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17.09.2007
Property market crisis spills over to Europe FT Deutschland has an interesting story that the US property market crisis has spilled over into the commercial property sector in Germany. It quotes the example of a Goldman Sachs fund which in May bought a commercial property in Frankfurt at a price of €2.7bn, at 22 times the annual rent, plus 10%. The article said this marked the height of the property boom. Goldman Sachs was not able to sell parts of the property, as had been planned, and furthermore it had to meet extra financing costs. The article quotes two other examples, one involving Allianz, and another the successor of Karstadt Quelle.
Alan Greenspan interview in FT: US property crisis to get worse Alan Greenspan, who is currently giving interviews to promote his autobiography, has told the Financial Times that the fall in US property prices still has a lot further to go. He said the precise fall was difficult to estimate but he suggested either a high single-digit figure for the peak-to-trough fall in average US house prices, and possibly double-digit figures. He said his successor had only little room for manoeuvre to cut interest rates, given the persistently high level of inflation. He said subprime mortgages were only the trigger that set off a broad re-evaluation of risk. The real problem were the off-balance sheet investment vehicles that issued much of the asset-backed commercial paper. They represented a “savings and loans disaster waiting to happen” because of the mismatch between their assets and liabilities. Mr Greenspan thought the issuance of asset-backed commercial paper ”is probably not going to get back to where it was. He also made predictions about the future of credit market. CDOs “will never get back to the levels and structures that they were, because now everybody knows you cannot price them”, but he said CDS are there to stay as they diversity risk. The FT has more details about Greenspan’s thinking, especially how he views the US economy today, in a separate article. One point Greenspan makes in that article is that US is entering a phase with lower productivity growth, which has led to a shift in the trade-off between unemployment and inflation. Another reason for this is the end of the disinflationary impact of globalisation. He said inflationary expectations are not as well anchored as is generally believed. Another interesting comment is over bubbles. “I am coming to the conclusion that bubbles are inevitable. Human beings cannot avoid them . . . They cannot learn.”
A critical week for the banking sector Frankfurter Allgemeine has an interesting story about the chances of further bank failures. It said that this is going to be crucial week to find out whether the problems in the banking sector can be contained. It quoted Josef Ackermann of Deutsche Bank, who had previously been relatively optimistic as saying that there was a now a chance of a deeper crisis, and even a recession, if central banks do not succeed in stabilising the financial sector.
Buiter and Sibert on Northern Rock bailout The serial commentators Willem Buiter and Anne Sibert argue in their latest Oped in the Financial Times that the Bank of England has lost much of its credibility in the bail-out of Northern Rock. The building society, the fifth largest in the UK, is not systemically significant. The Bank of England should not bail out individual banks, but ensure that clearing and settlements functions properly. Here is the conclusion. “The Bank’s credibility is being sacrificed for a bail-out of a systemically insignificant mortgage lender that looks at least partially politically motivated. The chancellor wants to protect depositors and does not want a bank failure on his watch. Depositor protection, however, is the job of the FSA and the Financial Services Compensation Scheme. Redistribution of income is the Treasury’s province. If the Bank is part of the inevitably political bail-out of individual banks, its independence in the realm of monetary policy could be compromised.”
Munchau on the stages of this crisis In his FT column, Wolfgang Munchau describes this crisis in terms of a three act drama. Act I is the subprime crisis and its initial spillovers into the banking system. It is the crisis we are witnessing right now. Act II will be the adjustment crisis of global imbalances, brought about by a US recession and a devaluation of the US dollar. This will bring a very painful process to Europe and Asia. Act III will be a crisis of CDS, once the level of corporate defaults rises in a recession.
FT Editorial on the Fed’s choice In an editorial, the FT urged the Fed to cut interest rates by 25 basis points. No cut would create havoc on the markets, while a 50 basis point cut would satisfy the market, but would also signal that the Fed is ready to abandon its price stability objectives. If the Fed opts for a 25bp cut, the accompanying statement will be crucial. “The Fed should say that it remains concerned about the risk of inflation and should justify any rate cut by reference to an increased risk of severe recession,” the editorial argued. Under no circumstances must the Fed give the impression that it is ready to entertain moral hazard.
Sarkozy’s dispute with ECB and euro group intensifies Nicolas Sarkozy dominated the news cycle on this weekend’s eurogroup meeting in Porto with his attack on the ECB and the president of the Eurogroup Jean Claude Junker (Le Monde) over their response to the financial crisis. Sarkozy said that he finds it strange that the ECB injected liquidity into the money market without lowering interest rates. This only gave credit lines to financial speculators, but made life of enterprises harder. Sarkozy also criticised Jean Claude Junker for not doing anything in response to the crisis. He called on Junker to rethink his role as the eurogroup president. The remarks are a double insult, writes the FAZ. On Friday the eurogroup officially welcomed the ECB’s reaction and decided not to react immediately to the crisis. Central bankers rejected his attacks saying that his remarks have zero impact on the ESCB interest rate decision.
Apart from Sarkozy’s stunt, France also plays another - though less confident - role in the news from Porto. The FT Deutschland has the story that several euro area member states are currently considering to issue a written warning to France to meet its obligations within the Stability and Growth Pact. A written warning, to be published by the Commission, is the strongest type of peer pressure the Ecofin has at its disposal. France rejects to commit itself to an annual reduction of its structural deficit by 0.5 percentage points and postponed the year in which a balanced budget is to be achieved from 2010 to 2012. Unimpressed with the reassurance of France’s finance minister of how France considers to gain one percentage point of economic growth, Eurogroup president Jean Claude Juncker said that France should demonstrate its efforts to reduce the public deficit (Le Monde). Though finance minsters welcomed the French reform agenda they warned that structural reforms and deficit reduction should go together.
Karamanlis reelected in Greece Costas Karamanlis centre-right New Democracy party won a narrow victory at Sunday’s general election but will have only a wafer-thin majority in the 300-member parliament. The FT reports that his party was projected to win 42% and 153 seats under a proportional electoral system that favours the frontrunning party. The main opposition party, Pasok, was behind with a projected 37.5% and about 101 seats. The FT said the conservatives would be facing problems to get support for their priorities: an overhaul of the debt-burdened pension system and a fresh attempt to amend the constitution to end the state’s monopoly of higher education. Small parties with radical agendas were among the overall winners in this election, including the Popular Orthodox Rally, a hard-right party with 4% of the vote and 11 seats, the first time the party has ever been elected to parliament. On the left, there were two parties. The Communists managed to reverse a 20-year trend of decline, with 8% of the votes, while the Radical Left Coalition, which ran a campaign aimed at disillusioned socialists, doubles its share to 6%.
Are the Europeans lazy? Claudio Michelacci and Josep Pijoan-Mas look at the differences in working time across the Atlantic. Writing in Vox, they conclude that differences in working time across the two sides of the Atlantic simply reflect differences in incentives over working life. “But is it really the case that Americans and Europeans have become intrinsically different? It may be. Yet, it is also true that aggregate labour market conditions have evolved quite differently in the US and Europe. During the last thirty years, wage inequality has increased substantially in the US and little in Europe, while the unemployment rate has risen in Europe but not in the US. Today, unemployment risk is smaller in the US than in Europe, obtaining better jobs is easier, there are greater chances to move up the career ladder, and to get employed in highly paid jobs. This implies quite different incentives during the working life of American and European workers.”
A riposte to the Economist Thomas Klau in the FT Deutschland takes issue with a recent leader by the Economist which recommended the split up of Belgium as a solution to the current political impasse. After three months Belgium does not have a new government yet. A hike in tensions between Dutch-speaking Flanders and the French-speaking Wallonia has provoked separatist calls on the plan. Klau argues that the split up of Belgium would be tantamount to a declaration of defeat for Europe. In today’s globalised world the state can only survive if it is capable of integrating citizens with different languages and ethnic groups. A fall back into regionalism could not be the answer. |  |
