Another half trillion

 

The big news this morning everywhere was the ECB’s €442bn 12-month repo auction, the largest and longest-dating ever, through which 1100 European banks have obtained new liquidity. FT Deutschland cites finance minister Peer Steinbruck, once again displaying his full misjudgment of the financial crisis, as saying that the banks would  no longer have an excuse to refuse credits. The article points out that the banks have a very good reason to withhold credit, as the rating of its customers has deteriorated due to the deep recession. The article also quotes Bundesbank president Axel Weber as saying there is no generalised credit crunch, but there are credit constraints especially for small companies. The article also cites a survey according to which the credit crunch has become the main reason for insolvencies of SMEs. Insolvency administrators complain that banks with whom the companies had long-standing relationships now refuse credit. (So much for “not a generalised credit crunch”). Weber was also quoted as saying that the German government’s forecast of a 0.5% growth next year was too optimistic. He expects zero growth.

The Federal Reserve Open Market Committee, meanwhile, ended speculation that it may raise interest rates soon with a statement saying: “The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.”

 

OECD  expects recovery, but not over here

In its latest forecast, the OECD expects recovery for 2010 everywhere except in Europe. Eurozone forcasts were revised downwards for 2009 to -4.8% (rather than -4.1%) while the US was revised upwards to  -2.8% (rather than -4%), reports Les Echos. General Secretary Angel Gurria said the the Eurozone and the US  are different with respect to the magnitude of the stimulus package, the flexibility of their economy and the transparency about the capital needs of their banking sector. For the eurozone he recommends further interest cuts, and to continue the unconventional monetary policy as well as the stimulus policies. Countries with margins of manoeuvre should even increase their efforts. He warned in particular Germany, not to end stimulus measures prematurely.

 

The OECD  warned Austria that continued turbulences in Eastern Europe could threaten Austria’s financial and fiscal stability, reports Der Standard.

 

 

IMF and Ireland clash over bank strategies...

Karl Whelan of the Irish Economy blog dug up some interest bits from the IMF Article IV consultations on Ireland, which shows some serious disagreements about bank resolution policy. IMF staff noted that bank nationalisation could become necessary, while that was disputed by the Irish government, who also disagreed with the fund’s view that pricing of bad assets would be easier under nationalisation. The staff made the point that nationalisation would need to be accompanied by a clear commitment to operate the banks in a transparent manner and on a commercial basis.

 

IMF also wants Ireland to cut public sector pay, employment, and to raise property tax

The Irish Independent summarises the main points of the report. In particular, the IMF calls for more reductions in the public pay bill and government employment; broadening the tax base, including the introduction of a "long overdue" property tax; and a better targeted social welfare payments. The report also warns that Ireland has become the most expensive place to do business in the eurozone.

 

After Berlusconi

No, he is not going to resign soon, the FT writes, but notes that there are a lot people in the government who shuffling to and fro, hoping to take over soon. There is no clearly designated successor, the article notes. Berlusconi has no incentive to quit either, since his immunity from prosecution lasts only for as long as he is in office. (talk about bad incentives!)

 

Tremonti on debt

In a feisty speech, Giulio Tremonti yesterday declined to raise Italy’s debt to deal with this crisis, according to La Repubblica. He said it is quite frightening during a crisis to have the world’s third largest mountain of debt, without being the third largest economy . The government has to walk a tightrope to secure solid public finances and social peace.

 

Greece national stress tests

The Bank of Greece conducted stress tests together with the IMF on Greek lenders and concluded that the fundamentals of Greece’s banking system are healthy and that the banking sector could withstand further severe economic shocks, reports Kathemerini. [We believe that stress tests need to be transparent and Europe wide to convince the markets. Assurances of this sort are simply not enough.]

 

 

Brad Setser on dollar reserve growth

Brad Setser has another excellent discussion of the latest global financial flow data which shows that custodial holding at the Fed (investment the Fed is administering on behalf of others, mostly foreign central banks and state funds) have risen to record level. As Setser explains in great detail, one cannot simply extrapolate from this information, but his take is that if central bank reserves are up, and if the custodial holdings are up, global central banks should be adding to their dollar reserves. But interestingly, they are mostly buying at the short end of the market – Treasury Bills – rather than longer term notes, as they fear inflation down the road. So this is not exactly comforting for the US.

 

 

The paradox of macro-prudential regulation

Avinash Persaud has an interesting column in Vox, in which he writes about the paradox of macroprudential regulation, which consists of encouraging behaviour that a prudent firm would otherwise follow – which he compares to the paradox of savings. He said a good macroprudential tool would be counter-cyclical capital adequacy requirements, but not the type of proposals for macroprudential regulation that recently came out of the US (and the EU), which suggest more micro-prudential regulations of the sort that already failed.

 

Why are leading indicators doing so well – when the real economy is not?

James Hamilton has an interesting post in his blog looking at the Conference Board Leading Economic Index, which has increased by more than 1% in both April and May. He looked at the components and finds that the largest positive contributors are stock prices and yield spreads. In other words this is self-feeding mechanism, in which markets race ahead, which in turn produces a spike in leading indicators. (Unfortunately now, the rally seems to be over, which will bring the leading indicator a little closer to reality.)

 

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