Italy
Posted by jackkatz on November 18, 2011
The EUR made small gains overnight on increasing talk that the ECB may loan money to the IMF to shore up European countries suffering debt problems rather than making direct loans. The thought is that the IMF has tighter compliance controls. Frankly this makes more sense, that the IMF be more involved as it has historically been the rescue mechanism for sovereign problems albeit so far for emerging nations and for much smaller sums. Markets have bandied around the idea of the ECB ramping up its printing presses (QE) and calling the ECB the lender of last resort. Germany and the ECB have resisted this but the clearest explanation of why this is not the right idea comes from BoE head Mervyn King. To paraphrase, he indicates that “lender of last resort” by a central bank is intended for institutions that are clearly regarded as solvent, done against good collateral and at a penalty rate (think Fed Discount Window). The ECB buying of sovereign debt is just that, “sovereign” and a financing of the current account deficit of those countries. If and when something goes wrong this will create liabilities for the surplus countries. Effectively this is a mechanism of transfer from surplus countries to deficit. No wonder Germany is against the idea. One assumes that by lending to the IMF, the ECB will get repaid full value at some point. Anyway, we have hope for the EUR for the first time this week although risk currency gains are limited.
· New ECB chief Draghi told Euro-zone governments to act fast to get their rescue fund up and running expressing exasperation at their lack of progress. “Where is the implementation of these long-standing decisions? We should not be waiting any longer.” More reason the ECB doesn’t want to lend directly. Too much wishy-washiness.
· Italian 10 year yields dropped back to a more reasonable level of 6.65%. And just a month ago we were calling those levels unreasonable.
· New Italian PM has breezed through confidence votes and unveiled sweeping reforms and also is enjoying a 75% support in opinion polls.
· BoE policy maker Martin Weale said there was a very strong case for extending the central bank’s QE program next year.
· Canada’s annual inflation rate eased to 2.9% in October but markets were disappointed it didn’t ease more. Core which excludes food and fuel dipped to 2.1%. CAD actually gained a bit as market expectations for a rate cut diminished.
· The Yuan was fixed at a slightly weaker level as talk is that the Bank of China may keep the currency in a tight range through next week at least. No official word of such intent and one wonders if this is still a rebuttal to Obama’s slam at their currency manipulation.
· The Russian ruble is not likely to strengthen during the remainder of 2011 according to Central Bank Chair Sergei Ignatyev. “The volatility of both the nominal and real ruble rate has now increased but there is no trend for strengthening this year.”
· As the US keeps reporting increasingly positive economic data some forecasts are for Q4 to grow at a 3.2%. But questions are also emerging on sustainability of growth in light of the European crisis. Seems interruptions keep occurring to the recovery, Arab spring, tsunami and earthquake, Thai floods and now the potential fall out from the debt crisis.
· In a sign of global growth shifting, Boeing inked a record sale of aircraft to an Indonesian airline. Recent aircraft sales by both Boeing and Airbus have largely been to so-called emerging regions of the world with European and N American airlines buying relatively few aircraft. The Indonesian order will be in part financed by the Exim bank and along with other recent Boeing successes, is expected to create a large number of jobs in the US.
