meeting, which they consider to be of critical importance for the long-term future of global governance – and the short-term performance of the global economy.
Munchau on interest rates cuts
In his FT column Wolfgang Munchau says the recent 150bp rate cut by the BoE was simultaneously justified, scary, and irrelevant. The latter is particular important as money rates remain largely dysfunctional, despite the relative improvements. Real world interest rates still bear no relation with bank base rates, and furthermore banks have cut down no lending volumes. The answer is fiscal policy, globally co-ordinated.
Jorg Kramer on inflation
Jorg Kramer, chief economist of Commerzbank, writes in Frankfurter Allgemeine that the huge increases in central bank money will over long periods lead to higher inflation, as central banks will almost surely not be able to switch their policies once the economy emerges from this downturn. The same happened in the US after the last recession, when interest rates were kept too long too low. The right post-recession policy would consist of steep cuts in central bank liquidity provisions, combined with sharp increases in repo rates. The consequence of this analysis is that inflation-indexed government bonds would outperform ordinary government bonds for quite some time.
The crisis and the euro area
There have been a few articles on the future of the euro area. Writing in RGE Monitor, Peter Boone, Simon Johnson, and James Kwak say that the euro area may not survive if this crisis, and the global recession in particular, get a lot worse. They painted a scenario under which the euro area bond markets might be subject to speculative attack, and propose the following four remedies. 1. cut repo rate to 2%, 2. create a European Financial Stability Fund with $2 trillion of credit lines, 3. Have co-ordinated fiscal expansion to the tune of 1% of GDP in each country 4. develop a financial regulatory regime, with Switzerland, to guarantee that each financially important organisation is bailed out. (We don’t agree with their analysis that the euro area might brake up under the strain, but we think the proposals are ok, more or less)
Buiter and the eurosceptics
This is quite a wonderful blog entry by Willem Buiter, in which he takes issues with a very typical nitwit British eurosceptic argument purporting that the euro area is likely to break up because of the differences in bond spreads. He goes through a concrete hypothetical default scenario and concludes that if Italy for example were to default, it would be rational for Italy to default inside the euro area, rather than outside.
Save the inter-banking market
Writing in Lavoce, Pietro Draghi and Loriana Pellizzon argue that central banks should offer explicit guarantees to the money market. The should offer not only liquidity but also guarantees to the counterparties in the inter-banking market. The technical instruments for such guarantees exists, and is consistent with existing government guarantees. This would not only reduce the overall government burden, but would also reduce the need for banks to recapitalise.
Greek finance minister under fire
The Greek finance minister Giorgos Alogoskoufis might lose his job over his inability to convince banks to take part in the €28bn bailout scheme, reports Kathemerini. Many conservatives as the latest sign that the minister is no longer in any position to handle economic affairs. Prime minister Karamanlis warned banks that while participation in the scheme is voluntary, the government would not behaviour that turns against the society..
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