It seems to be catching. Definitive signs of weaker growth in the US and a loss of growth momentum in Europe now seems to be extending across to China as well. In the first five months of 2011, new lending fell by 12% compared with the corresponding period of last year, and by 40% vis-a-vis 2009. Policy officials in China will be pleased – they have been raising reserve requirements and hiking rates for a while now in an endeavour to rein in rampant lending growth. In recent weeks, there has also been some evidence of slowing in production, although like the US this may reflect the difficulty some producers are having obtaining key parts from Japan. Asian equities are lower once again overnight, with the Shanghai Composite down another 1%, a loss of more than 12% in the last two months. Tonight China publishes key industrial production and inflation data – there has been a suggestion by some local commentators that inflation could have climbed to 6% last month, which against the backdrop of weakening growth will complicate the PBOC’s monetary policy task.
Guest post by FXPro
Commentary
Europe in a twist over burden-sharing. Despite the ECB’s latest veiled warning that it stands on the brink of raising rates once more next month, the euro has lost ground over the last couple of days because of the focus on the ugly spat which has developed amongst European policy officials concerning burden-sharing. In the blue corner, Germany, led by Finance Minister Schauble but supported by Chancellor Merkel and her coalition, want ‘substantial’ private sector involvement (that is, debt rescheduling) as part of any additional Greek bailout package. In the red corner is the ECB, led by retiring President Trichet, who fears that Greek debt re-profiling would represent a default and could open a fresh Pandora’s Box of financial problems for Europe which the central bank would then largely be expected to clean up. Trichet was extremely candid on Thursday, not only voicing his considerable concern over forced re-profiling but also ruling out ECB participation in any voluntary rollover of Greek debt as it matures. From the ECB’s perspective, what it is essentially suggesting is that both bond-holders and the central bank should be spared any suffering from this debt crisis, and that it should continue to be the taxpayers that shoulder the burden.
Not surprisingly, the representatives of the taxpayers, namely the politicians of Germany, Finland and the Netherlands, are increasingly agitated by this expectation, to say the least. Although it is easy to understand the ECB’s immense frustration at the predicament that it now finds itself in, it is very hard to defend its position on re-profiling in the current circumstances. Unless Greece makes miraculous progress on asset sales and tax-revenue collection (both of which look extremely unlikely), its debt dynamics have almost certainly reached the point where they are incapable of being serviced. As such, private sector participation in debt rescheduling, as Schauble pointed out again on Friday, is inevitable. His 7-yr bond-swap idea is a good one, from the point of view that it will buy time and force creditors to stay around. However, implementation will be complex and difficult, it will trigger a credit event which will have serious funding implications for Greek banks in particular, and it will put further pressure onto both Ireland and Portugal. If the ECB stops providing funding to Greek banks because their collateral becomes ineligible, then depositors in the country will surely accelerate their withdrawals of deposits from these banks.
There are no easy solutions to this mess. The ECB is obviously aggrieved to be in this position, and it desperately wants to preserve what independence it has left. It is also very conscious of the considerable deterioration in the quality of its own balance sheet. However, it needs to relent on its obstinate opposition to debt rescheduling because this is surely better than a broad-based default. Either the ECB agrees to monetise the debt (as per the US and UK approach) or it agrees to accept that some debt needs to be rescheduled. If bond-holders fail to agree to participate in burden-sharing, then why would the likes of Germany want to remain in the euro? Some bond-holders recognise that haircuts and rescheduling are a fait accompli, but this recognition has been very slow in coming.
US in a twist on debt limit and fiscal policy. Luckily for the world’s largest economy, the focus remains on Europe’s lumbering response to its debt crisis rather to the equally moribund approach being adopted by America’s politicians. Vice-President Joe Biden and Treasury Secretary Geithner have been holding meetings with Republican leaders over recent days, in an attempt to get them to accept the idea that tax increases need to form at least some part of the solution to reducing the enormous fiscal deficit. More meetings are due to be held this week, as both sides show some more urgency with the August 2nd drop-dead date for reaching the debt limit fast approaching.
Suspect sterling not helped by poor production data. Sterling was already stumbling ahead of Friday’s weak production data. The 1.7% decline in headline output in April was the biggest monthly fall for twenty months, with the weakness concentrated in the energy sectors. The ONS stated that the impact of the extra public holiday in April, together with the Japan earthquake played a part in the softer numbers, with the weather cited as factor for the sharp decline in energy output. Even though the data is seasonally adjusted, this can never be perfect for a moving feast such as Easter so, in all likelihood this could also have had a negative impact on the data. Factory gate prices were also softer than expected, headline input prices falling from 17.9% to 15.7%, with the monthly increases in output prices (headline and core) also softer than expected at 0.2% for both. The fact that sterling is actually slightly firmer on the release is down to a combination of positioning and some fears in the market of an even weaker number than we actually saw, together with the observation that much of the weakness was down to one-off factors that could well reverse in the May data. Still, sterling’s more cautious stance is warranted due to the change in policy expectations over recent weeks which could well see at least one MPC member moving from voting for higher rates when the minutes of yesterday’s MPC meeting are released in just under two weeks time.
Share
