BIS criticises governments over bank policies

 

The Guardian (hat tip Calculated Risk) has a preview of tomorrow’s BIS annual report, which does not mince its words about the crisis resolution. The BIS, which has been an early and persistent voice of warning in the run-up to the crisis, said that the failure to sort out the banking system would threaten the global recovery. The Guardian quotes from the report: “The lack of progress threatens to prolong the crisis and delay the recovery because a dysfunctional financial system reduces the ability of monetary and fiscal actions to stimulate the economy.” The BIS said governments had not acted quickly enough to unload the toxic assets from bank balance sheets, while blanket guarantees of bank lending have exposed the taxpayer to potentially large losses.

 

 

Buiter on the ECB’s 12-month repo

Willem Buiter makes the point that the ECB’s decision last week to supply the banking system with a 12-month repo at 1% interest, totally €442bn, is  a gift, as it gives banks access to excessively cheap money. He says it is inefficient and unfair to recapitalise the banking system via cheap money. In that sense the ECB is conducting fiscal policy, not monetary policy. He accuses the ECB of pandering to section interest, and urges the ECB to act in the public interest again.

 

Merkel promises lower taxes, higher spending, and lower deficits

It’s election time in Germany. The Christian Democrats have decided yesterday on a gravity-defying, and probably unconstitutional package of tax cuts, coming only weeks after the same Christian Democrats voted in favour of a constitutional debt ceiling. Merkel has concluded that she needed to promise tax cuts – totalling about €15bn – in order to win the next elections, but her programme does not  say anything how this will be financed. Merkel categorically ruled out tax increases, as this would stifle economic growth. But she said nothing how Germany is going to cut the cyclically-adjusted deficit to 0.35% of GDP from 2016, which is now stipulated by the constitution, and which requires deficit cuts as from 2010 onwards. Der Spiegel, which has the story, quotes economists and legal experts as saying that Merkel’s election programme was unconstitutional. FT Deutschland, which also has this story on its front page, says some CDU state premiers favour tax increases to meet the constitutional debt ceiling, for example a rise in VAT on food.

 

Munchau on intra-euro area imbalances

In his FT column Wolfgang Munchau asks what will happen if Germany heads towards a zero budget deficit and if Sarkozy continues to expand the budget, which is likely in the runup to the 2012 French presidential elections. Munchau concludes that this might drive German investors, who face a shortage of domestic bonds, into the French government bond market. For as long as Germany produces masses in excess savings, France should have no difficulty in financing an expansion of its deficits. This imbalance has some parallels with the financial relationship between China and US. Germany will be trapped in the French bond market, just as China is trapped in the US capital markets today. In the long-run, imbalances unwind one way or the other. Unless Germany abandons its balanced-budget policies, or unless France abandons its expansionary fiscal policies, there is a huge disintegration risk to EMU in the long run.

 

Draghi calls for exit strategy coordination

It is too early for an exit strategy now, Mario Draghi told the Financial Stability Board, according to La Repubblica. But when the time has come it is important that exit strategies are co-ordinated globally, especially between the US, the EU and Japan. The second precondition is a resolution to the banking crisis, meaning that credit flows have normalised again.

 

How to spend it

Francois Fillon reunited his reshuffled cabinet to make one point clear: the new debt issuance should finance only investments that are financially profitable with a clear socio-economical goal, reports Les Echos. The debt is not to finance a third stimulus package, not buildings or social expenditures. It’s more for long term growth such as environment projects, research and key industries such as biotechnology or ecotechnology to secure competitiveness (!).  Earlier, some ministers had floated ideas on how to spend the money with proposals such as additional places in prisons.

 

 

Bank of Spain wants consolidation

El Pais leads its economic section with the story that the Bank of Spain called for the consolidation of Spanish savings banks in a meeting two weeks ago. The paper says the Bank of Spain did not say who should merge with whom, nor did it give any concrete instructions, but added that the statement was significant nevertheless, given the Bank of Spain’s influence in the banking sector.

Spain approved a €9bn fund to support mergers for banks to avoid that solvency problems of small banks compromise confidence into large banks reports Le Monde.

 

 

Spain’s black economy is swelling

El Pais has an interesting story about the Spanish black economy, as 800,000 immigrants, about a third of the total, are now outside the official sector. This number is the gap between the total number immigrants, as establish by a nationwide labour market survey, which is 2.6m, and the number of immigrants on the social security register, which is 1.8m. The rise in the black economy is a direct consequence of the economic crisis in Spain. Most of those immigrants are believed to have worked in construction, tourism and domestic services.

 

Emergency mood in Ireland

The Irish Independent calls on the government for immediate cost cutting actions. No more postponing of unpleasant decisions, no more excuses like the European elections or the Lisbon Treaty. The public sector needs to shrink and the government should take action before the summer pause not afterwards.  Property tax should be introduced immediately, even if the charging mechanism is not yet properly understood. “April's emergency budget was a baby step in the right direction but there has been slippage since then. We are in a national emergency. We need to see action every day and every week. But instead, all we are getting is silence.”

 

 

Keenan on cost cutting and bus drivers

Brendan Keenan picks up the looming strike of Irish bus drivers  - one of the best paid and well protected in Europe, to highlight what he considers to be the most striking argument from the IMF report on Ireland: ”Just fixing the arithmetic of budget deficits and bank losses may not be enough. It must be done,..., in a way which inspires confidence in the outcome and persuades people to join in the national effort, rather than protecting their own patch. If we could somehow get that with the bus drivers, we would be half-way there.”

 

 

Blame game

This is a story to show just how unreal some debates are: Der Standard reports that a recent study from Deloitte accuses the former board of Kommunalkredit Austria to be not properly informed about the risks taken.  The risk management was criticised as low professional. Member of this board was Claudia Schmid, current education minister, who defended her position by saying that she was in charge with “Financing, environment and ICT” and not with the treasury. She accused the other side of trying to make political capital out of this story.

 

 

 

Quatremer on Schulz

Jean Quatremer has an excellent commentary on Martin Schulz, the Socialist parliamentary leader in the European Parliament, whose refusal to put a Socialist candidate for the Commission presidency has caused much consternation. Quatremer hints that personal reasons may have played a role in this. He also mocks Schulz’ assertion that this was a battle the Socialists could not win, and made the valid that politicians would never apply the same logic to national elections.

 

 

Martin Feldstein on inflation

Writing in the FT, Martin Feldstein says that the recent rise in 10-year yields signifies an increase in investors’ fears of inflation and a higher US budget deficit. Analysising the difference between yields on ordinary bonds and those on inflation-protected bonds suggests that the entire rise in the yield can be explained by changing inflationary expectations. He says the US government should not withdraw the stimulus now, but it is important nevertheless that the US authorities reassure investors that they do not allow inflation to rise.

 

Setser on the Net International Investment Position

Once again, Brad Setser offers a deep insight into global financial flows with an analysis of the latest US net international investment position. He remarks that the debate about the dollar’s reserve currency status rests too much on market share, not on market size. Emerging countries have seen a huge increase in their total reserves in the last few years, while holding the dollar share constant. This leaves the US hugely exposed to a sudden withdrawal of funds, should the reserve position reverse.

 

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