Summary

The quest to prevent deficit-ridden Euro-zone states suffering Greece’s plight continues to lack conviction

Headlines

Japan: Sources tell Reuters that the BOJ is leaning towards easing policy next week but that it is not a done deal.

Prime Minister Yukio Hatoyama says that the government will work closely with the Bank of Japan to end deflation. He also says that he expects the bank to take appropriate steps to support the economy.

Finance Minister Naoto Kan says (when asked by an opposition lawmaker if he thought a formal agreement with the BOJ would help beat deflation): “There’s a question over whether it’s good to have an explicit policy accord. The BOJ governor has already said in public that the bank wants inflation from plus zero to plus 2% … I am cautious about the framework of an accord.”

The Cabinet Office says that core private-sector machinery orders fell a seasonally adjusted 3.7% m/m in January (in line with forecasts).
The corporate goods price index falls 1.5% y/y in February (in line with forecasts).

UK: Prime Minister Gordon Brown announces that the Budget will be held in “two weeks time” on March 24th (the Treasury officially confirms the Budget date in a written statement to Parliament) He also states (when asked about the UK’s debt rating): “This four-year deficit reduction plan, legally binding, legislated in parliament, is I think very clear and I think the markets should understand this. Our debt is structured in such a way that the average maturity is about 13 years. It’s a lot longer maturities than any of the debt you are dealing with in other countries.We’ve been able to finance it on that basis without the same amount of rollover that’s needed by other countries. I would also say the cost of financing this debt is still lower than the cost of financing debt when we came into power in 1997. I believe we will maintain that credit rating.” Regarding the global economy, he states: “Clearly there are issues about currency imbalances, there are issues about trade imbalances, there’s issues about the excessive holding of reserves by certain countries — all these things are holding back the growth that we need to see in the world economy.”

The Guardian says that Prime Minister Gordon Brown will go to Buckingham Palace on April 6th to call a May 6th election .

The Office for National Statistics says that manufacturing output  fell 0.9% m/m in January, the biggest fall since last  August and forecasts of a 0.3% increase. Overall industrial production fell 0.4% compared to forecasts of a 0.3% increase.

Eurozone: French industrial output rises 1.6% m/m. This compares to forecasts of a 0.2% increase and a 0.2% decline in December.

European Central Bank Executive Board member Jose Manuel Gonzalez-Paramo says: “Euro zone countries must coordinate their fiscal policies better, so that the reaction to this kind of imbalances does not diverge too much.” He adds: “(It illustrates) the importance of creating some room to manoeuvre in the good times, as many countries have done including Spain, because that becomes useful when reacting against any shocks.”

China: Exports rise 45.7% y/y in February (following a 21.0% increase in January) while imports grow 44.7% (after jumping 85.5% in January). As a result the trade surplus for February shrinks to USD 7.6 Bn, compared with USD 14.2 Bn in January (in line with forecasts).

The China Securities Journal reports that banks made about CNY 700 Bn in new loans in February, down from January’s CNY 1.39 Trn.

US: The WSJ says that discussions about how to signal in advance the start of the next tightening cycle will be at the centre of discussions at the FOMC’s meeting next Tuesday (although no such signal will be given in that meeting’s statement). It says that Fed officials also are likely to decide at the meeting to end their purchases of USD 1.25 Trn of mortgage-backed securities by the end of this month, as planned.

Australia: Reserve Bank of Australia Deputy Governor (Economic), Phillip Lowe, says: “The one (area) I’m worried about is (China’s) stimulus stays in place too  long and we get problems with asset prices or inflation.” For Australia, he notes: “Business are generally confident but still cautious. Access to credit for business is improving and there are some signs commercial property developers are  getting a warmer reception from lenders as the economy gathers pace.”

Comments

As strikes and economic turmoil continue to blight the Greek economy, the government might at least feel some sense of hope that it can battle its way through the current crisis without necessarily resorting to outside assistance. Whether this is feasible or not only time will tell, but last week’s sale of EUR 5 Bn worth of 10-year Greek debt – with 95% of the auction going into real money accounts and 76% being absorbed by names from the Euro-zone or UK  – was certainly a positive first step along that road. In fact, should current plans being formulated for a Euro-zone debt union ever come to fruition, then we need not necessarily worry about Greece again; but such is the disagreement and vacillation currently surrounding the proposal that there can be little confidence that a fail-safe system is genuinely being formulated for the future.

Vacillation amongst the Euro-zone leadership – very much in evidence since Ireland’s fiscal problems grew to a head towards the end of last year – rose to new levels last week when at the last minute, a number of key players seemingly reneged on an alleged agreement to offer guarantees to buyers of Greek debt in return for fresh austerity measures out of Athens. Indeed, the apparent volte-face by Germany was  apparent only hours after Greece announced its latest austerity measures as Angela Merkel simply welcomed Greece’s new measures as an ‘important step’ without offering any of the expected support. The Greek government’s retort was to then explicitly threaten an approach to the IMF (or so it seemed) and it was arguably this threat (ahead of a meeting between the Greek PM and Angela Merkel) which precipitated the talk of a European Monetary Fund by German politicians over the weekend. Rather than herald the beginning of the end to the Euro-zone’s fiscal drama, however, the project looks destined for further uncertainty and deadlock if headlines in the interim have been anything to go by.

Despite German finance minister, Wolfgang Schäuble’s apparent enthusiasm for an EMF, it now seems that interest is rather thinly spread amongst senior officials both in Germany and elsewhere. Backing her minister, Angela Merkel said that she found the idea “interesting”, and implied that although treaty changes would be needed, this should not be seen as a barrier. However, although Christine Lagarde also described the fund as a “an interesting idea”, she nonetheless commented that it did “not appear to me to be an absolute priority in the short term”. A far more negative spin has thus far emerged from the ECB. Jürgen Stark told Handelsblatt that such a fund would send the “wrong incentives”, calling Instead for budget rules to be “strengthened and strictly enforced through a stringent surveillance mechanism.”. Axel Weber meanwhile said: “Any discussion about bailouts is completely counterproductive … It’s not helpful to talk about ways to institutionalise help when the question is how to implement the budget reforms.”

The lack of clear resolution from the outset hardly bodes well for the establishment of a debt union that many have decreed as an indispensable partner to monetary union. This of course will entail the eradication of the a central tenet of the fiscal stability criteria – the no bail-out clause – and will clearly meet stiff resistance if Messrs Stark and Weber’s allusion to morale hazard are anything to go by. It is clear, therefore, that a long hard road lies ahead for proponents of the union with treaties to be changed and hardened objectors to be assuaged. Aside from the transfer of risks to fellow member states that a debt union would entail, it is these sizeable barriers to agreement that perhaps explains the rather limited reaction in the foreign exchange markets.

On, perhaps, a slightly more cynical note, it might be argued that part of France’s reluctance to give the idea a particularly high priority is that they are more than happy if the EUR continues to weaken from here as a result of political deadlock. It certainly didn’t seem that surprising to us to hear Finance Minister Christine Lagarde yesterday arguing that a weak EUR ‘makes investing in France more attractive to foreign investors’. We suspect that we will hear rather more in this vein in the not too distant future.

Article by Neil Mellor, Analyst at Bank of New York Mellon

(neil.mellor@bnymellon.com)

Original : https://gm.bankofny.com/Research/MorningUpdate/Article.aspx?Type=0&ContentManagerID=24236