Monthly Archives: April 2010

UK News

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Too bad he’s gone over to the dark side.

Hopefully it doesn’t actually happen.

Brown Says U.K. Deficit Plans Go Further Than Other Countries

April 12 (Bloomberg) — Prime Minister Gordon Brown said his plans to reduce the deficit show his Labour Party has “done more than any other country” on the public finances.

He said the government would achieve 11 billion pounds in efficiency savings, and savings of 4 billion pounds from public-sector pay and pensions. He spoke at an event in Birmingham to introduce the party’s election manifesto.

Brown also said Labour would not make a pledge on increases in value-added tax, and his deficit reduction plans do not depend on such an increase.

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Found one buyer of euro- Swiss Nat Bank

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Seems they are willing to take the credit risk to support their exporters at the expense of the macro economy, rather than cut taxes to sustain domestic demand:

(Dow Jones) — A Swiss National Bank official reiterated Sunday that the central bank will act decisively to prevent excessive appreciation of the Swiss franc against the euro, adding the central bank is taking into account the development of the economy in its entirety.

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China Bank Lending Cools

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Lending by State owned banks is an important source of aggregate demand.

With lending both down and front loaded, a moderate first half could be a prelude to a very weak second half.

China’s Bank Lending Cools, Easing Overheating Risks

April 12 (Bloomberg) — Chinese banks extended a less-than- estimated 510.7 billion yuan ($74.8 billion) of new loans in March after the central bank told lenders to set aside bigger reserves and pace credit growth.

The figure compares with 700 billion yuan in February and the median forecast of 709 billion yuan in a Bloomberg News survey of 21 economists. The central bank released the latest data on its Web site today.

Lending Spurt

First-quarter new lending was 35 percent of the government’s full-year target of 7.5 trillion yuan, partly because Chinese banks lend more at the start of each year. March lending was down from a monthly record of 1.89 trillion yuan a year earlier. In the first three months of 2009, lending was 48 percent of the year’s total.

Meantime, a smaller trade surplus in the first quarter — down 77 percent from a year earlier at $14.49 billion — capped the increase in the nation’s foreign-exchange holdings. Li Wei, a Shanghai-based economist at Standard Chartered Bank Plc, said the U.S. currency’s strength last quarter reduced the value in dollar terms of reserves held in currencies such as the euro.

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GS on GREECE – INITIAL IMPRESSIONS AND MARKET

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This remains the tricky part, seems:

Several key issues remain outstanding, however:

1. The budgetary and reform milestones which need to be cleared in order for Greece to receive funding have yet to be hammered out with the lenders. The statement suggests that discussions will start tomorrow and may last weeks, potentially resulting in market volatility if there are disagreements.

2. Availability and drawdown conditions have yet to be decided. Specifically, the one reached over the weekend is a political agreement and each EMU government will now need to go seek legislative approval in Parliament. Related open questions include: Where will the loans rank with respect to other existing Greek debt? Where will these loans show up in the lenders’ books (i.e., will they increase the deficit and debt)? Will they require extra funding in the capital markets?

3. Most importantly, as Erik Nielsen has commented in a note this afternoon, the issue of medium term debt sustainability remains open. It will depend on measures and reforms put in place by the Greek authorities, the response of domestic activity, and the external economic environment.

Best Regards. FUG
Francesco U. Garzarelli

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Greece is offered 30bn euros loan

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Yes, this is the first ‘real’ offer, with a rate and a quantity.
I heard it requires approval of all 16 member nations.

This could initially stabilize the bond markets if/when approval is discounted, with short covering in the euro as well.

The terms and conditions include IMF ‘austerity’ measures which will act to slow the economy of Greece and the entire EU, which is already dangerously weak to the point of promoting higher budget deficits through low tax revenues and high transfer payments, all of which serves to further weaken the credit worthiness of all the member nations. It also increases the euro debts of the other contributing nations. While this is a very modest amount, the implication of the same type of ‘rescue’ for the larger euro nations that might go the way of Greece is for much higher levels of stress for the remaining euro member nations presumed to be ‘strong.’

The euro should therefore fundamentally remain on the weak side as the high levels of euro national govt deficits are adding the non govt sectors holding of euro denominated financial assets, with the austerity measures likely to add to euro govt deficits and euro weakness.

Greece is offered 30bn euros loan

April 11 (BBC) — Leaders of the 16 eurozone nations have agreed to fund up to 30bn euros in emergency loans for debt-hit Greece, if the country wants the cash.

The price of the loans will be fixed using IMF formulas, and be about 5%.

Luxembourg Prime Minister Jean-Claude Juncker, speaking for eurozone finance ministers, said there were no elements of subsidy in the loan proposal.

“The total amount put up by the eurozone member states for the first year will reach 30bn euros,” he said.

Mr Juncker added that the financing would be “completed and co-financed” by the International Monetary Fund.

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Interest Rates Have Nowhere to Go but Up – NYTimes.com

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>   
>   (email exchange)
>   
>   On Sun, Apr 11, 2010 at 10:58 AM, wrote:
>   
>   What is your call?
>   

It’s certainly possible, but my suspicion is that we may be going the way of Japan, with interest rates low for very long. With core CPI going negative and the output gap/unemployment remaining very high, especially people who can’t find full time work hitting a new high of 16.9%, the Fed is far from meeting its dual mandate of full employment and price stability (along with low long term rates). And the recent dollar strength, stubbornly high jobless claims numbers, weak loan demand numbers, and not much sign of life in housing has to be a concern about the recovery being more L shaped than V shaped as well.

Seems the Fed would have to have some pretty strong forecasts for CPI and much higher levels of employment to move any time soon apart from perhaps going to what they consider a more ‘normal’ real rate of 1% or so.

And when I look at the euro dollar rates out past 5 years they’re higher than libor got in the last cycle, and this one doesn’t feel like it’s stronger than the last, at least so far. So to discount rates that high (well over 5%) as midpoints of expectations for fed funds looks high to me.

Consumers in U.S. Face the End of an Era of Cheap Credit

By Nelson D. Schwartz

April 10 (NYT) — Even as prospects for the American economy brighten, consumers are about to face a new financial burden: a sustained period of rising interest rates.

That, economists say, is the inevitable outcome of the nation’s ballooning debt and the renewed prospect of inflation as the economy recovers from the depths of the recent recession.

The shift is sure to come as a shock to consumers whose spending habits were shaped by a historic 30-year decline in the cost of borrowing.

“Americans have assumed the roller coaster goes one way,” said Bill Gross, whose investment firm, Pimco, has taken part in a broad sell-off of government debt, which has pushed up interest rates. “It’s been a great thrill as rates descended, but now we face an extended climb.”

The impact of higher rates is likely to be felt first in the housing market, which has only recently begun to rebound from a deep slump. The rate for a 30-year fixed rate mortgage has risen half a point since December, hitting 5.31 last week, the highest level since last summer.

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From John Lobley

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To my great friends at AVM/III,

After 4 years in research and 20 years in sales, I am moving to trading (at Barclays). The ticker to buy puts on Barclays is “BARC LN Equity OMON”. I will be working for Ronti Pal who runs our swap and treasury desk. I will be managing a book that will (hopefully) take advantage of some of our longer term (6-12mos) strategic views. I am looking forward to this new challenge. Thankfully this is not “good-bye” as I asked to still act as a Relationship Manager for AVM. While I will not cover you guys day to day, I will still represent your interests here. So feel free to contact me for any issues. My first job in that role is to assign new capable coverage so that you are in good hands. I am happy to tell you that Colin McCleod will be filling that role with Sean Mahon as his back-up. Sean graduated from Harvard about four years ago and has developed into a motivated and capable saleperson. Sean went to Princeton and has been my right hand man for the last two years. So you have an “Ivy League” line-up :) Both are personable and have high integrity.

I started talking to AVM sometime in 1992 while at JP Morgan. It has been rewarding to get to know all the talented and creative people at your shop. I will miss covering you day to day but I look forward to maintaining a dialogue with some of you.

Cheers,

John Lobley

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Dallas speech

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I guess he thinks the coming fiscal spending will close the output gap…

Cash Crunch Will Force Governments to Do Less

By Gerald F. Seib

April 9 (WSJ)

In a speech in Dallas, Mr. Bernanke bluntly noted that two giant fiscal waves were headed for the federal government, one atop the other. First comes the big deficit caused by the economic downturn. That will be followed immediately by ballooning costs for baby-boom retirees drawing Social Security and Medicare funds. “To avoid large and unsustainable budget deficits, the nation will ultimately have to choose among higher taxes, modifications to entitlement programs such as Social Security and Medicare, less spending on everything else from education to defense, or some combination of the above,” Mr. Bernanke

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The greece market is essentially shut. A new wave of stops-out

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Greece dragging other peripherals weaker by 5-10 bps
Small bull steepening in swaps, 2s30s 1-1.5 steeper

Subject: The greece market is essentially shut. A new wave of stops-out

The greece market is essentially shut. A new wave of stops-out
getting triggered today in Greece. The tickets are all small
and electronic but all one way. The market is very illiquid
even in b/marks. In the HDAT the on the runs were quoted
in tiny at start of day now there is nothing – last looked like

GGB 4.3 03/12 (644.1bps vs core, +76.0)
GGB 6.1 08/15 (570.0bps vs core, +52.5)
GGB 6.25 6/20 (428.1bps vs core, +21.0)
GGB 4.6 09/40 (330.6bps vs core, +12.7)

the linker 2.3 30 is trading with 4points bid-offer now.

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