Bundesbank says Ireland will destroy eurozone

 

The Irish Independent picked up these incredible comments from the Bundesbank in its monthly bulletin in which it criticised Ireland, Spain, Portugal and Greece for running "persistently high" current-account deficits over the past decade, which the Bundesbank says is a "source of danger" for the single-currency region.

The Bundesbank blamed the current-account deficits in Ireland and elsewhere on increases internal demand, "comparatively" strong inflation and a "grave" erosion of competitiveness. The Bundesbank dismissed the claim that reducing the German surplus would help to reduce the imbalances. Ireland's current account deficit would only improve by 1 percentage point if Germany increased imports by 10pc, the report says. “Ireland's economic policies pose a danger to the eurozone as a whole and we should take measures to improve the economy ourselves rather than look to others to change”

 (Interestingly, the Bundesbank does not think that persistent current account surpluses, which are the logical counterpart of current account deficits, constitute a “source of danger”. This suggests to us that the people who write these report are economically illiterate.)

 

IMF breaks off talks with Hungary

This is a story we used to see a lot more ten or twenty years ago. Hungary and IMF have  broken off talks, as the new Hungarian government refuses to accept further austerity measures. The FT reports that the message is not entirely clear, as the economy minister later accepted that Hungary would cut its budget deficit to 3% of GDP by 2011. It looks as though the government is mindful of the local elections, which could see the rise of a far-right party that opposes foreign capital. The election are held in October. The EU also criticised the Hungarian policies, as well as attempt to undermine the independence of the central bank. Hungary currently does not need to draw on the €20bn standby facility, but the article says the country’s financial position remains precarious. The forint fell by over 3% against the euro after the news of the breakdown of talks came out.

 

Moody’s downgrades Ireland’s rating

Moody’s has been the last rating agency to downgrade Irish debt citing growth prospects and a deteriorating debt position. The FT says the downgrade to Aa2 puts Moody’s rating on the same level as Standard & Poor’s, and still one notch higher than Fitch. Irish 10-year yields went up 8bp to 5.51%, and CDS rose 10bp to 261.

 

Austerity vs Stimulus: Brad de Long and Niall Ferguson

The FT’s debate on austerity vs stimulus seems continued with Brad DeLong and Niail Ferguson. DeLong argues:

“Greece, Ireland, Spain, Portugal and Italy need to be austere. But Germany, Britain, America and Japan do not. With their debts valued by the market at heights I had never thought to see in my lifetime, the best thing they can do to relieve the global depression is to engage in co-ordinated global expansion. Expansionary fiscal, monetary and banking policy, are all called for on a titanic scale. But, the members of the pain caucus say, how will we know when we have reached the limits of expansion? “

He says the US enjoys an exorbitant privilege, and should use. The market will tells us when to stop, but they have not done so now, and probably will for some time to come.

Niall Ferguson says the Keynesians are like the old Bourbons: The have learned nothing, and they forgot nothing. He makes the argument that the US amassed similar levels of debt during the second world war, but to do so in peacetime is reckless. He cites surveys on both sides of the Atlantic showing that the public is nervous about the debt-build-up. He says the key is to enact policies that shore up the confidence of the public.

 

Giavazzi and Giovannini on the low interest rate trap

Writing in Vox, Francesco Giavazzi and Alberto Giovannini argue that the strict application of an inflation target – with no financial stability rule – would land economies in a low interest rate trap, in which they are prone to financial crises.

“... the crisis has taught us that central banks, when they set interest rates, should also be concerned about the fragility of the financial system. Interest rates should reflect the value of liquidity, and this should take into account the fact that crises are spikes in the value of liquidity...Underpricing liquidity in this way makes crises more likely. In other words, since in the event of a crisis the price of liquidity goes up, central bankers should keep policy rates higher than those they would set with the sole objective of price stability. Such a deviation from simple inflation targeting would have the important effect of signalling to all financial market participants that liquidity is not as abundant as they perceive in normal times, but can dry out unexpectedly and dramatically. By charging the ‘true’ price of liquidity (i.e. its shadow price), central banks will help dampen excessive risk taking.”

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