MacroScope

Mervyn King gets a “B” grade from economists… for the time being

As is now customary for retiring central bank chiefs, Bank of England Governor Mervyn King has received a warm – but not a standing – ovation from economists for his time in charge.

But if there’s one thing the last few years have shown, it’s that the legacy of prominent central bankers can sour quickly after retirement.

King received a median 7 out of 10 score for his 10 years as Bank of England governor from 39 economists polled by Reuters this week.

Although the general tone was favourable, there was a wild range of opinion.

One economist was so appalled by his governorship that he awarded him 1 out of 10.

Another thought he was nothing less than a triumph of modern central banking, giving him 10 out of 10.

Want to know what the ECB is going to do? Watch the German PMI

A sudden turn for the worse across German companies should clinch an interest rate cut from the European Central Bank next week, or in June at the latest.

That’s because the latest PMI surveys, which have a decent correlation with economic growth, suggest the German economy  shifted back into reverse this month, against the expectations of economists.

And the one thing the ECB’s Governing Council never allows to pass is any sign that Germany, Europe’s No.1 economy, is floundering.

Why euro zone bond yield ‘convergence’ may be something to fear

 

Are European bond investors looking for love in all the wrong places?

The premium bankers demand to hold various types of euro zone debt over that of Germany has recently come down. In normal circumstances, this might suggest markets are no longer discriminating between the risks associated with different member countries’ bonds. But analysts say the recent convergence is based on a precarious belief of ECB action rather than any real improvement in economic fundamentals.

Spain and Italy still offer a comfortable premium over Germany. But a narrowing in yield spreads that is being driven by a fall in the funding costs of Spain and Italy, rather than by a rise in German yields, gives reason for pause.

According to Lyn Graham-Taylor, fixed income strategist at Rabobank:

The fact there is almost no movement from Germany and a huge movement in peripherals is indicative to us of this convergence for the wrong reason.

France’s downturn is more significant than you think

The huge downturn in French businesses was by far the most disappointing aspect of this week’s euro zone PMIs, which again painted a dismal picture of the euro zone economy.

Maybe it’s because grim euro zone PMIs come around with depressingly familiarity these days, but economists on the whole had surprisingly little say about this.

Still, the March survey delivered some major landmarks relating to France.

Most obviously, its services companies endured their worst month since February 2009, practically at the nadir of the Great Recession of 2008-09.

Europe’s ‘democratic deficit’ evident in Cyprus bailout arrangement

The problem of a “democratic deficit” that might arise from the process of European integration has always been high on policymakers’ minds. The term even has its own Wikipedia entry.

As Cypriots waited patiently in line for banks to reopen after being shuttered for two weeks, the issue was brought to light with particular clarity, since the country’s bailout is widely seen as being imposed on it by richer, more powerful states, particularly Germany.

Luxembourg has accused the Germans of trying to impose “hegemony” on the euro zone.  The country, whose banking system, like Cyprus’, is very large relative to the economy’s tiny size, fears that similarly harsh treatment could be imposed on its depositors.

Euro bailouts — one out, one in

We had thought the end-of-week EU summit was going to be a lacklustre affair but things are starting to bubble up.

Ireland announced last night it would issue its first new 10-year bond since it was bailed out in 2010. It sounds like the books on the syndicated issue will open today with dealers predicting strong demand. This is a crucial step in Dublin becoming the success story the euro zone desperately craves. Some European Central Bank policymakers have said the bank’s bond-buying programme could be deployed to help Ireland once it has demonstrated its ability to issue debt in a variety of maturities. Others, notably Bundesbank chief Jens Weidmann, appear less keen on the idea.

With yields below four percent (they peaked above 15 percent in 2011) and needing to raise only a few billion in debt this year, it’s not clear that Ireland even needs ECB help to put the bailout behind it, but bond-buying support would certainly seal its exit and also show the ECB’s intent to markets. Further down the line, it will be worth pondering whether Ireland’s journey demonstrates that austerity was the right medicine. Plenty of euro zone policymakers will say so. The interesting question to address would be whether Dublin could have got there faster with more leeway to boost growth and therefore tax revenues.

To print or not to print

It’s ECB day and it could be a big one, not because a shift in policy is expected but because journalists will get an hour to quiz Mario Draghi on the Italy conundrum after the central bank leaves monetary policy on hold.

To explain: The story of the last five months has been the bond-buying safety net cast by the European Central Bank which took the sting out of the currency bloc’s debt crisis. But now it has an Achilles’ heel. The ECB has stated it will only buy the bonds of a country on certain policy conditions encompassing economic reform and austerity. An unwilling or unstable Italian government may be unable to meet those conditions so in theory the ECB should stand back. But what if the euro zone’s third biggest economy comes under serious market attack? Without ECB support the whole bloc would be thrown back into crisis and yet if it does intervene, some ECB policymakers and German lawmakers will throw their hands up in horror, potentially calling the whole programme in to question.

In Italy, outgoing technocrat premier Monti is due to meet centre-left leader Bersani, the man still harbouring hopes of forming some sort of government. Whether he succeeds or not it seems unlikely that any administration can ignore the dramatic anti-austerity vote delivered by the Italian people.

Euro zone week ahead

Italy will continue to cast a long shadow and has clearly opened a chink in the euro zone’s armour. It looks like the best investors can expect is populist Beppe Grillo supporting some measures put forward by a minority, centre-left government but refusing any sort of formal alliance. That sounds like a recipe for the sort of instability that could have investors running a mile. The markets’ best case was for outgoing technocrat prime minister Monti to support the centre-left in coalition, thereby guaranteeing continuation of economic reforms. But he just didn’t get enough votes. Fresh elections are probably the nightmare scenario given the unpredictability of what could result.

The story of the last five months has been the bond-buying safety net cast by the European Central Bank which took the sting out of the currency bloc’s debt crisis. But now it has an Achilles’ Heel. The ECB has stated it will only buy the bonds of a country on certain policy conditions. An unwilling or unstable Italian government may be unable to meet those conditions so in theory the ECB should stand back. But what if the euro zone’s third biggest economy comes under serious market attack? Without ECB support the whole bloc would be thrown back into crisis and yet if it does intervene, some ECB policymakers and German lawmakers will throw their hands up in horror, potentially calling the whole programme in to question.

In other words, until or unless a durable government is formed in Italy which can credibly say and do the right things, the euro zone crisis is back although not yet in the way it was a year ago when break-up looked possible.

A flaw in euro zone defences

Italy continues to dominate European financial markets and it looks like the best they can expect is populist Beppe Grillo supporting some measures put forward by a minority, centre-left government but refusing any sort of formal alliance. That sounds like a recipe for the sort of instability that could have investors running a mile. Outgoing technocrat prime minister Monti is speaking Brussels today. The markets’ best case was for him to support the centre-left in coalition, thereby guaranteeing continuation of economic reforms. But he just didn’t get enough votes.

Fresh elections are probably the nightmare scenario given the unpredictability of what could result.

The story of the last five months has been the bond-buying safety net cast by the European Central Bank which took the sting out of the currency bloc’s debt crisis. But now it has an Achilles’ Heel. The ECB has stated it will only buy the bonds of a country on certain policy conditions. An unwilling or unstable Italian government may be unable to meet those conditions so in theory the ECB should stand back.

Euro zone triptych

Three big events today which will tell us a lot about the euro zone and its struggle to pull out of economic malaise despite the European Central Bank having removed break-up risk from the table.

1. The European Commission will issue fresh economic forecasts which will presumably illuminate the lack of any sign of recovery outside Germany. Just as starkly, they will show how far off-track the likes of Spain, France and Portugal are from meeting their deficit targets this year. All three have, explicitly or implicitly, admitted as much and expect Brussels to give them more leeway. That looks inevitable (though not until April) but it would be interesting to hear the German view. We’ve already had Slovakia, Austria and Finland crying foul about France getting cut some slack. El Pais claims to have seen the Commission figures and says Spain’s deficit will will come in at 6.7 percent of GDP this year, way above a goal of 4.5 percent. The deficit will stay high at 7.2 percent in 2014, the point so far at which Madrid is supposed to reach the EU ceiling of three percent.

2. Banks get their first chance to repay early some of the second chunk of more than a trillion euros of ultra-cheap three-year money the ECB doled out last year. First time around about 140 billion was repaid, more than expected, indicating that at least parts of the euro zone banking system was returning to health. Another hefty 130 billion euros is forecast for Friday. That throws up some interesting implications. First there is a two-tier banking system in the currency bloc again with banks in the periphery still shut out. Secondly, it means the ECB’s balance sheet is tightening while those of the Federal Reserve and Bank of Japan continue to balloon thanks to furious money printing. The ECB insists there is plenty of excess liquidity left to stop money market rates rising much and a big rise in corporate euro-denominated bond sales helps too. But all else being equal, that should propel the euro yet higher, the last thing a struggling euro zone economy needs.