The return of stagflation
The oil price for WTI hit $135pb yesterday, another record, and another day when newspapers fretted about a return to 1970s deflation. The oil price fall back to $131pb later, but was still trading at levels twice as high as a year ago. Frankfurter Allgemeine said that the Fed’s minutes, showing a rise in the inflation forecast and a lower growth forecast fuelled those fears on financial markets. The article quotes Joachim Fels of Morgan Stanley who makes the point that global inflation was 5%, while the global money market interest rates was 4.3%. Fear of inflation in the euro area also has led to an increase in German two-year treasury yields from 2.9% to 4.2% since mid-February. Oh, and by the way, the euro is back at $1.58.
The return of nuclear energy in Europe
Frankfurter Allgemeine writes about the return of nuclear energy in Europe, with the announcement of the Berlusconi administration set the foundation for a new generation of nuclear power stations – whose constructions should start within the next five years. Italy was one of the first European countries to go anti-nuclear, with a referendum after the Chernobyl disaster that led to the end of Italy’s industry in 1990. German chancellor Angela Merkel also came out in favour of nuclear power. She criticised Germany’s decision to switch off all remaining nuclear power stations as ridiculous, and added that it was hypocritical for Germany to switch off nuclear and coal-fired stations, only to reimport electricity produced by the same technologies elsewhere. (This has another point of disagreement between CDU and SPD, and may come as a big issue, possibly in the next elections).
Mass rally in France
Throughout France over 500000 unionists, pensioners, public and private sector employees protested against the government’s plan to increase the number of contributable years from 40 to 41. Perturbations were less severe due to the minimum service rule introduced by Sarkozy. Trade unions celebrate the high turnout as a success though Le Figaro writes that these were too few to change the course of the pension reform. Trade unions already announced more to come. Outraged fishermen who block the ports and petrol storages in the North for days now also announced further actions as they were dissatisfied with the government’s proposed measures reports Le Monde. These measures include an aid package of €110m and a system that guarantees 40 cents per petrol liter instead of currently 70 cents. The European Commission already warned that it will remain vigilant and that any solution should respect European law.
More strains for the Spanish housing market
El Mundo reports that the Spanish property registrars expect that property crisis to continue until 2010. They blame the problems on the financial crisis, as people found it increasingly difficult to obtain mortgages. A second reason is oversupply in the Spanish housing market which would take some time to flush out. They estimate deliquancy rates to go up from a current 1.3% to about 3%, though not to level of between 6-7% as seen during the last property crisis in the 1990s.
Libor to stay high
The FT reports that tension on the money market continue, with dollar, euro and poun 3-month Libor rates trading at about 70bp above the official short terms rate – compared to 10bp before the crisis. The article quoted Jim Reid of Deutsche Bank as warning that high Libor rates are here to stay for the entire year, as banks are become more risk-averse. The article also makes the point that companies and individuals have been making use of their credit lines since the crisis, as a result of which there is now less room for manoeuvre for new loans. Most analysts agreed that the money markets tensions will cease only once the banks have fully repaired their balance sheets.
CDS market continues to grow
For some this market is the next subprime crisis: Credit default swaps, financial instruments to insure against payment default. The FT reports on the latest Bank for International Settlement data, showing that the volumn of the CDS market has reached $58 trillion – which is slightly less than the recently reported estimated from the International Swaps and Derivatives Association.
Dominique Strauss-Kahn on the euro group
In a column for the FT Deutschland, IMF MD Dominique Strauss-Kahn says the euro area was punching below its weight globally. He advocated more powers for the euro group of finance ministers, better internal policy co-ordination, and a single voice in international affairs. He criticised that member states were still not sufficiently aware of the spillovers of their policies. He warned we should not be complacent about the euro’s successes during its first ten years.
Almunia interview in Frankfurter Allgemeine
In an interview with Frankfurter Allgemeine, EU economics Commissioner Joaquin Almunia made the point that the euro area is more than just a monetary union, but also an economic union. He said the reasons for the low potential growth rates lie in the economic policies of the member states that needed to be co-ordinated much better. When asked whether this required new institutional rules, he said no. What was needed instead was a much better application of existing rules. He said there was not sufficient understanding in member states about policy spillovers, that national decision have an impact elsewhere in the euro area. He also said that finance ministers were actually aware of this problem to a much a greater degree than is generally given credit for.
The Philidelphia Fed says core inflation misleading
The US obsession with core inflation indices is now increasingly challenged at home. The Philidelphia Fed (hat tip Big Picture blog) published research showing that core inflation was a useless measure, because first food and oil are not the most volatile prices, and second because core inflation is not a very good predictor of actual inflation (which used to be the case a long time ago). The research concluded that combining CPI and personal consumption expenditure indices produces the best results.
Carmen Reinhart on debt default
Writing in Vox, Carmen Reinhart has an interesting article warning about complacency in respect of debt default. There is a mistaken view that there the debt default risk has been alleviated since emerging countries have switched from long-term foreign debt to more short-term domestic debt. Look at long-term historical time series, she said that countries have always found ways to default on domestic debt, for example through inflation. As an example she quotes Argentinia, where the government has issued bonds linked to an inflation index which shows official inflation at 8%, while unofficial estimates show rates in the order of 25-30%.
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