The credit crisis is back big time

 

Oil broke above $140pb after Libya said it would cut production, and after Opec predicted a price peak of $150-170 this summer, the FT reports. Yesterday also saw more credit-related write-offs, and a generally gloomy outlook about a stagflation ridden global economy triggered a big sell-off in shares. Gold went up by more than 3% to over $900 again. The FT reports that its European share index is now at the lowest level since 2005. The markets were particular concerned about a new wave of financial instability. In the US, Citigroup shares lost 6.3%, and are now at the lowest level in a decade. In all this uncertainties, the euro bounced back against the dollar, now trading again at over $1.576.

 

 

 

Some really gloomy stuff from our US friends

The Calculated Risk blog has collected some particularly gloomy views about the state of financial markets. Huge inventories are about to hit the US in Q3, and that the equity market was miles behind the credit markets, which if true would signal another huge equity crash.

 

 

 

Willem Buiter on the Fed

Willem Buiter has stepped up his criticism of the Federal Reserve, saying the Fed’s policy stance is reckless. He makes the point that even if you accept a view of no second-round effects, there is a sizeable zero round effect, as he calls it, as the rise in energy prices increases the output gap and will be inflationary. This effect, he says, plays no deliberations in the Fed policy at all.

 

 

 

The Fed blames the emerging markets

This is rich. Fed Vice chairman Don Kohn blames the central banks of emerging markets for the mess the Fed has caused with its monetary policy. The WSJ economics blog has all the detail. Speaking at a conference in Frankfurt, this is what Kohn had to say: “The upward trend in prices of food and energy over the past several years…importantly reflects the pressures posed by rapidly growing demand in developing economies against relatively inelastic global supplies of commodities… In those countries where strong commodity demands are associated with rapid growth in aggregate demand that outstrips potential supply, actions to contain inflation by restraining aggregate demand would contribute to global price stability,”

 

 

Spain frets about Euribor increase

As risk aversion returns to the financial markets, spreads between money market and official interest rates widening again, which is bad news for mortgage holders with variable-rate mortgages. El Pais notes that Spanish mortgages have gone up an accumulated 73% since 2005, and the 3-month Euribor has now reached its all-time high of 5.363%. The article blames Jean-Claude Trichet for all this, especially his recent pre-announcement of the interest rate increase, which preceded the latest Euribor rate rally.

 

 

Fortis to raise capital

The Dutch-Belgian bank Fortis will raise about €8.3bn in new funds, through a combination of new equity capital, the elimination of a dividend, and sale and lease back operations, according to Financial Times Deutschland. The decision has shocked observers and is a sign that the bank has been hit harder by the credit crisis than previously assumed. The shares lost some 20% yesterday. A Chinese insurer, Ping An, which holds 5% of Fortis, must also play a special role in raising new funds.

 

 

Early data on June inflation not looking good

Some German Lander yesterday produced some bad inflation number, notably Hessen with 3.8%, and Saxony with 3.4%, which suggests that the German and euro area inflation statistics are likely to remain higher, or edge up even higher this month. FT Deutschland reports that those bad a numbers (for Hesse it was the highest in 15 years) could adverse impact the already shaky consumer.

 

 

 

Italy still among the countries with the highest corporation tax

Il sole 24 ore reports on the corporation tax rankings in the EU, as published by Eurostat. The highest are Malta (35%), France (34,4%), Belgium (34%) and Italy (31.4%), followed by UK and Spain (30%), and Germany (29,8%). At the bottom end are Ireland (12,5%), Bulgaria e Cyprus (10%). The EU average is 23.6%. The biggest relative cuts came in Germany (where the rate is now lower than in the UK), and Italy.

Some highlights of the ranking on the marginal top income tax are: Denmark (59%), Sweden (56.6%), Netherlands (52%), Finland (50.5%), Austria and Belgium (50%), Germany (47.5%), France, UK and Poland (40%).

 

 

The cause (and the politics) of high oil prices

Paul Krugman’s Friday column in the NYT is worth reading today. It is about the politics behind the popular thesis that the oil prices is driven by speculation. Krugman has been railing against the thesis for quite some time that the oil price is driven by speculation. He makes the point that this is a convenient message for politicans, as it appears to reduce the need for a change in energy policy. You can blame someone. You do not have to something about it. He said the experts who make those claims reminded him of those supply side economists in the 1980s who told Congress that cutting taxes would raise economic growth.

 

 

 

Panic to follow euphoria in the UK

Martin Wolf observes that collective panic is breaking out in the UK, where commentators are calling for an increase in the inflation target, or massive subsidies for the mortgage markets. After a decade of an economic boom, the UK cycle (like the ones in Ireland and Spain) is indeed falling sharply, but as yet, he says, there are no forecasts of recession. Wolf pleads with his countrymen to stick to the framework agreed over ten years ago. Panic is the worst kind of emotion.

 

 

Is a French EU presidency what Europe needs right now?
Anand Menon writes a comment in the FT casting doubt about the success chances of a French EU presidency. He recalls the disastrous 2000 presidency, which ended up in the dismal Treaty of Nice, and says Mr Sarkozy’s shirt-sleeve criticism of Peter Mandelson, who he blamed for the Irish No vote, did not suggest that the French truly understand how to play an EU27. Good presidencies must show a degree of impartiality, they must take on board the concern of small countries, and work with the EU institutions.

 

 

 

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