Didier Reynders to succeed Junckers as euro group chief
Didier Reynders, the Belgium finance minister, could become the next president of the euro group by the end of 2008, reports Le Monde. Reynders said that he would voluntarily accept this task if a consensus in the eurogroup would be reached. With 9 years of experience as a finance minister, he is the second longest serving member of the euro group after Jean Claude Juncker, who will not seek a third term. Reynders is backed by France but his open criticism of the ECB during his presidency of the eurogroup in 2001 could alarm the Germans, says Le Monde. The Belgian newspaper De Standaard said, however, that both the Germans and the Dutch are likely to support Mr Reynders, which would make an overwhelmingly strong candidate. A decision will be made in September. In Belgium, Mr Reynders is president of the Mouvement Réformateur, the largest Francophone party in the country. A potential handicap is the tension between the two language communities in his country. Other candidates are the Spanish finance minister and former Commissioner Pedro Solbes, who managed to improve public finances at home before the economic downswing set in, a potential advantage for a euro group president (We think that Mr Solbes would be an excellent choice. The only trouble is that he has big job steering his own country through a depression – after which he is more likely to retire than seek another job.)
Turkey doubles inflation target
Is this is the future of inflation targeting? When inflation rises, adjust your target upwards? The central bank of Turkey has become one of the largest central banks to do so, according to the FT, when it tried to accommodate higher oil and food price by raising its 2009 inflation target from 4 to 7.5% - to 6.5 per cent in 2010, and 5.5% in 2011. The FT said the central bank was clearly putting its credibility on the line. Here is a quote from Sevin Ekinci, a Turkish economist: “This is not a good moment for the central bank of Turkey. They’re saying their inflation-targeting has failed. It’s the last thing they should have done, and they have done it.”
Jingle mail in Spain: The Brits are sending their keys
FT Deutschland has a very interesting article on jingle mail in Spain, as an increasing number of British homeowners send their house keys to Spanish banks and savings associations, as they can no longer afford to pay the mortgage. The British mortgage holders have suffered from the dual problem of higher short-term interest rates, to which Spanish mortgages are pegged, and the fall in sterling against the euro. In Spain, unlike in many US states, mortgages are recourse, that means the mortgage holders is liable with his entire wealth, not just the mortaged asset, for the repayment of the mortgage. But this is difficult to enforce for foreigners. As a result the Spanish are sitting on an increasingly stock of property, for which there is presently no market. The property crisis has hit particular the types of property bought by foreign tourists: Condos in coastal areas. The FTD articles mentions two Spanish banks that have established branch offices in London to lure voracious British homebuyers. They are Bancaja and Caja del Mediterraneo.
OECD: What crisis?
Crisis? What crisis? The worst is over. The will be no recession anywhere. The worst turmoil in the financial markets is over. Good to invest in subprime mortgages again. Well except for the last one, the OECD yesterday gave what was probably the most optimistic economic outlook we have seen in a long time. After a few quarters of weaker growth, the OECD economies will resume rapid growth from the August of 2009, which is quite a precise definition of the turning point. According to FT Deutschland, the OECD said the reason we are getting through this crisis so well are the great structural reforms of the past and the great macro management. The argument is that the US economy will withstand the property crisis much better than generally thought. As for monetary policy, the OECD says Bernanke should keep the interest rates low, and only raise them once the recovery is well under way (It is hard to find to find an analysis which we disagree more.) In a separate article the paper quotes a study from the Institute of World Economics in Kiel, according to which the economic recover might start as early as this year.
Alan Meltzer on the Fed
If you thought we are extreme with our views on the Fed, and inflation, you should take a look at what Alan Meltzer had to say in an interview with Frankfurter Allgemeine. He said the Fed abandoned its balanced policy course in 2003, and his since adopted a reckless monetary policy that has caused both the asset price bubble and inflation. He says the Fed has to raise interest rates right away to combat the inflationary pressures that have built up in the economy. He also criticised the Fed’s decision to take illiquid paper as collateral, as this would give rise to moral hazard.
Belgian crisis continues
Jean Quatremer has a very good entry about the Belgian political crisis. The creation of the Leterme government this spring did not resolve the main problem – the disagreement between the Flemish and the Walloons over constitutional reform. Quatremer writes that PM Leterme is absolutely determined to press the issue this summer, and the Francophones are wrong to think that there is much to negotiate. Leterme and his Flemish Christian Democrats want a radical transformation from a federal to a confederal state, where the centre (i.e. Belgium) is relegated to defence, foreign policy, and certain aspects of social policy. He quotes a Flemish official who said that there will be no true negotiations. Either the Francophones accept it, or there will be new elections.
SPD at 20%
Germany’s Social Democrats yesterday received the worst poll rating in their history – at 20%, just 5% ahead of the Left Party, co-chaired by former SPD chairman Oskar Lafontaine, Frankfurter Allgemeine reports. Even worse for the left, under this polls the Christian Democrats and the Free Democrats would be close to former a coalition among each other – without the need for a third party.
UK inflation expectations are on the rise
FT Alphaville has a note on UK inflation expectations as measured by the difference between the yield on 30-year government bonds (or gilts as they are called in the UK), which was 4.61%, and inflation-linked gilts over the same maturity, which was 0.7%. The difference is generally taken to be the implied inflation expectations, now 3.9%, the highest since the BoE gained independence 11 years ago.
Persaud and Goodhart on the regulatory implications
Avinash Persaud and Charles Goodhart make the point in an FT Oped that after every financial crisis we are asking for more disclosure, more regulation, and more control of compensation. Each time, with no affect. They propose an alternative strategy. To build on the new Basel II capital adequacy requirement by adding a new component. The problem is that bank lending is procyclical – due to the nature of risk models for example. To include an element of counter-cyclicality into the system they porpose a method that would reduce a banks’ ability to hand out credit the larger its asset become - based on an observation that banking crises are often preceded by a large inflation of assets in the banks’ balance sheet.
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