Plus ça change…

The former UK Chancellor (and PM) Gordon Brown made a virtue of announcing the same policy measure several times over, forcing one to delve deep into the numbers to determine what was new and what had been previously announced. The same holds true for last night’s UK policy measures to tackle the credit crisis. Both the chancellor and central bank governor announced measures to improve liquidity and lending.  

On liquidity, it is ‘new old news’, with the Bank activating a scheme put in place last December to offer liquidity to banks at 6-month duration. The chancellor also announced a ‘funding-for-lending’ scheme through which long-term funding for banks will be offered, conditional on expanding lending to the non-financial sector. This is more ‘new’ news, standing between the Bank’s efforts and the more command economy-style ‘Project Merlin’, which set lending targets for banks, although the Treasury has long been exploring ways of getting more involved. Will it work?

Guest post by Forex Broker FxPro

Efforts to improve the price of credit are more likely to be effective than lending quotas. For sterling, the most remarkable thing was the lack of reaction, even despite the hint of more QE to come. This shows just how much more immune currencies are becoming to QE.


Time for Greece to decide. Asset markets and currencies essentially are in stasis ahead of Sunday’s critical election in Greece. In recent days, the odds of a victory for the pro-bailout New Democracy Party (NDP) have shortened considerably. That said it is also apparent from recent polls that there remains a strong groundswell of support for Syriza, and that it will push the NDP all the way. Even if Syriza did top the poll, the party will find it difficult to fashion together a majority government. As such, the claim by Syriza’s leader that the legitimacy of the EU-IMF bailout will be hugely compromised should his party win is partly bluff. Although an understandable sentiment, Tsipras has a problem if he attempts to rip up the agreement too quickly – for instance, the only way to pay Greece’s immense public services bill is through the good grace and favour of international creditors. Should Tsipras send Greece’s creditors packing then he will rapidly incur the wrath of government workers and his support will drain away almost overnight. Unfortunately, there is every prospect that this weekend’s Greek election will again be a ‘no result’. Greece is almost ungovernable these days, a function of its bankruptcy, the collapse of proper institutional structures and arrangements, chronic tax avoidance, a spectacularly rapid decline in living standards and a subjugation of hope. Ultimately, Greece will certainly leave the euro and hopefully it will be sooner rather than later. The outcome of this weekend’s election is very unlikely to temper this inevitability.

Too early to write off Germany. Against the backdrop of a significant increase in Bund yields over the past week or so, various commentators and real money managers have voiced their reservations concerning the rising risks to Germany as a sovereign. For instance, PIMCO publicised a recent asset allocation decision to lower its exposure to Bunds, citing (justifiable) concern over the inexorable rise in contingent liabilities in Germany. Many now regard Germany as being stuck between a rock and a hard place. If it relents and endorses a fully-fledged banking and fiscal union replete with a universal euro-wide deposit-guarantee scheme then the financial cost will be enormous. Alternatively, if Germany continues to resist the equivalent of financial marriage with numerous bankrupt sovereigns, then the contingent liabilities of funding the rescue facilities will continue to rack up in any event. In addition, should most of Europe’s south ultimately leave the single currency, there is the extremely delicate question of how their national central banks repay the EUR 650bn of TARGET2 balances owed to the Bundesbank. Furthermore, Germany would need to stump up a huge wedge of cash to recapitalise the ECB. Up until very recently, Bunds benefitted from a very significant risk premium, which has been partially unwound over recent trading sessions. That said there is a danger in being too quick to write off Germany from a sovereign credit perspective. Deutschland’s economic tentacles are truly global, and the national balance sheet remains a strong one, certainly much better than any other major European sovereign. Although some of the arguments now circulating regarding heightened Bund-risk are worth noting, at the same time there is a danger of becoming overly alarmed.

Swiss problems. Being virtuous seems to entail just as many problems for Switzerland as it does anywhere else. Although it shares none of the sovereign issues of the majority of eurozone members, this does not mean the economy is without issues (beyond deflation). This was evident in the FX reserves data released recently that showed a 28% jump when the SNB intervened during May to defend the EUR/CHF 1.20 level. Yesterday’s comments from SNB President Jordan reflect the fact that holding the line is not without cost. While the SNB was talking tough on defending the 1.20 level, stating it “will not tolerate” any further franc gains, Jordan also outlined the need for corrective measures in the property market. The issue is the extent to which the expansion of the monetary base is feeding through into asset prices – property in particular. This is not a new thing and there was tinkering around the edges last year to temper the impact on property values. Now the SNB sounds a bit more hawkish, noting that apartment prices “already exceed values already justified by fundamentals”. The irony is that, in tackling a credit crisis, in part caused by excess asset values elsewhere (US sub-prime, UK property etc.), the SNB is creating the same problem via its currency fire-fighting. For different reasons the same issue is being seen in Germany. Despite the SNB’s assurances, the market remains nervous, particularly ahead of the Greek election this weekend. The cost of 3mth EUR/CHF puts has risen over the past month, reflecting the markets’ perception of a greater probability of the CHF cap being breached in the near future. Current option pricing puts this between 15% – 20% of the 1.19 level being breached.

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