MacroScope

Stop fighting the Turkish central bank. Since a shock interest rate cut earlier this month, the front end of Turkey’s bond yield curve has collapsed over 80 basis points, with two-year yields hitting seven-month lows of 7.84 percent. The curve is flattening as the 10-year sector starts feeling the heat as well. Whether it reflects investors’ faith in the central bank’s ability to safeguard economic growth while bringing down a record wide current account gap is another matter altogether. Bond investors have in fact been uneasy with the central bank’s experiments, fearing that overly loose monetary policy will cause an inflation shock down the road. But with more rate cuts clearly on the cards, investors are finding that Turkish rates, especially at the front end, are too attractive to miss. Especially as the central bank is shoring up the lira with daily dollar sales.

“Its difficult to go against the central bank. It’s been six months of mixed policy and finally international investors are getting the message,” says Luis Costa, head of CEEMEA currency and debt strategy at Citi. “Logically you should be paying long-end rates but it’s a challenging environment for that as the central bank bank is forcing the curve to be extremely flat.”
Markets are now pricing in another interest rate cut next week. How will markets react? The difference from the surprise rate cut on Aug. 3  is that other emerging central banks, fearful of a growth collapse, also now appear to be gearing up for policy easing. A dimming euro zone outlook means a poor outlook for exports from Turkey and other emerging markets. “There’s some realisation that the Turkish central bank may not be all that wrong,” says Zsolt Papp, who helps manage Swiss private bank UBP‘s emerging debt portfolio.

Investors have in fact realised Turkey is not overly concerned about inflation and that allows it more room to ease policy, Papp says, adding the moves in the Turkish curve indicate that is being priced in. Citi’s Costa agrees. “Policy is now clearly being driven by growth and that’s a massive game changer.”

The debt crises in the euro zone and United States are claiming some innocent bystanders. Investors fleeing for the safety of the Swiss franc have ratcheted up pressure on Hungary, where thousands of households have watched with horror as the  franc surges to successive record highs against their own forint currency. In the boom years before 2008,  mortgages and car loans in Swiss francs seemed like a good idea --after all the forint was strong and Swiss interest rates, unlike those in Hungary, were low.  But the forint then was worth 155-160 per franc. Now it is at a record low 260 -- and falling -- making it increasingly painful to keep up repayments. Swiss franc debt exposure amounts to almost a fifth of Hungary's GDP. And that is before counting loans taken out by companies and municipalities.

Hungarian families could get some relief in coming months via a government plan that caps the exchange rate for mortgage repayments at 180 forints until the end of 2014.  But the difference will have to be paid -- with interest -- from 2015.  Meanwhile, the issue threatens to bring down Hungary's banks which must pick up the cost in the meantime and will almost certaintly see a rise in bad loans --  no wonder shares in Hungary's biggest bank OTP are down 25 percent this month.  "(The franc rise) suggests a massive jump on banks' refinancing requirements going forward, " says Citi analyst  Luis Costa.

These overburdened banks will end up cutting lending to businesses, meaning a further hit to Hungary's already anaemic economic growth. ING analysts earlier this month advised clients to steer clear of Hungarian shares, "given the burden from (forint/franc) depreciation not only on loan-takers but also the implications this has for the domestic growth story."

The second Greek bailout was aimed at ring-fencing euro zone contagion, but could unleash it instead.

Comments from rating agencies since euro zone leaders agreed to involve the private sector in a  Greek rescue plan suggest last week’s events have increased rather than decreased the risk of contagion in the medium-term, says Gary Jenkins of Evolution Securities.

Fitch ratings stated on Friday:

If the Irish and Portuguese economies and public finances are not firmly on a sustainable path going into 2013, when both will need to regain access to medium-term market funding, the potential precedent set by PSI (private-sector involvement) in the Greek package will be incorporated into Fitch’s assessment of the risks to bondholders and reflected in its sovereign rating opinions and actions.

Jim O'Neill, the Goldman Sachs economist who coined the term BRICs back in 2001, is adding four new countries to the elite club of emerging market economies. But does his new edifice have the same solid foundations?

In future, the BRIC economies of Brazil, Russia, China and India will be merged with those of Mexico, Indonesia, Turkey and South Korea under the banner “growth markets,” O'Neill told the Financial Times.

Hmmm.  Doesn't quite grab you like BRICs, does it? The Guardian helpfully offers an amended branding banner of  "Bric 'n Mitsk" (geddit?). But which ever way you cut it, it's hard to see a flood of investment conferences and funds floating off under the new moniker.

Last month's special report “For some professors, disclosure is academic” has been making waves in the academic world, as this story shows:

Economists urge AEA to adopt ethics code: letter

By Kristina Cooke

NEW YORK (Reuters) - Almost three hundred economists have signed a letter to the American Economic Association "strongly" urging it to adopt a code of ethics requiring disclosure of potential conflicts of interests.

The 135-year-old American Economic Association, or AEA, does not have a code of conduct for its approximately 18,000 members. Over half of its members are academics, according to its website.

Reuters polls of economists over the last few weeks have come up with some pretty firm conclusions about both Ireland and Portugal needing a bailout from the European Union.

Portuguese 10-year government bond yields have hovered stubbornly above 7 percent since the Irish bailout announcement, hitting a euro-lifetime high and giving ammunition to those who say Lisbon will be forced into a bailout.

And of those who hold that view, it’s clear that bank economists have been most vocal in expecting Ireland and Portugal to seek outside help.

Doom and gloom is in no shortage in Ireland this week with “bailout boys” from the IMF descending on the capital and newspaper editorials mourning the end of Irish independence.

The opening of the 600 million-euro new terminal at the Dublin Airport today was somewhat also muted, despite the Dublin Airport Authorities’ best effort to splash.

Reporters invited to cover the event were given a lavish gift bag containing a box of chocolates, a mini bottle of champagne and a crystal and marble paperweight commemorating the opening of the T2.

 We're getting a lot of good feedback on our special report on cozy ties between Wall Street and the Fed. As one Wall Street economist put it: "I've never seen the 'Fed Alumni Association' used more extensively for back-channel communications with the Street than has been the case since June."

The story pulls back the veil on the privileged access that Federal Reserve officials give to big investors, former Fed officials, money market advisers and hedge funds.

Another economist from a European bank thanked us for the report, saying: "I hate the idea that monetary policy is communicated through non-official channels, be it old friends or newsprint."

Trichet

The European Central Bank is breathing a sigh of relief as it managed to take back 442 billion euros in emergency loans lent to banks a year ago without blowing a hole in money markets.

Banks borrowed modestly from two extra lending operations the ECB offered to sweeten the payment deadline, rolling over just over half the one-year loans, or 243 billion, and letting 199 billion euros flow out of the financial system.

The ECB has been keen to get money markets back on a more normal footing and to avoid banks becoming hooked on central bank money, but was wary of shocking markets with a sudden liquidity shortage.

European banks must pay back almost half a trillion euros to the European Central Bank on July 1 as the ECB’s first-ever one-year loans fall due, potentially putting pressure on banks’ ability to refinance and on money market interest rates.

But the ECB is confident it has put the necessary crash protection in place, with offers of unlimited three-month and six-day funds on the menu next week to make sure banks are not starved for funds.

 ”We have taken all precautions,” Austrian central bank governor Ewald Nowotny assured journalists on Friday. “We are confident that this will all occur without tensions.”