The euro is getting weak. Help!

 

The euro is back to below $1.55, not exactly low by recent standards but not as dizzy as the levels it recently acquired. The reason is, of course, the changed perceptions about the strength of the euro area economy, according to a number of confidence surveys, and the most recent publication of Germany’s Ifo survey. Here is a story in the FT about the noticeable change in sentiment. Another reason is a slight shift in expectations about relative interest rates. After cutting rates to 2% the Fed has signal a paused, while Jean-Claude Trichet reaffirmed the central bank’s present position. No cut, no rise. While European and US interest rates are not about to converge, the process of divergence is over.

 

 

 

Bank of England says we are already in overshoot territory

The Bank of England said the correction in the securitised mortgage markets has gone too far – which it did in the stability report – and which would suggest that its decision to accept MBS as collateral for lending may not be as risky as some people believe. FT Alphaville has a succinct summary of the what the Bank said. The BoE apparently also made the point that mortgage default does imply a real loss as the property is transferred to the bank. True from a macro perspective, though clearly not from the banks’ own perspective.

 

 

 

Why imbalances in the CDS market will continue

The FT has an interesting technical piece on imbalances in the market for credit default swaps, which it says are likely to continue. The problem, it said, is the demise of the market of synthetic collateralised debt obligations, financial instruments which do not buy credit directly, but via CDS. At the moments the CDS is dominated by speculators who move in and out thus driving up volatility.

 

 

 

Does Sarkozy have an affair with Merkel?
Of course not. Don’t be silly. But his laudatory speech in Aachen, where Angela Merkel received the prestigious Charlesmagne  Award, has certainly raised eyebrows. He spoke of his respect, admiration, and attachment to Angela, and said he and her make a nice couple. FT Deutschland has all the details, plus a photo that probably tells all. It shows Sarko embrace a cringing Merkel.

 

 

 

Martin Wolf on the future of the UK

Martin Wolf has a thoughtful column in the FT about the long-term future of the UK economy. He said the UK economy will face fundamental and structural change. It will in future not be able to rely on finance and housing to prosper. He urges the Bank of England to stick to inflation-targeting mandate even at the risk of a big slowdown. The Federal Reserve may be able to do it differently, but the UK is no position to generate inflation.

 

 

 

Dennis Snower on the crisis

Writing in Vox, Dennis Snower has outlined four mechanisms through which the crisis will act out. The first is the subprime-induced money market difficulties which will ultimately translate into a reduction of credit to companies and individuals. The second is the continued decline in US house prices; the third is the interaction between falling wealth, consumption and employment; and the forth is rising inflation as a result of lax monetary policies. In the long run, he writes, the prospects are good – though in the long-run we will all be dead.

 

 

Avinash Persaud on financial regulation

Avinash Persaud has a very interesting article in Vox about the follies of financial regulation. He has every crisis brings about the same three responses: better disclosure, prudential controls and risk management. This has been tried for 20 years, and it is not working. Instead we should focus on three things: First, the biggest source of financial instability is the economic cycle. One should therefore eliminate pro-cyclical incentives in the banking system. The second class are maturity mismatches and leverage; and finally banks should pay an insurance premium to tax payers.

 

 

 

 

Double Digit inflation in the Baltics

Karsten Staehr has an article in RGE Economonitor on why inflation in the Baltics is so high – over 16% in Latvia, and over 11% in Lithuania and Estonia. The Balassa-Samuelson effects explains only a tiny bit, mostly its inflation due to extremely high rates of growth. And as inflation is highly autoregressive, it will be very hard to bring down.

 

 

10 years euro

 

It is starting. Frankfurter Allgemeine has beaten all the other newspapers to present the first wistful ten year euro reminiscence. Obviously the euro is not ten years old yet – that will be on January 1, 2009. But ten years ago was the fateful meeting of the EU Council which decided that Wim Duisenberg should be the first president of the EU. The thing we liked in the FAZ article is that it painstakingly compared the prices of coffee and bear during that period. Coffee prices went up by 20%, a ham sandwich by 100%, beer by 100%.  

 

 

 

Why is there a gap between inflation expectations and market-measures of inflationary expectations?

Morgan Stanley, hat tip FT Alphaville, has a good answer to this condundrum. At the beginning of the credit crisis, there has been excessive safe haven buying of standard government bonds, which drive up their yield, thus reducing break-even inflation rates. MS believe that true inflation expectations are higher than the market-based indicators suggest. Once the credit crisis ends, and the exceptional demand for government bonds falls, breakeven rates will go up steadily.

 

Prodi’s parting shot

A final act of the outgoing Prodi government was to put the list of some 40 million tax payers online. Italians had the chance to look up how much their neighbours, friends and idols earn. Assaulted by internauts the site was closed again after a couple of hours. La Stampa successfully downloaded the lists and used it to publish a ranking with the highest income earners. Italians were up in arms against this measure. Ex vice finance minister Vincenco Visco defended his action by saying that it was in accordance with the law. This law from 1972 gives an Italian citizen the right to look into the register at the local tax center. This was well before the internet.

 

 

 

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