Euro area surprisingly robust
Here is the summary: GDP was up 0.4% during the quarter, after 0.8% in Q3. This is not too bad, give a potential growth of about 0.5%. Eric Chaney of Morgan Stanley writes there are some indications of a slowdown in domestic demand, dragged down by a poor performance of German consumer spending. Corporate fixed investment remained strong at 4.1% year-on-year, and 0.4%, quarter-on-quarter. He also said intra and extra EMU trade seem to have sharply slowed, a sign that companies are becoming cautious on future demand.
The big positive surprise was the Netherlands, with 1.2% during the quarter, after 1.9% in Q3. France and Germany had growth of 0.3% each. The annual growth rate of Finland's GDP slowed down to 2.3% in December from 5.1% the month before, reports Newsroom Finland.
The FT writes in its report that a large part of the euro area slowdown was due to Italy. There were no data pending a technical overhaul of its data, but the article quotes Marco Valli at Unicredit's estimate that GDP had shrunk by 0.3%. Recent data suggested “that we were a bit too optimistic” about the extent of structural improvements in Italy. “This underperformance is probably going to last a while yet,” he added.
ECB collateral rises sharply
Euro area banks deposited a record amount of asset-backed collateral with the ECB to raise cash, according to the Financial Times. The volume reached €215bn by end September, which took the proportion of asset-backed debt to 17%, up from 12% in 2006. The volumes and ratio are likely to have risen strongly in Q4, especially as Spanish and Dutch banks pledged record amounts of ABS as collateral. The FT quotes Marco Annunziata of Unicredit as saying that the ECB's collateral system had proved "brilliant", but risked creating the wrong incentives for banks, encouraging them to build up stocks of asset-backed securities.
Another German businessman in the dock
German newspapers were full of reports about the televised police dawn raid on the home Klaus Zumwinkel, the head of Deutsche Post, who has been charged with tax evasion for about €1m. It is a shocking case because of the timing, the scale, and because this is the latest in a long string of scandals involving senior business leaders that have turned many Germans profoundly anti-capitalist.
As part of the coverage, we also learned that tax evasion has become much more difficult in Europe, as banks now regularly updated foreign tax authorities. In this case, Zumwinkel is believed to have a used a Liechtenstein-based foundation. FT Deutschland has a story on how this works.
Frankfurter Allgemeine said in a comment that Zumwinckel was the last representative of old corporatist Germany. The old elites - Peter Hartz at Volkswagen, Heinrich von Pierer at Siemens, and many others - have all fallen due to corruption, tax evasion and other charges. The old system stands discredited, and is making way for a system in which shareholders will call the shots.
Financial Times Deutschland said Zumwinkel has been one of the most prolific government advisers, which is what makes this case particularly galling. The paper also makes the point that this is the last, and one of the most appalling cases in a long string of criminal investigations against Germany's corporate elites.
Ooops. The IKB bailout is going a couple of hundred million more expansive
A day earlier, the German government said the bailout would cost the tax payer the nice round sum of €1bn. Frankfurter Allgemeine writes that, as it turns out, it will be €1.2bn or even €1.4bn, if the government cannot find any more private sector support. The commercial banks have pledged €300m on condition that they be left alone after that.
A German inflation forecast for the euro area
Frankfurter Allgemeine has a short note about a forecast by a group of German economists, called ECB Observer. They envisage a 2007 inflation rate 3.1%, and a 2008 inflation rate of 2.7% - and they duly recommend that the ECB should put up interest rates to meet the inflation target.
iTraxx Watch - A mini rally
Conditions on credit market improved yesterday, with the benchmark iTraxx Crossover down at 531bp, meaning that the cost of credit insurance has fallen. FT Alphaville said the improvement was driven by short-sellers' profit taking, not a shift in sentiment.
Some scary charts on the UK housing market
FT Alphaville has some scary charts on the UK housing market, in particular chart showing House price to incomes ratios for the US and the UK relativ to 2002. The ratio has not changed much in the US, but stands at 150 for the UK.
The next stages of the crisis
Paul Krugman noted that every week or two the credit crisis hits a new market subsegment one has never heard of before. One of them are the monoline insurers who are now in danger of losing their credit rating. An interesting post, entitle The Monolines are f$%#ed came from the Big Picture Blog, which explains in all the gory detail why there is not going to be a successful rescue of this industry. HHer"These firms have become financial terrorists, holding the muni bond business as their hostage. They know what happens to bank robbers and bad guys once they let the hostages go -- they get riddled with bullets."
More bad news from UBS
UBS reported a loss yesterday, and was really gloomy about the first quarter. The bank had write-offs of €12.4bn in 2007 in subprime losses, but it also has an Alt-A mortgage portfolio (one class above subprime and almost as junky) worth some $26.6bn. There is also some $27.5bn of subprime stuff left which has not yet been written off, according to a news report in FT Deutschland.
And some good news from Spain
Paul Fabra in Les Echos writes that Spanish banks fare better than expected despite the fact that Spain’s housing market is crashing. Fabra argues that the banks prudence owes a lot to the Bank of Spain. The Spanish central bank established in 2000 a counter cyclical fund, in which banks have to contribute in good times to cover losses in bad times. The Bank also discouraged the use of vehicle instruments. Banks have remained with their traditional business and large banks like Santander resisted the temptation of an universal bank
Zapatero not assured of victory
The FT has a story on recent opinion polls ahead of the March 9 elections in Spain, showing falling support for the Zapatero government. The Socialists lead is now down to 2.9pp in a poll in El Pais, and 1.3pp in a poll in Expansion. The article quoted one analyst as saying that the Socialists would need a high turnout to win.
Italian gloom
The FT has a good article about the economic debate in Italy pre-election, with both sides slagging off each other. The report said that Eurispes, an independent social studies institute in Rome, has produced a report showing a dramatic worsening of sentiment. The main finding is that 32% of Italian families were worse off than a year earlier; 78% felt negative about their future, and only 38% get to the end of the month on their incomes.
Prodi's economic record
Francesco Daveri has a balanced assessment of the Prodi government's economic achievements. He applauds the 5pp cut in indirect wage costs, support for innovation and corporate tax cuts, but says the effects of the measures has not yet translated into growth, as the measure have not all been implemented. He is more critical of the Prodi administrations failure to liberalise service industries beyond the initial initiatives on pharmacies and mobile phone. Here is a French version of the article in Telos.