New collateral rules to drive up financing costs for euro area banks

 

FT Deutschland was following up on its own story yesterday, according to which Yves Mersh, the ECB governing council member from Luxembourg, forewarned of a tightening in the ECB’s liquidity’s rules. Banking experts expect this to result in an increase in refinancing costs – and this at a time when 3-month money costs almost 5% - compared with a policy rate of 4.25%. European banks pass on 90% of asset-backed securities directly on to the ECB, in exchange for liquidity, and this trend has been particularly pronounced in Spain. José Manuel González-Páramo, a member of the ECB’s directorate, said that ABS now account for 16% of the ECB collateral, after 6% last year.

 

 

A credit cruch for the euro area?

Writing in Europe Economonitor, Elisa Parisi-Capone argues that the credit cycle in the euro area has definitely turned again, despite the ECB’s ultra generous liquidity policies. The article contains an interesting analysis of the direct impact of US credit on Europe, as foreigners hold 39% of outstanding US-origin ABS – so that a lot of the expected losses have yet to be accounted for by foreign banks. Within Europe, the article says, most of the damage is likely to occur in the UK and Switzerland, though German, Dutch and French banks also have some exposure.

 

 

Irish minister talks about second referendum

Frankfurter Allgemeine has picked up a story according to which Dick Roche, the Irish Europe minister, said he favoured a second referendum, the first time that such a statement has been made by a senior Irish politicians. The article contained a lot of caveats, including that Roche has no cabinet rang, although he is considered one of the more senior members of the Fianna Fail party, and that Roche himself said he was only speaking in a personal capacity. He also said there was no alternative way to ratifying the Treaty but through a second referendum.

 

 

Economists are pessimistic about prospects for German economy

The FT Deutschland’s poll of economists in August has registered a marked deterioration in confidence, with 40% now believing that a recession is probable, after 25% in the previous month. According to this poll, the economists are now more gloomy about Germany than about the US. Furthermore, the majority of the polled economists expect the downturn to be protracted, and likely to result in a rise in unemployment.

 

 

France struggles with 2009 forecasts

Les Echos has an article about the difficulties faced by Eric Woerth, the French budget minister, in drafting the 2009, given that the forecasts for 2008 has been significantly too optimistic, and had to be revised twice. Woerth would like a more cautious forecasts, while economy minister Christine Lagarde appears more optimistic. The article also quotes a BNP forecast, according to which 2009 growth will be less than 1%, with the budget deficit close to 3%.

 

 

Eatwell and Persaud on systematic risk

John Eatwell and Avinash Persaud have an interesting article in the Financial Times, in which they make three concrete proposals to reduce systemic risk. They start by arguing that it is a failure of composition to think that best practice at firm level automatically translates into system-wide stability. The first proposal is for regulators to begin system-wide stress tests, just as they did with avian flu and Y2K. Second, subject financial institution, independent of their legal status, with high leverage and a high degree of short term fund to a special regulatory regime; third, countercyclical charges should be levied, based on systemic phenomena.

 

 

 

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