Custom Search

vendredi 8 avril 2011

Correct analisys?The 2.0 Euro: Are Trichet and Bini Smaghi competent or just scholastics "by-the-book" Central Bankers? Time already answered...

BookofLannes Note:
I Humbly set forth my opinion(s).
These is an  highly debatable  analysis, not for the competent and precise approach , but just becasue the empirical evidence of choices and monetary politics ( wondering if is there any except Inflation Terror...) are there. Under your nose. 

  • Greece is failed  and the default is already discounted in the Bund Spread other than in the stellar CDS Pricing (Note:  At present date on 10 yrs curve   you need 95.500 € to Ensure 100.000 € invested in Greek Debt)
  •  Is there a sense to keep on buying already gone debt?
  • Irish are broken: same as above. 
  • Portugal is close to,  not yet: worth to support it... yesterday , not tomorrow today . Maybe
  • Stability Fund MUST be onerous for countries which will benefit form it.
  •  What is saying the same Europe that 14 Months ago  was mentally "collapsed" at the idea of a foreseeable EUR - in the meanwhile sliding down to a nice 1.17- at parity with USD? So what now, with EURUSD  at few inches to Historical Higher High of 1.45 ?
  • Have been all the experts muzzled? 
  • Is  this the hidden ECB strats, a... 2.0 Euro ?
Once more Eurotower is showing what really is. 
Enjoy the analysis

ECB takes the right decision, with major risks

The main reason for today’s rate rise is of course entirely obvious. Eurozone inflation has persistently come in higher than expected in recent months, and the headline CPI rate reached 2.6 per cent in March, mainly because of higher oil prices. Since the ECB tends to be more influenced by the headline inflation rate, while the Fed places more emphasis on the (much lower) core rate, it was always likely that the two central banks would react in different ways to a commodity price shock.
However, this is not the only reason for the ECB’s greater hawkishness. The Fed (rightly in my view) is convinced that there is still plenty of spare capacity left in theUS economy, because the unemployment rate remains far above the equilibrium or structural rate of unemployment. By contrast, the ECB is less confident about the margin of spare capacity in the European economy. Unemployment has risen much less than it has in the US since the crisis, and direct surveys of spare capacity in Europe suggest that the economy is already beginning to run into some supply constraints. Although current estimates of the output gap in the US and Europe are broadly similar at about 3-4 per cent of gross domestic product, there seems to be much more uncertainty about this in Europe, and therefore more potential danger of a permanent rise in inflation as commodity pressures hit the system.
All this can be neatly summarised by estimates for the appropriate level of short rates derived from various versions of the Taylor Rule. As noted in this earlier blog, the rule continues to suggest that policy rates in the US are too high, not too low, perhaps by as much as 100-200 basis points, even allowing for the expansionary effects of quantitative easing. In the eurozone, by contrast, many Taylor Rule estimates suggest that the appropriate policy rate might be around 1.5-2 per cent by the year end, about 50-75 basis points higher than it is today. Not only does this suggest that the divergence between ECB and Fed rates may widen over the rest of the year, it also suggests – heaven forbid – that both central banks may actually be doing the right thing. Economic conditions are very different in the two economies, and policy should therefore also be different.
However, there are two ways in which the ECB strategy might go very wrong. The first concerns the risk of a larger oil price shock. We are already clearly seeing the impact of higher energy costs in slowing the European consumer, and rising interest rates could leave the households in the eurozone area facing an outright decline in real disposable income this year. Of course, when an adverse supply shock hits the economy, there are no easy paths for the central bank to adopt, and the ECB will protest that its mandate requires it to hit its CPI inflation target regardless of the consequences for GDP growth. But it can expect no praise if it pushes the economy back into recession.
The second risk concerns the impact of ECB strategy on the sovereign debt crisis. President Trichet’s statement today makes it clear that the governing council is unhappy about the amount of progress made by the heads of government at their meeting on March 24. In the ECB’s favourite language, no “quantum leap” was taken at that meeting. And the central bank is now very reluctant to bail out the member states from the consequences of their own inaction. The message today is that the ECB is setting monetary policy for 331m people, and its overriding responsibility is to try to provide monetary stability for the whole of that group, not for any subset of it.
The irony, though, is that the impact of higher short rates will be much less in the core economies, which actually need higher rates, than it will be in the peripheral economies, which do not. This is because most mortgage rates are fixed in line with long term rates in countries like Germany and France, whereas they will float upwards in line with short rates in countries like Spain and Portugal. The ECB can ameliorate these effects to some extent by continuing to provide liquidity to European banks in unlimited quantities, but this may not be enough. Several economies are faced with solvency crises, not liquidity crises, and today’s decision will make these problems worse. There is little point in the ECB trying to deny this.
So while the ECB’s decision may well be the right one, within the terms of its own mandate, it is fraught with many risks

Aucun commentaire:

Disqus for bookoflannes

Intense Debate Comments