175 days - Belgium's crisis is turning into farce

 

175 days after elections Yves Leterme hands back his mandate to form a government for the second time. Leterme is blaming his French speaking Christian democrat coalition partner for blocking the government formation by not agreeing on the terms for a constitutional reform. The francophone parties in return accuse Leterme that he just looks for someone else to blame for the breakdown, one week after Leterme’s Dutch speaking coalition partner refused to cooperate. The king has now to decide whether to give Leterme, the winner of the election, a third chance or whether to find an alternative. Le Soir speculates on Guy Verhofstadt, the prime minister of the outgoing government of a liberal-socialist coalition. Of course, this threat could provoke the Christian Democrates to find another scenario. And the crisis goes on and on….

 

 

ECB inject ever more money into the markets

After Thursday's shocking jump in the 1-month Euribor from 4.2 to 4.8%, the ECB promised it would inject even more liquidity into the market than it had already planned. The Financial Times reports that the ECB will take the exceptional step of extending a regular money market operation "by an extra week to cover the Christmas holiday and year end, when financial institutions will be under huge pressure to put their books in order." The rise in the one month rate at the end of the November suggests that banks needed to raise funds to meet minimum liquidity ratios for their year-end accounts.

 

 

 

Il Sole 24 Ore on inflation

The Italian economy is, for once, not the driver of eurozone inflation, with national inflation now firmly below the eurozone average. But Il Sole 24 ore reports that there is growing concern in Italy about price increases next year. Gas prices are due to rise 4.6% in January, and electricity will go up by 2.5%. Furthermore, due to the recent hike in Euribor rate, borrowers on variable mortgage rates are likely to suffer a sudden spike in their mortgage payments.

 

 

Neelie Kroes warns on subprime in Europe

Il Sole 24 ore reports that Europe has weathered the global financial storm fairly well so far, but that subprime crisis could arrive in Europe as well. Kroes was quoted as saying that several member states had problems with local banks, adding that national governments are not on top of this, and are not sufficiently co-operating with the European Commission and the European Central Bank.

 

 

 

Merkel is surprisingly flexible on the minimum wage

After the issue of the minimum wage has caused such a stir within Germany's Grand Coalition, Angela Merkel is now very open-minded about extending the scheme to other sectors, whenever the social partners want it to happen. Frankfurter Allgemeine reports that Ms Merkel is much more open about this idea than previously, although neither she nor the CDU want a national minimum wage.

 

 

Dassault to shift jobs out of the euro area

Le Monde has an interview with Charles Edelstenne, CEO of Dassault, who says the company is no longer in the position to compensate for the 30% fall in the dollar except through shifting jobs outside the euro area. He said the company was currently planning to take the necessary decision, which would be announced in early January.

 

 

 

Should the ECB cut rates? Probably yes

In a comment in Frankfurter Allgemeine, Thomas Mayer argues that the present situation poses a dilemma for the ECB. If it followed its mandate strictly, it would have to raise rates. But this would be irresponsible. Financial stability and price stability are currently conflicting goals. Mayer advocates a rate cut, but says the ECB needs to readjust its monetary policy framework if that were to happen.

 
 

 

Should the Fed raise rates? Probably not, but almost

Willem Buiter argues in his blog that the Fed should raise interest rates. He said the Fed, other policy makers, and Larry Summers are "constitutionally incapable of taking the long view." They are out to minimise short-run pain, and in doing so prevent medium-term adjustment. And this is his conclusion: "It is probably the clearest evidence that we can expect an accelerated decline in the global role of the US."

 

 

After the Minsky moment, here is the Rogers' Moment

In his FT column Wolfgang Munchau says Will Rogers' memorable statement "If stupidity got us into this mess, why can't it get us out" applies in particular to this crisis. For over a decade central bankers have been overreacting to economic shocks, to the extent that their policies produced a massive asset bubble, which has been the root causes of the present financial crisis. Now that the Fed is about to cut interest rates again, we are repeating the same old mistakes.

 

 

Brad Setser on dollar vs euro: the fall is over

Brad Setser came off the fence in his last blog entry, saying that the decline of the dollar is over, also citing a rising number of senior economists who share that view. He argues that at the current rate, the US trade deficit with the EU should fall quickly. (In our view, this has never been the argument. The argument has been that the US needs a very substantial devaluation to reduce its global, not bilateral, current account deficit. A dollar-euro overshoot would part of such a process.)

 

 

 

Some great charts

Yves Smith has a collection of great charts (not all by himself - see his Naked Capitalism blog entry for further attributions) showing the extent of the credit crisis. In terms of the money and short-term debt markets this is about the worst situation since the 1987 stock market crash. The first chart on Commercial Paper nice shows the two waves of the credit crisis, the first in August, the second in November, with ABCP rates peaking respectively.

 

 

The end  of the Tiger

The Irish Independent has a story warning about the end of the Celtic tiger. It quoted economist Brian McCormick saying that the 'second wave' of the Irish boom was coming to an end. Net new jobs will fall from 69,000 this year to only 17,000 next year. At the same time the unemployment rate will rise from 4.5% to 5.2%.

 

 

Rob Arnott on Equity Markets

 

The FT has an interesting comment by investor Rob Arnott, who argues that valuation in equity markets are not sustainable. In the US, wages are the smallest fraction of GDP in history, and profits are at a 40 year high. This trend cannot and will not go on forever. Earnings will continue to grow in the future, but investors expectations are too optimistic. The era of double-digit stock market returns is over.

 

 

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