ECB to raise haircut for mortgage-backed liquidity operations

 

We reported on this some while ago, but El Pais this morning has some details on the rule tightening the ECB is planning in respect of its liquidity operations. At present, the ECB applies a haircut of 2% on mortgage-backed lending. That means, banks have to pledge €100m in mortgage-backed securities to obtain €98m in credit. The ECB is discussing to raise the haircut (i.e. discount) to 10-15% to make it less attractive for banks to pledge mortgage-backed paper, a practice that has increased significantly, especially among Spanish banks.

 

Germany supports Juncker’s third successive mandate as head of the eurogroup

Jean Claude Juncker’s reappointment as eurogroup chief is now considered a done deal, after Germany lent its support. Juncker had originally planned to quit the post after four year to become president of the European Council in January, but his career move was shattered by the Irish No to the Lisbon Treaty. Juncker plans to commit himself only until the middle of next year, in the hope that the Lisbon Treaty will be ratified by then, according to FT Deutschland.

 

Juncker himself gave an interview in Le Monde in which he defends the absence of a stimulus package for the euro area. He said the situation is different here than in the US, and that there was sufficient budgetary room for manoeuvre in all the country to deal with the downturn.

 

Euro area service industry already in recession

The latest Markit euro area service market indicator showed a big fall to a recession-index level of 48.5 (with 50 being neutral) in August, the third time that this indicator has fallen, FT Deutschland reports. It adds the latest results of its own euro area economic indicator, according to which the euro area will effectively stagnate in the second half of this year. On a country-by-country basis, the service sector downturn is most extreme in Spain, where the index slumped to a depression level of 37.1. The index was marginally positive only in Germany, which is currently one of the most robust economies in the euro area, though also weakening.

 

Sarkozy levies capital income tax to finance welfare to work

Sarkozy announced last week to finance the negative income tax (RSA), designed to get welfare recipients back to work, by a 1.1% increase in the capital income tax. It not only surprised his own party, which argued for a wealth tax cut instead, but also deprived the Socialists of their munitions.  Politically (Le Monde) and economically ( Les Echos) daring as it was, Sarkozy now rowed partly back when he suggested that the new tax should be included for the upper tax limit of 50%, effectively exempting rich tax payers from this extra tax. Le Monde argues that as a result this tax rise will burden the middle class further instead of relieving it as promised during his election campaign. The capital income tax taxes income from life insurance, dividends and property. Le Point has some interesting statistics on this showing that the elderly could be hit most and makes the point that intertemporal savings decisions are likely to be affected as capital income is often part of a pension scheme.

 

The decoupling of the euro

Jean Marc Vittori in Les Echos  looks at the most recent devaluation of the euro. The euro lost 8% of its value in less than one month  and is at the lowest value against the dollar since the beginning of the year. Vittori argues that this is due to the different policy response of the US and the eurozone in response to the financial crisis. The US saved its economic growth by using a fiscal package of $150bn and lowering interest rates to 2%. In the euro zone the central bank raised its interest rate in July and finance ministers seem unable to agree on a substansive relaunch strategy. As a result economic performance is progressing in the US while it continues to recede in the euro zone.

 

 

Whatever happened to the SPD?

Germany’s post-communist Left Party for the first time overtook the SPD in an opinion in a western German state – the Saarland, which holds elections in 2009. This is a somewhat special situation since Oskar Lafontaine used to be a popular SPD prime minister of that state until the 1990s. Now as one of the leaders of the Left Party, he is planning a triumphant return, by defeating his old party, which would then have to accept the role of a junior coalition partner. (The polls are a reflection of the depth of the crisis in the SPD, which has been fighting an inter-party warfare over whether to participate in coalitions with the Left or not. The issue is coming to a head in the state of Hesse, where the state party is planning such a coalition to oust unpopular premier Roland Koch. See FT Deutschland and other German newspapers for coverage of this story.

 

Meanwhile, Frankfurter Allgemeine has the story that foreign minister Frank Walter Steinmeier will this Sunday present his conditions for accepting to become his party’s candidate for chancellor, which would include the ability to choose both the election programme, and his senior staff. There is an intense rivalry between him and party leader Kurt Beck, who has become exceedingly unpopular inside his own party. The SPD will, however, not decide this Sunday, but wait until later in the autumn.

 

 

Wage restraint wanted

The Finnish government advised unions and employers representatives to come up with a new model to keep future pay rises in check without returning to a tripartite centralised incomes policy agreement framework reports Newsroom Finland.  Prime Minister Vanhanen said repeatedly that pay increases in the next round must be markedly lower than those agreed in the previous one.

 

 

FT advocates tough love for the UK

In an editorial, the FT says the government should not announce any feeble measures to help the economy, such as this week’s announcement to forego stamp duty. Instead the government should allow both house prices and sterling to fall. The currency had been overvalued in any case, and this is a welcome adjustment, the FT said. The Bank of England will have to take the rise in import costs into account, and maintain tighter monetary policies than would otherwise be necessary.

 

 

 

 

Stephen Roach on Chinese inflation

In an FT Oped, Stephen Roach said inflation risks are China’s biggest macro challenge. He is particularly concerned by the inclination by Chinese officials to dismiss the build-up of inflationary pressures as “structural” – and thus the beyond the control of monetary policy: Higher minimum wages, “imported” commodity inflation, and international price equalisation. He said the US committed the same error, and believed in the same feeble excuse in the 1970s.

 

Flemish racist count

It is getting worse in Belgium. Jean Quatremer, probably now the most reliable chronically of Flemish racist outburst, gave us some outrageous examples of anti-Francophone outburst in the Dutch-speaking part of Belgium. A French colleagues of his was thrown out of a taxi at Brussels airport because he did not speak Dutch. The presenter of the main Francophone TV channel did not get served in a restaurant in Bruges for the same reason. No one recognised him there, because francophone TV is no longer carried in Flemish cable TV channels. The most outrageous example quoted was from a school in the Brussels suburb of Wezembeek Oppen, where the parents have been instructed not to speak any other language picking up their children, in order not to disturb the school language purity. Quite mad.

 

 

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