Category: Economics

Categories
Economics

[2475] Issues with the ECB’s soft loan

It was reported that European banks took out EUR489 billion worth of cheap loan from a facility provided by the European Central Bank. The Wall Street Journal revealed these banks will require more than EUR700 billion to meet their obligation next year, with more than EUR200 billion debt maturing in the first quarter of 2012 alone.

The facility is designed to avert or reduce liquidity crunch in Europe. These are two-fold. One, so that the bank have enough money to not default. Two, so that these banks do not cut loans to individuals and businesses.

Given the near panic that prevails in today environment that is ever looking for the big bazooka solution, it is understandable that the facility provides comfort and reduces the likelihood of bank runs.

But the interest rate of 1% is so low that there is an opportunity for some banks that have a better position than others to profit at the expense of the ECB. Some could probably borrow and reinvest in higher yielding assets like government finance to get essentially free pure profits. The Journal indeed did mention that the French President Nicholas Sarkozy has suggested this to kill two birds in one stone: the banks get their refinancing and the money flows into government coffer through the sales of sovereign debts to further postpone the sovereign debt crisis farther into the future.

Discounting banks which actually need the facility to refinance themselves in time when massive amount of debts are maturing, would the presence of the better-positioned banks compete with those who truly need the funds?

I would imagine some kind of controls is present in the ECB but in time of near-panic like this, I expect the controls to be weak. The tighter the controls, the longer it will take to disburse the money and that is not good. There is no time decide who really needs it. Just give it out and worry about it later.

The tightness of the loans would depend on the size of the facility. I tried to look for it but I have not found it. I would think it should be more than EUR700 billion so that the facility would be too big for the whole of 2012 requirement.

So, I would guess some banks would make pure profit. So, the presence of controls would not answer the crowding out concern.

Also, even if some of the banks actually needed the loan, what exactly prevents the banks from hoarding it like what happened in the United States with money from Troubled Asset Relief Program. Lending cost to businesses and consumers were high but the banks had access to cheap fund. The banks were saved

So, really, the facility is saving the banks. Liquidity issued faced by individuals and businesses will not be solved by the loan facility from the ECB.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
p/s – an extremely helpful Q&A by FT Alphaville.

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Economics

[2471] Decoupling, finally?

The 2008-2009 financial crisis laid to rest the idea that Asia is isolated from the troubles in the US and Europe. The idea was that the fundamentals in Asia were strong enough to support growth. Proponents of decoupling were silenced and embarrassed but the celebration on the other side did not last long. There was a recession at hand and the debate swiftly switched to how best to address the recession.

The dead is walking.

It is 2011 and the idea of decoupling is reemerging again. It has been criticized, just it has been criticized before but statistics in the past few quarters and months have been surprising. The final GDP growth for Malaysia is very likely to be healthy despite all the skepticism and bad news from abroad. The industrial production index figures came out strong for October, beating forecasts by a long shot; it beat even the highest forecast among those polled by Bloomberg. Exports meanwhile has been amazing despite Europe tumbling up and down on a roller coaster ride. The only thing that is not as great as these things is the leading indicator, which by the way, is not negative. After all that has been said and done, it is likely Malaysia will grow at least 5% for the whole year of 2011.

Contrasting these numbers and those in Europe, there appears to be a strong case for decoupling.

Decoupling does make sense, since domestic demand is strong. Just observe the GDP growth figures. It is really hard to say there is a threat of a recession by looking at the GDP numbers so far. Still, the trade exposure is still high, and it is also really hard to say Malaysia will escape whatever really bad happening in Europe unscathed. I will not stick my neck out just yet, unlike the author of Economics Malaysia who writes that Malaysian exposure to European woe is not as big as a brouhaha some has made it out to be.[1]

Standard Chartered thinks 2012 will be a two-speed world, implicitly supporting the decoupling idea in its report. Financial Times’ Beyond BRIC sarcastically, maybe, writes, “just don’t call it decoupling” while reviewing the two-speed world report.[2]

As for myself, I think I prefer to be on the safer side. I subscribed strongly to the decoupling idea because I looked at the so-called real economy and concluded, Malaysia would go through the global crisis rather smoothly. I was wrong. There was a shallow recession. So, I will sit out and watch as an observer than a proponent this time around, for now.

Still, if the European crisis materializes, if the worst materializes, it will be worse than that experienced in 2008 and 2009.

Add that to the fact that the Chinese economy is slowing down (slowing down is relative because the growth rate is still high), I at least am expecting 2012 to be a rougher ride than 2011. But it does not take a genius to say that; I dare say it is the general feeling within the profession.

The more important thing is that we will see whether the decoupling hypothesis will survive 2012.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
[1] — [Malaysia’s European Sensitivity. Economics Malaysia. December 12 2011]

[2] — [Standard Chartered sees a resilient Asia, Mideast and Africa in 2012. Standard Chartered. December 12 2011]

Categories
Economics Politics & government

[2469] The United States of Europe, on the way

There are several stages of economic integration.

Free trade agreement is probably the lowest of all integrations. It seeks just free flow of capital and labor across borders.

The next step is either custom or monetary union together with a common market. Member states surrender monetary policy to a central authority while maintaining independent fiscal policy. Trade duties are harmonized across the union.

The next stage is fiscal union where individual governments cede their power over fiscal policy to a central authority.

The European Union is on the verge of becoming a fiscal union, making history less than just two decades after adopting a monetary union in all of its sense. Today at an important summit, a majority of European leaders voted for stricter fiscal deficit rules. They believed the best way to solve the debt crisis is to integrate further. Integration will eliminate the crisis of confidence Europe currently suffers from, much like how a troubled California will not trouble the United States by much.

This integrationist logic is persistent among Europeans. When Europe suffered from a serious currency crisis long ago, the then European leaders thought the best way to eliminate volatility between currencies that adversely affected trade in Europe was to have a monetary union.

This is really a big jump. Usually, debates on exchange rate mechanism gyrates between floating or fixed regime. Europe chose to not only have a fixed regime, they chose a fixed regime by marriage. You cannot get a more fixed regime than a monetary union.

Now, the thinking is that the best way to address the debt crisis to have a fiscal union.

Yes, it is an exaggeration to call the recent development in Europe as outright fiscal union. But the new agreement is a big push towards that direction, towards the United States of Europe.

Categories
Economics

[2466] Too much chocolate can be a bad thing

The auction attracted enough bids to sell all of the bonds on offer, thus avoiding failure. Yet the avoidance of failure is different from success. Italy will pay an interest rate of almost 6.3% on the bonds, the highest since 1997, according to Bloomberg. What is more, the rate is almost a full percentage point higher than the one the country had to offer in an auction a month ago. With enough successful auctions such as this one, Italy will be on a path to bankruptcy. [Super Mario vs the Bond Vigilantes. Free Exchange. November 15 2011]

I laughed after reading the last sentence.

Categories
Economics

[2462] With a fail-safe, no reason for supercommittee compromise

The failure of the supercommittee to agree on the distribution of US budget cut is not much of a news. It has been expected. Leaks of how difficult it was to reach a common ground made it way to news reports .

More importantly, the impact of the failure is not too big because the fail-safe automatic cut is going to happen anyway. Both the unsurprising result and the minimal impact of the failure are signified through the low level of attention given by the media on the issue. Focus on the failure is not nearly as intense as focus on the earlier downgrade of US debt by S&P’s.

In retrospect, the fail-safe mechanism is a brilliant political maneuver. It was a result of uneven bargaining where deficit hawks, perhaps irresponsibly, held the US government at random and squeezed as much juice as possible out of the situation. Default or cut it. It was a Hobson’s choice: default was out of the question. And now here we are with the fail-safe mechanism.

While the fail-safe mechanism now ensures the implementation of the USD1.2 trillion budget cut over the next 10 years, it may have also contributed to the failure of compromise. If the members of the supercommittee — whom belongs to competing political parties and we know they serve their political bias — know the cut is going to happen anyway with its distribution already apportioned, why compromise when a compromise angers your voters base?

In a way, the supercommittee is really a lame duck committee. No incentive to action with every incentive to do nothing.