from Global Investing:
Jean-Claude Trichet, EM c.bankers’ new friend
What a friend emerging central bankers have in Jean-Claude Trichet. Last month the ECB boss stopped euro bears in their tracks by unexpectedly signalling concern over inflation in the euro zone. Since then the euro has pushed steadily higher -- against the dollar of course, but also against emerging currencies. The bet now is that interest rates -- and the yield on euro investments -- will start rising some time this year, possibly as early as this summer.
That's provided some relief to central banks in the developing world who have struggled for months to stem the relentless rise in their currencies.
Being short euro versus emerging currencies was a popular investment theme at the start of 2011, partly because of EM strength but also because of the euro zone debt crisis. "What that also means is that people who were short euro against emerging currencies had to get out of those positions really fast," says Manik Narain, a strategist at investment bank UBS. Check out the Turkish lira -- that's fallen around 5 percent against the euro since Trichet's Jan 13 comments and is at the highest in over a year. South Africa's rand is down 6 percent too. Moves in other crosses have been less dramatic but the euro's star is definitely in the ascendant. The short EM trade versus the euro has more room to run, Narain reckons.
But emerging central bankers can take some of the credit for their currencies' recent weakness. Many have dragged their feet on tightening monetary policy -- Indonesia, Chile and Russia were among those that surprised markets last month by not raising interest rates; Turkey went a step further and cut rates. To some extent that has worked -- fears of an inflation spiral are pushing cash out of emerging stock and bond markets.
Expectations are Trichet will retain his hawkish tone at this Thursday's ECB meeting. Emerging central bankers will certainly be hoping that he does.
The ECB’s exit strategy gets the austerity treatment
As a top central banker you have to watch your words. Almost every one you utter is scrutinised by finanical markets for a cryptic hint on policy the way a jeweller studies a diamond. So when you chop out almost a quarter of the content of your main policy message, the likelihood is that you know you are playing with fire. The ECB juggled the flames on Thursday, slashing 427 words — almost 25 percent –from its monthly policy statement. The leaner 1,388 word composition represented no change at all in the bank’s view of the world, stressed the bank’s President, Jean-Claude Trichet. But the some of the stuff binned involved some of juiciest material, particularly all-important plans to remove crisis support. That section got reduced by almost 30 percent to a slender 62 words although the message stayed the same, something along the lines of: we will reel support in gradually and when markets are ready. With central banks in other major advanced economies now turning back in the direction of stimulus, the ECB’s unwavering, albeit shorter, view of the exit route helped the euro break through the $1.40 barrier. It just shows that austerity really is all the rage in much of the euro zone.
Diplomacy not needed for top ECB job, says Bundesbank boss
Axel Weber, head of Germany’s Bundesbank and a frontrunner to take over the leadership of the European Central Bank next year, thinks diplomacy is over-rated in central bankers.
Weber normally avoids all comment on the tricky subject of choosing a successor to current ECB President Jean-Claude Trichet but with just over a year to go before the plum post comes up, could not resist making an ambit claim.
Asked by a television interviewer whether he was enough of a diplomat to take over from Trichet given his public criticism of the ECB’s decision to buy government bonds in May, Weber said he thought diplomacy was an optional extra.
“I’t's important to be diplomatic for the diplomatic corps; it’s not so important for the central bank,” he said.
“I think it’s very important for central banks to have a strong view, to basically stand for that view … that sometimes requires (putting) diplomacy in the back seat.”
Weber’s main competition for the top job, Italy’s Mario Draghi, is is no stranger to diplomacy as head of the Financial Stability Board of international regulators and is seen as more moderate than the anti-inflation Weber.
Interesting that Weber’s comments came during an interview in which he backed extending the ECB’s ultra-generous liquidity supplies into the start of next year, surprising many observers who had expected him to take a hard-line stance.
ECB takes a turn to taciturnity
The European Central Bank’s normally loquacious policymakers have been struck dumb over the last month.
The ECB’s 22 rate-setters generated just 14 Reuters news stories in February, much lower than January’s total of 24 and the 27 stories I count in December. Even the core Executive Board members have managed only four speeches between the six of them, compared to a flurry of 10 speeches and interviews in the previous two weeks after policymakers returned to work from their end-of-year break.
Even the U.S. Federal Reserve, playing two team members short with just 17 policymakers at the moment, has out-talked the ECB with a rough tally of 26 news stories generated so far this month, a 30 percent increase on January.
Sure, the Fed has had to sell its decision to raise the discount rate, assuring markets that the hike is not a monetary tightening. But euro zone investors are arguably in just as much need of reassurance, with the ECB poised to announce a further winding back of its emergency lending steps next week and debt markets in turmoil over fears about Greece and other euro zone countries with massive budget shortfalls.
The one issue which has brought ECB policymakers out fighting has been the suggestion by International Monetary Fund economists in a research paper that central banks consider raising their inflation target from the 2 percent level adoped by many to 4 percent, to give themselves more room to cut rates in case of another crisis.
Diabolical! said Lorenzo Bini Smaghi. Playing with fire! said Axel Weber. Most unhelpful, said Juergen Stark, choosing his words more carefully at an IMF conference in Korea where the paper was discussed , in comments which together account for 20 percent of this month’s public utterances by ECB officials.
Still, ECB President Jean-Claude Trichet may well make up for a month of reticence at his news conference on March 4, when he will announce the ECB’s exit plans as well as new staff economic forecasts, in a hour which may prove to be a bumpy ride for investors if December’s experience is anything to go by.
Walking, talking ECB leading indicator
German Bundesbank President Axel Weber is developing a reputation as a leading indicator for the European Central Bank.
In the same way as a pickup in confidence can foreshadow a pickup in the economy, Weber’s comments about the direction of ECB policy this year have tended to be borne out by events.
The ECB’s broad hint on Nov. 5 that it will drop its super-long, one-year loans to euro zone banks next year follows a similar suggestion by Weber a week earlier.
And earlier this year, the 52-year-old publicly argued (and succeeded) for the ECB not to cut its main interest rate below zero, or follow other central banks in adopting a massive asset-buying programme.
Some economists wonder whether Weber – seen along with Italy’s Mario Draghi as an heir apparent to ECB President Jean-Claude Trichet in 2011– just dares to say publicly what others are already thinking, showing little regard for the unwritten rules that make Trichet the official barometer of ECB opinion.
But others say Weber’s record this year shows he is successful at convincing others to follow his lead. A former academic, he can talk eloquently about the nitty-gritty of economic analysis and as the representative of the euro zone’s biggest economy and banking sector, his opinion carries weight.
“When Weber speaks, the market does tend to listen,” says Societe Generale economist James Nixon, a former ECB staffer.
Trichet torpedoes hopes for 30 euro note
The European Central Bank’s President, Jean-Claude Trichet, has torpedoed a request for a new 30 euro banknote, backing up the rejection with ice-cold historical and mathematical reasoning.
European Parliament member and former Irish deputy finance minister Jim Higgins had asked Sharon Bowles, chairwoman of the parliament’s Committee on Economic and Monetary Affairs, whether a 30 euro note could be introduced.
She passed the question on to Trichet, but instead of dismissing the question out of hand, the ECB boss answered the question with a typically analytical approach.
“The ECB’s predecessor decided on a sequence of 1:2:5 for the seven euro banknote denominations, 10 and 100; 20 and 200; and 5, 50 and 500,” Trichet wrote to Higgins.
“This sequence is in line with the common denominational split of most of the world’s currencies and also corresponds to the sequence of the euro coins.”
He even went on to give examples of more unusual currency patterns, although by overlooking that Tunisia has a 30 dinar note, he may have exposed a hole in his knowledge.
“Some countries use or have used a sequence of 1:2.5:5. This was the case in the Netherlands in the pre-euro days of the guilder. However, to our knowledge, no country uses 3:30:300, etc. as a denominational sequence.”
Markets to Trichet: You say it best when you say nothing at all
The Venice backdrop may have warranted some high Italian Opera but financial markets appeared to be humming to the sound of Irish crooner Ronan Keating during the European Central Bank’s latest monthly news conference.
Keating sang the chart-topping hit with the line “You say it best when you say nothing at all” in 1999, the year the ECB was established.
FX and bond markets appeared to concur as ECB President Jean-Claude Trichet and his Italian colleague Mario Draghi gave their latest assessment on the state of the euro zone economy on Thursday, after the central bank kept interest rates at their current all-time low of 1 percent.
There wasn’t much new in it. The recovery from the crisis will be slow and subdued and the economic road ahead is likely to be scattered with potholes, Trichet said, keeping very much to last month’s line.
So markets began focusing on what Trichet wasn’t saying. A lack of conviction on the recent rise of the euro put the wind up currency markets and pushed the single currency up further, while a sanguine message on inflation appeared not to be what bond markets were expecting, sending euro zone government bond futures to a contract high.
Maybe markets may well have got Keating’s greatest hits on their playlist. Another of his tunes was called Rollercoaster, something plenty of traders must have been singing in the shower over the last couple of years.
Do you people need a translator? I am here to help.
What he says is very clear if you have a basic reckoning skill on the way the World is run. I know that is a rare commodity these days…
I just want to ask you, How well is it working for you so far?
Let me help—–> when he says:
“Cracking open the Solovian black box of technical progress has taken us from theories of learning-by-doing, to the impact of R&D on product variety and quality,”
He means: “We do not share technology with the common folk,we keep ours in a secret black box; in this way we can maintain control through secret govt. programs and technology suppression.”
“Since we no longer have to observe due process of law, transparency is nonexistent,now; ‘we just do it’”.
“Keeping two sets of books has effected what is available to the public as they are deemed second priority (at best). The added costs of maintaining this fiction is expensive; therefore we must find an alternative to that end going forward.”
When he says: “Going one step further, investigation of the sources of this growth dispersion in the U.S. and euro area economies reveals parallels even in the root causes of dispersion in economic performance and productivity,”
He means: “Much of the economic sector in the US is not known by the general populace – therefore it is impossible to submit a financial report to display for scrutiny as much is deemed not for public consumption (or at the very least extremely embarrassing).”
When he says: “Finally, a priority for medium and long-run growth is that our policy institutions remain attuned to an ever-changing landscape. We have seen in recent years the near-Knightian uncertainty policy makers endured and how boldly they responded,”
He means:
“The general populace is getting fed up. Leaders at the forefront of organizations within our immediate control or under our influence must not consider the public’s anger inasmuch as the fact that the pre-arranged latent scenario selected to fit the conditions at the time (you will be informed)will activate and take care of any backlash from the public as they will be distracted sufficiently by outside events- Leaders should continue to stick to their guns in times of uncertainty, and act accordingly.”
When he says: “I have learned whilst discussing global imbalances and financial transmission channels — much of it done here at Jackson Hole — that appropriate improvements in regulation and multilateral surveillance frameworks can yield large gains. We should work hard to maintain momentum,”
He means: “If we continue to crack down,oppress, over-observe and intimidate the public; most desirably under the guise of ‘regulation’ (as has been observed as very successful up to this point);it should continue to bear fruit.”
“we must not only continue this policy; but we need to push harder to keep the public off balance so as not to give them time to organize an appropriate response going forward”.
You are welcome – enjoy!
Mr. kmowitall
Central bankers come out on top in cost-benefit analysis
Bankers worried about losing their bonuses might be well advised to consider a cost-benefit analysis of the contribution of their public sector colleagues.
Central bankers not only earn much less than their high-flying private sector counterparts, but over the last year have spent almost every second weekend in high-level, save-the-world meetings aimed at clearing up the mess created by Wall St and City banks.
European Central Bank head Jean-Claude Trichet (who earns a mere 350,000 euros a year ) confessed to a group of student journalists that he spends almost every weekend working.
“My week often consists of seven working days, because we always have international meetings during the weekends,” he was quoted as saying by Germany’s Frankfurter Neue Presse.
Trichet spent last weekend, for example, at the G20 meeting in London followed by a meeting of central bankers and regulators in Basel to thrash out a new framework for bank regulation.
One of the proposals: supervisors should make sure banks ”limit excessive dividend payments, share buybacks and compensation.”
I feel the more money you make, the harder you should work. As banks make most of the money, they need to work the long hours. So they can see what it is like to try an pay off a huge mortgage.
Calculators please, gentlemen
Central bankers in the euro zone will have to get out their dictionaries and calculators to work out how often they are entitled to vote on European Central Bank decisions under a complicated new voting system.
New rules show that the size of a country’s economy, the health of its banking sector and the spelling of its name will all influence how often a governor from one of the euro zone’s national central banks gets to vote on setting ECB interest rates and other crucial policy decisions.
This could make the difference between a governor from a similar-sized economy being sidelined for as little as six months in a three-year period or as many as nine.
The system, set to kick in after three more countries adopt the euro, involves up to four groups of central bankers sharing differing numbers of votes. Votes will rotate every month, compared to the 12-month rotation seen at the U.S. Fed, and the complexity of the rules is mind-boggling.
”The Governing Council has decided that the number of governors gaining voting rights at the start of each month will be equal to the difference between the number of governors allocated to the group and the number of voting rights assigned to it, minus two,” the ECB said in its explanation of how it had decided on the rotation rate.
Coloured charts handily included with the announcement make the process somewhat easier to follow for the mathematically-challenged.
ECB happy with liquidity flood, but is it in greater good?
Central bankers have not had much reason to be happy over the last two years, as the financial crisis has lurched from bad to worse.
But the European Central Bank at least is now finding comfort in the fruits of its injection of close to half a trillion euros in 12-month funds last week, which has pushed money market interest rates to new record lows.
“We are very happy, we see clearly that we decreased the risk premia,” ECB President Jean-Claude Trichet said on Thursday, after the ECB kept its benchmark rate on hold at 1 percent.
Still, the ECB’s generosity in filling bank coffers with cheap cash could paradoxically help financial institutions defer the day of reckoning when they will have to write down bad loans and toxic assets on their books, and adjust their balance sheets. Flush with ECB cash, banks could be encouraged to think they can hang on to past investment mistakes, rather than writing them down now.
The Swiss-based Bank for International Settlements, a forum for the world’s central banks, says this painful process is a prerequisite for financial and economic recovery, and the International Monetary Fund says the euro zone is lagging the United States in writedowns.
Maybe the ECB is not helping.
