The impact of negative interest-rates on the economy of Denmark

Whilst so much of the media and indeed the world were focusing on the travails of my old employer Deutsche Bank yesterday something else significant sneaked under many radars. This was the International Monetary Fund lecturing Switzerland on the subject of negative interest-rates as you can see below.

Calibrating the negative interest rate differential so as to discourage persistent inflows that can cause prolonged deflation and weaken activity is appropriate.

A rather flowery way of suggesting an interest-rate cut from the present -0.75% which is reinforced here.

Some widening of the current effective interest rate differential—either by lowering the exemption threshold or the marginal policy rate—could therefore be considered to reduce the frequency of small-scale interventions.

So the IMF would prefer that Switzerland cut its interest-rates again further into negative territory rather than intervene in foreign exchange markets. That is intriguing on two fronts and the first is the fact that it is tempting it to test where the lower bound is which I shall define as the point at which bank depositors switch to cash. The second is that it is setting interest-rate for foreigners and foreign investors rather than the domestic economy. Indeed for the domestic economy there is potentially trouble ahead according to the IMF.

Sustained low interest-rates could raise financial stability risks……..Elevated household debt and banks’ concentrated exposure to mortgages could be key amplifiers in the event of macroeconomic shocks .

Reality for Denmark

This made me think of the country which has had negative interest-rates for the longest as Denmark plunged into that icy cold world in early July 2012 when it cut to -0.2%. They have been there since apart from a brief foray to the not so giddy heights of 0.05% in late spring and summer 2014. Also if the IMF view extends to other countries which set their interest-rate more for the foreign exchanges than domestic demand there might be another reverse ferret on its way.

Effective from 8 January 2016, Danmarks Nationalbank’s interest rate on certificates of deposit is increased by 0.10 percentage point to -0.65 per cent.

As it was nobody was expecting an end to negative interest-rates anytime soon according to the Nationalbanken or DNB.

The implied overnight interest rate does not reach 0 per cent until in four years

The ordinary experience

This is for borrowers as follows according to the DNB.

Viewed over a longer period, there has generally been close to full pass-through from the rate of interest on certificates of deposit to the banks’ lending rates.

We note they took their time and wonder about how we define close but okay. However the experience for the ordinary depositor remains different.

The banks have been hesitant to pass on the negative rate of interest at Danmarks Nationalbank to small enterprises and especially to households. The latter have been completely exempt from negative deposit rates.

I have wondered along the line of the lyrics below about this.

How long has this been going on?
How long has this been going on?

As far as we can tell banks will continue to resist passing on negative deposit rates to the ordinary investor. However businesses are not exempt as some 30% of deposits are and I have pointed out the dangers to long-term business models from them.

Negative deposit rates are in widespread use for insurance and pension companies, for which the alternatives to bank deposits are placement on money market-like terms, e.g. in short-term securities, likewise at negative rates of interest.

Actually it would now appear that the pension industry likes very few potential futures.

Some pension companies have reported to the Danish Financial Supervisory Authority that substantial interest rate hikes would be the worst scenario imaginable for them.

Mortgage Rates

The Danish Mortgage Bank data is delayed but in week 22 of 2016 then the average short-term rate was -0.23% in Danish Kroner and -0.13% in Euros. The long-term rate was 2.65%.

Any signs of trouble?

If we were to find any they would be found in asset markets of which the likeliest is house prices. On that I noticed this in the DNB Monetary Review.

Since March, the yield on mortgage bonds has fallen more sharply than the yield on government bonds,

Rather awkwardly the rally was driven by foreign investors noting that the ECB (European Central Bank ) is buying such bonds ( covered bonds) in the Euro area making the Danish variety look more attractive. So what about the housing market.

Let me hand you over to a report earlier this month from the DNB which opens with an official denial of what Taylor Swift would define as “Trouble,Trouble,Trouble”.

Although house prices have risen considerably over the last 3-4 years, there are no indications that the Danish market overall is experiencing a speculative house price bubble.

Ah so over the period of negative interest-rates! In case you are wondering about the overall state of play here it is.

But today’s annual increases of 4-5 per cent do not indicate a bubble.

However it has been ” Wonderful! Wonderful! Copenhagen” for those who have invested in property there.

However, price increases in Copenhagen have been so persistent and strong that the development could be consistent with a bubble according to the test, just as in the mid-2000s……. So Danmarks Nationalbank finds that there is reason to monitor developments in Copenhagen closely.

So we learn that monitoring closely is one step up from being “vigilant” in central banker speak. Also those who want to buy in Copenhagen must feel excluded in many cases.

The Real Economy

This has been troubled during this period but has so far in 2016 seen a better phase recording quarterly GDP growth of 0.7% and then 0.5%. But considering the monetary stimulus the forecasts are hardly stellar.

Danmarks Nationalbank expects the gross domestic product (GDP) to grow by 0.9 per cent this year, rising to 1.5 and 1.8 per cent, respectively, in the next two years.

However according to the Governor there may well be trouble ahead.

“We expect the economy to reach its normal capacity level as early as 2018. Conducting expansionary fiscal policy well beyond that point is risky, especially if interest rates continue to be very low. There is a risk of overheating and economic imbalances, which it may be necessary to take measures to prevent,” says Lars Rohde.

He also thinks that fiscal policy needs tightening which means that the current establishment memo seems to have forgotten to be sent to Denmark.


There is much to consider here. Firstly I think that advocates of monetary stimulus have to conclude that the effect on economic growth has disappointed. Denmark has simply not had much and if you factor in the lower oil price it has not done well at all. As to specific news we have reports in the Copenhagen Post of businesses bring production home but also the problems of world shipping are affecting Maersk on the other side of the coin.

Meanwhile we are seeing another move higher in house prices which has even the central bank getting out its slide rule for bubbles! I also note it seems to be hinting/asking for higher taxes on property. On that front well as we see yet another record low for the 2 year bond yield of Germany as it get safe haven flows because of the problems of Deutsche Bank  we may yet see more downwards pressure on interest-rates and yields. Oh and as Elton John put it “Please don’t shoot the piano player” about the last sentence.

Something rather familiar to UK and US readers is found in Denmark which is that employment has done better than GDP growth which raises a familiar concern and theme.

Productivity growth in the Danish economy has been weak in the wake of the financial crisis. This is especially the case from the 2nd half of 2015 and onwards when the decoupling of output and the labour market situation calls into question future productivity growth and the actual sustainability of the growth in employment seen during the last year or so.

Share Radio

I was interviewed on the evening show by Simon Rose yesterday.



What has happened to the UK housing market post the leave the EU vote?

As the UK economy moves on post the leave vote we have an opportunity to take a look at the mortgage and housing markets as we peruse new data.  That will take our minds off all the news services pointing out another record low for the share price of my old employer Deutsche Bank which has fallen 6% this morning in response to reports it will not be bailed out. Speaking of price plummets we were of course promised this by the former Chancellor of the Exchequer George Osborne.

An analysis by the Treasury to be published next week will suggest that two years after a Brexit vote, UK house prices could be between 10% and 18% lower than after a remain vote, Mr Osborne told the BBC.

The next bit was maybe even more spectacular.

And at the same time, first-time buyers are hit because mortgage rates go up, and mortgages become more difficult to get.

Apparently a drop in prices would not even help first-time buyers according to the convoluted logic of Mr. Osborne.

What has happened to UK mortgage-rates?

Last week Moneyfacts told us this.

The cut to base rate has had a welcome impact on mortgage rates, and it isn’t only residential borrowers who are benefiting. Indeed, our latest research shows that buy-to-let (BTL) investors are continuing to enjoy a fall in mortgage rates, particularly those looking for a longer-term deal, with average rates falling to all-time lows.

Ah all-time lows again! What sort of rates are being seen then?

the figures show that the average five-year fixed rate BTL mortgage at 75% loan-to-value (LTV) has fallen by a significant 0.49% in six months to stand at 3.96%, which marks the first time that the rate has fallen below 4.00%. Meanwhile, the average five-year rate at 70% LTV has fallen by 0.15% in a single month, while the average at 60% LTV has fallen by 0.13%.

If we want some more perspective we have this.

all rates have dropped dramatically, with all falling by almost 1% year-on-year:

So it would appear that in spite of the surcharge on Stamp Duty in April new borrowers and those able to remortgage are better off in terms of monthly repayments.

If we move onto ordinary mortgages then Moneyfacts told us this on the 15th.

The figures, taken from the latest Moneyfacts UK Mortgage Trends report, show that the average two-year tracker mortgage rate has fallen by a significant 0.19% in the last month, standing at 1.94% in August (down from 2.13% in July). Not only is this the lowest ever recorded, but it implies that almost the full 0.25% base rate cut has been passed on.

A little care is needed on the Bank Rate cut issue as banks rather sneakily nudged rates higher in July in anticipation of the widely expected official change. The same was true of fixed-rate mortgages with the net effect shown below.

Nonetheless, the month-on-month fall of 0.04% means that the average two-year mortgage rate has hit yet another record low of 2.44%, while the average five-year fixed rate has seen a similar reduction of 0.03% to another record of 3.05%.

So we see a world where up is yet again the new down as the mortgage rates which were supposed to rise have in fact fallen across the board to what are mostly all-time lows.

The Bank of England steps in

There have been a litany of easing moves from the Bank of England since the leave the EU vote. These of course contradicted all versions of the Forward Guidance of Governor Carney. We have seen a cut in the Bank Rate to 0.25% which is below the “lower bound” of Governor Carney as well as hints of future cuts. In addition we have seen £60 billion of conventional QE (Quantitative Easing) announced of which some £1.17 billion of short-dated ( up to 2023 maturity) purchases will take place this afternoon. Thus we see that downwards pressure was placed on both variable and fixed-rate mortgages.

As of last week another weapon has been deployed which is the Term Funding Scheme. This offers up to £100 billion for four years at the Bank Rate itself. So it is a replacement for the Funding for (Mortgage) Lending Scheme which still exists albeit mostly as a vehicle which supported past mortgage lending. Those who want to know more about the TFS can read about it in my article of the 16th of this month, but for today’s purposes it is a vehicle to keep the downwards pressure on mortgage interest-rates. We only have data on the first couple of days when nothing was taken but at any time banks have trouble funding products it is there as a backstop and a very cheap one at that.

House prices

If we look at the official data there has been little sign of a collapse or a reverse in house prices.

Average house prices in the UK have increased by 8.3% in the year to July 2016 (down from 9.7% in the year to June 2016), continuing the strong growth seen since the end of 2013.

The march higher has in fact continued.

The average UK house price was £217,000 in July 2016. This is £17,000 higher than in July 2015 and £1,000 higher than last month

Late last week Jackson-Stops published some research on the subject which is more up to date.

Asking prices of all UK properties for sale down by only 2% (from £297,508 in mid-June to £291,547 today)…… In London asking prices are only down 3% since mid-June

The caveat is that these are asking prices and not ones at which sales took place but there is only a mild change there. Some parts of London were already heading south as those who recall my article covering an area near to me ( Battersea Power Station and Nine Elms) where many new builds seem to have swamped demand.

As ever the numbers vary with whoever you ask as the Halifax recorded a 0.6% rise in house prices in August!

British Bankers Association

They have reported this today.

House purchase approval numbers are 21% lower than in August 2015 but in the first eight months of 2016 they are 2% lower than in the same period of 2015.

Is this a turn or a wait and see what happens? Actual borrowing was quite strong.

Gross mortgage borrowing of £12.4bn in the month was 1% higher than in August 2015. Net mortgage borrowing is just under 3% higher than a year ago.

Actually though the data is not what you might think as it was collected before the Bank of England move on the 4th of August! So we are left perhaps with the Council of Mortgage Lenders.

The Council of Mortgage Lenders estimates that gross mortgage lending reached £22.5 billion in August – 7% higher than July’s lending total of £21.1 billion. In addition to the month-on-month rise, lending rose 15% year-on-year, from £19.5 billion in August 2015. This is the highest August figure since 2007 when gross lending reached £33.6 billion.

Looking forwards there is this.

As with survey indicators for the economy, those for the housing market have also recovered in August. The Royal Institution of Chartered Surveyors survey bounced back, predicting price and sales volumes to rise over the three- and 12-month horizon.


As is so often the case we find ourselves noting information and data sources which are contradictory. However we do know that mortgage rates have fallen and that many house price indicators have shown rises. That is sad because whilst Chancellor Osborne used house price falls as a threat many such as first-time buyers would welcome them.

If we have many more days like this one then going forwards there may be issues over banks lending due to the fact their share prices are under pressure. Against that we know that central banks will rush with the speed of Usain Bolt to the aid of their “precious”. Maybe what is most remarkable is that with all the aid and help they have received banks seem to have lost some more supporters in terms of investors.

Meanwhile there is some happier news from one present and two past players from West Ham United. From the Guardian.

A year ago, former England captain Rio Ferdinand, West Ham United skipper Mark Noble and ex-Brighton striker Bobby Zamora turned up at the conference to unveil their Legacy Foundation – a regeneration charity with a plan to build a series of social and privately rentable housing schemes, backed by private investors.

The stars (all three of whom have played for West Ham) are coming back to present their first project, worth £400m, to build 1,300 homes on a 22-hectare site in a run-down area in Houghton Regis near Luton.



How has the Euro era worked out for the economy of Portugal?

It is time again to take a look at the economy of what is the oldest ally of England and Wales. Yes so old that it precedes the union with Scotland. This is because there is news on economic developments in Portugal both from it and the International Monetary Fund or IMF. Having been involved in a program for Portugal the IMF is keen to open with a positive spin on things.

Portugal has achieved a major economic turnaround since the onset of the sovereign debt crisis. Access to financing was restored following the large fiscal adjustment, the external current account position has moved from a large deficit into surpluses, while the unemployment rate—though still at high levels—declined sharply.

Actually there is a bit of a flicker of old era IMF here as we note the emphasis on the current account but there is a catch in that Portugal has not been able to avail itself of the next part of that play book which is a lower currency due to its Euro membership. Also we should welcome the lower level of unemployment.

A very familiar theme

It is kind of the IMF to confirm that my major economic theme on Portugal is in play. For newer readers it goes as follows. Whilst Portugal has down turns sadly in the good times it only manages economic growth of about 1% per annum. So let us note that according to the IMF “Good Times” by Chic should be on the turntable.

still-favorable cyclical tailwinds and supportive macroeconomic policy settings. The fiscal loosening in place since last year and the ECB’s appropriately supportive monetary policy stance…….. Historically low yields, notwithstanding occasional bouts of volatility, have afforded the public and household sectors relatively easy access to finance, and facilitated an expansionary fiscal stance since 2015

And yet.

The slowdown in economic activity that began in the second half of 2015 has persisted.

Putting that another way economic growth in the last three-quarters has gone 0.2%,0.2% and then 0.3%. If we note the lower oil price and all the monetary easing that is not much of a return and reminds me of my 1% cap on economic growth. Also as the IMF implies but does not say the way that the bond buying of the ECB has depressed Portuguese bond yields has allowed its government to spend more.

Looking Forwards

The IMF tells us this.

the 2016 growth forecast has been revised down, from 1.4 to 1.0 percent for this year.

Actually they think the same for 2017 as well as 1.1% the forecast which of course returns us to my theme. Let us now examine why they think this. Firstly we get something very familiar.

Directors emphasized that pushing ahead with structural reforms remains critical to enhancing competitiveness and promoting growth. They encouraged the authorities to fully implement the already-enacted reforms in labor and product markets,

I will leave the IMF to explain how you need to push ahead with something you have already implemented! The reality is of course that far fewer reforms have happened than claimed.

Also another regular theme mentioned yesterday and back on the 25th of July appears.

As banks continue to struggle with a large stock of NPLs, low profitability, and high operating costs, they are unable to reduce corporate indebtedness and provide adequate lending for investment.  (NPLs are Non Performing Loans)

This particular mess is self-reinforcing as of course a weak economy weakens the banks in the same way that weak banks weaken the economy.

Recapitalization needs of the largest bank Caixa Geral de Depósitos (CGD) and possible losses from the sale of Novo Banco may necessitate further injections of public money

There is also an issue with investment which the IMF skirts a little so let me switch to Portugal Statistics or INE.

Investment recorded a year-on-year change rate of -3.0% in volume in the second quarter, after a reduction of 1.2% in the previous quarter.

Same as it ever was

This bit is rather familiar from Portuguese economic history.

The ongoing recovery has largely been consumption-driven. Household consumption has grown by 10 percent between 2013Q1 and 2016Q1, even though disposable income has only increased by 4 percent over that period.

There is a glaring problem there as this looks unsustainable especially as we note this.

an unprecedented decline in the savings rate,

This type of growth has an issue.

The current account posted a surplus in 2015 for the third year in a row, but some weaknesses are emerging.

It is good that the balance of payments improved but it did have a following wind via the fall in commodity prices. We will see going forwards if it can be sustained. Here is the latest data which simultaneously boost recorded GDP and poses a question or two.

In the quarter ended in July 2016, exports of goods decreaseit wasd by 2.3% and imports of goods declined by 3.9%, when compared with the quarter ended in July 2015.

According to the Bank of Portugal tourism is a bright spot.

The ‘Travel and tourism’ item posted a positive balance of €4,385 million, i.e. 11.5 per cent more than in the same period of 2015

More austerity

Actually both Portugal and the IMF are in something of a mess here! Remember the U-Turn the IMF did on austerity and fiscal stimulus? Well not here.

A credible fiscal adjustment is therefore needed to put public debt on a firmly downward trajectory and ensure the medium-term sustainability of public finances.

Okay how much?

A structural primary adjustment of 0.5 percent of GDP in 2017 and 2018 would be an appropriate fiscal path, but that should be underpinned by credible measures.

They have little faith in the current plans it would appear and they are switching Portugal from a small fiscal stimulus to a contraction which if the economy does slow may well plunge it back into the mess it was so recently in.

The Bank of Portugal has told us that the national debt was 240.9 billion Euros at the end of July which makes the national debt to GDP ratio just under 132% by my calculations. This is a number which is always supposed to fall but yet keeps rising even in this better phase for the economy.

In terms of cost of the debt this is being kept under control by the QE bond buying of the ECB.


This is a nuanced situation as whilst it has improved it is still high.

In July 2016, the provisional estimate for the unemployment rate was 11.1%, remaining unchanged from the definitive previous month’s level.

It is not a good time to be young although again the numbers have improved.


The overall problem can be summarised thus. Back in the second quarter of 2004 Portugal had a GDP of 43.3 billion Euros and in the second quarter of 2016 it was 43.1 billion Euros. Thus we see yet another economic depression in Europe. Meanwhile the lack of economic growth saw the national debt to GDP ratio soar from 61% in 2004 to 132% now.

If we jump back in time to 2004 the European Commission told us this about Portugal.

Starting in early 2001, growth dwindled and the economy slipped into recession in late 2002. In 2003, GDP is estimated to have fallen by ¾%, almost the weakest
performance among EU Member States.

How is the Euro working out for Portugal? Also the future does not look so bright.

Portugal is projected to face large adverse demographic developments. According to UN projections, Portugal’s population has started to decline (by 2.2 percent between 2010 and 2015), and would further shrink by about 30 percent by 2100 in the baseline scenario,

I can vouch for some of the migration as for example Stockwell also has the name Little Portugal.

How are our banks still in so much trouble?

A major theme of the credit crunch era has been the banking crisis in so many places followed by the many bailouts under the Too Big To Fail or TBTF strategy. The catch is that this week has seen more signs of distress for various banks more than 8 years after the collapse of Lehman Bros which by definition shows that the strategy such as it was is continues to fail. What is supposed to happen is that the can is kicked into the future via the bailouts and then we pick the can up later in better times. Indeed in the past central bankers have been able to bask in the reflected glamour of a successful intervention.

Economic policy has been warped to suit the banks

It bears repeating that the economic response has been more for the banking sector than the real economy. The initial slashing of interest-rates benefited them and the proliferation of QE improved the value of their bond holdings. Also in a rather transparent move countries cut interest-rates to a lower bound for their banks. What I mean by this is that the Bank of England stopped originally at 0.5% because it was afraid that the creaking IT systems of the UK banks could not cope with any negative numbers.

More recently we have seen blatant subsidies to the banking sector. The UK started one this week which is the Term Funding Scheme where UK banks will be able to borrow up to £100 billion at an interest-rate of 0.25%. This of course follows on from the Funding for (Mortgage) Lending Scheme which not only gave then cheap finance but boosted one of the main assets house prices. Only yesterday the Bank of Japan warped its buying of equities towards an index in which banks are more strongly represented. The TOPIX bank index rose by 7% on the day.

Also banks are often excepted from negative interest-rates either by also being given money at the negative interest-rate ( i.e even better than free money) like the TLTROs of the European Central Bank or simply being excluded from them like in Japan. Actually the -0.1% interest-rate there is more honoured in the breach than the observance.

House prices

A big gain for banks is rising house prices a subject I have covered extensively in the UK. This week has given us some news on this front from the Euro area as some countries respond to all the monetary easing. From Netherlands Statistics.

Prices of owner-occupied houses (excluding new constructions) were on average 6.0 percent higher in August 2016 than in August 2015. This is the most substantial price increase in 14 years.

And on Tuesday Portugal Statistics joined the party.

In the second quarter of 2016, the House Price Index (HPI) registered an increase of 6.3% when compared to the same period of the previous year….When compared to the first quarter of the year, the HPI increased by 3.1%

Now these are only 2 of the Euro area countries but we do get a clue that the picture has changed for this major part of banks asset books.

UK Banks

The Bank of England has summed up the situation only this morning.

Market valuations of major UK banks remain, in aggregate, well below their book value.

This poses a direct problem for the TBTF strategy as the investments of the UK taxpayer are currently well underwater especially in the perpetually crisis ridden Royal Bank of Scotland. It symbolically has fallen another 2 pence today to £1.81 which compares to a peak over the past year of £3.34. With the travails of the world shipping industry it was sadly typical to find the accident prone RBS affected. Lloyds Banking Group at 56 pence is also well below the price at which the UK taxpayer invested although some of the shares were sold in better times. Whilst HSBC for example has done much better in share price terms the two main bailed out banks have hit more trouble after all these years. Also there is an implicit admittal from the Bank of England that it is still providing a subsidy.

bank funding costs remain significantly lower than during previous episodes in which market valuations have been well below book value.

Deutsche Bank

The topic du jour in banking and semaine and mois. For all the official proclamations that everything is fine we see rumours continue to circle particularly about the derivatives book. Yesterday its share price fell back close to its lows again and whilst it has rallied today the current price of 11.44 compares to a high of 27.98 Euros over the past 12 months. It faces a conundrum where it would like more share capital but that is increasingly difficult due to the low share price. A vicious rather than a virtuous circle is in play as represented by this from Bloomberg.

Leverage ratio — a lender’s capital measured against its assets — at Deutsche Bank lags behind the rest of the world’s major banks, according to data released Tuesday by Federal Deposit Insurance Corp……While it’s not an official scoring by the FDIC, Hoenig’s calculations put more emphasis on derivatives exposure,

There are obvious issue such as the upcoming fine over mortgage miss selling in the US. It is likely to be a fair bit below the US $ 14 billion mooted but none the less Deutsche could do without it right now. Of course it has not actually been bailed out except implicitly but we have to ask how it has such problems 8 years down the road.

Monte dei Paschi

The world’s oldest bank seems like an old friend on here now. It was only a few short weeks ago when we were told that everything was on its way to being fixed and yet yesterday Reuters reported this.

Monte dei Paschi shares fell for eight sessions in a row, shedding 26 percent of their value, after the unexpected resignation of CEO Fabrizio Viola on Sept. 8 added to uncertainty over the lender’s future.

This particularly matters right now because it does this.

a string of losses that have shrunk the bank’s market capitalisation to one ninth of the size of a planned 5 billion euro (4.31 billion pounds) share issue.

You get an idea of the scale of the change as I remember making a mental note that it was one fifth back then as opposed to the one ninth now. Ouch!

If we move to the wider issue of the Italian banking sector it is true that the Non Performing Loans look like they are topping up. The problem is that share prices and hence bank capital have fallen much more quickly.


As time passes it becomes ever more glaring that many of the banks were not fixed but simply patched-up and told to carry on. It is not just a European issue but that area is making the news right now with Fitch pointing out problems for Portugal earlier today a subject I covered on the 25th of July.

But asset quality is still a major weakness for the banking sector and, in our opinion, makes banks vulnerable to downside risks from the highly indebted Portuguese economy. The unreserved portion of problem assets exceeds 100% of capital at CGD, BCP and Montepio.

Indeed there was not much sign of European solidarity in this reported by Reuters about Italian Prime Minister Renzi on Monday.

Italian Prime Minister Matteo Renzi said on Monday that Germany’s central bank chief Jens Weidmann should concentrate on fixing the problems of his own country’s banks, after Weidmann had urged Italy to cut its huge public debt.

Renzi told reporters in New York that Weidmann needed to solve the problem of German banks which had “hundreds and hundreds and hundreds of billions of euros of derivatives” on their books.

So after all these years the words from Alice In Wonderland sum it up well.

In another moment down went Alice after it, never once considering how in the world she was to get out again.

Me on Tip TV Finance








The post EU leave vote UK Public Finances are pretty strong so far

Today gives us a little more insight into Britain’s economy post the EU leave vote as we get the chance to peruse the public finances for August. However already today we got an indication of how the world has changed. This is because in fiscally profligate Japan we saw the Bank of Japan promise this.

The Bank will purchase Japanese government bonds (JGBs) so that 10-year JGB yields will remain more or less at the current level (around zero percent).

So the Japanese government will be able to issue ten-year bonds for nothing and if there was anything to the accompanying rhetoric it will likely do very well.

an “inflation-overshooting commitment” in which the Bank commits itself to expanding the monetary base until the year-on-year rate of increase in the observed consumer price index (CPI) exceeds the price stability target of 2 percent and stays above the target in a stable manner.

Should the Bank of Japan manage anything like this then the bonds will be very poor value for ordinary investors meaning that Mrs. Watanabe should stay clear. That is of course assuming she believes all this as of course the Bank of Japan has promised rising inflation without much success for the last decade or two. Also she may note this.

With regard to the amount of JGBs to be purchased, the Bank will conduct purchases more or less in line with the current pace — an annual pace of increase in the amount outstanding of its JGB holdings at about 80 trillion yen — aiming to achieve the target level of a long-term interest rate specified by the guideline.

At this point it looks rather “same as it ever was” with added rhetoric! Especially if you believed that the Bank of Japan was on its way to infinity and beyond already.

Oh and there was as ever a present for the banks.

The remaining 2.7 trillion yen will be used for ETFs that track the TOPIX.

When I worked out in Japan some years ago banks were 32% of the TOPIX index but only 8% of the Nikkei 225 index. I am sure much has changed but you get the idea.

Perhaps the Bank of Japan was worried by the fall in the share price of Deutsche Bank yesterday.

Bank of England

It too is involved in an operation to reduce what its government pays on new or refinanced debt and only yesterday it spent some £1.17 billion on long and ultra-long Gilts. Due to the current “tantrum” in bond markets it was buying some of the ultra-longs some 8 points below where it has bought them in this phase of QE. But even so some £91 million was purchased of the UK’s longest conventional Gilt which runs to 2068 was purchased at a yield of a mere 1.35%.

The UK Government

The new Chancellor Phillip Hammond has already told us that he will not wear the same austerity hair shirt as his predecessor George Osborne. Although of course some caution is required there as Chancellor Osborne always seemed to be 3/4 years away from a public finances surplus wherever you started from!

However we were promised this in late July. From the BBC.

The new Chancellor of the Exchequer has said he may use the Autumn Statement to “reset” Britain’s economic policy.

At the start of a trip to China to strengthen post-Brexit business ties, Philip Hammond said he would review economic data over the coming months.

He added that the Treasury will act “if we deem it necessary to do so”.

We now know that the Autumn Statement will be on the 23rd of November but we have been told little more. My view is that if lower Gilt yields persist then any politician would find the urge to spend irresistible but as to how much we will have to wait and see. All we have so far are some guarantees for farmers and scientists and a promise of more spending on houses.

The Big Picture

This was of a disappointing performance towards a surplus in the UK public finances. After last month’s figures for July we were told this by the Office for Budget Responsibility.

Meeting our March EFO forecast for PSNB in 2016-17 would require it to fall by £19.8 billion over the full financial year. A third of the way through the financial year, PSNB was only £3.0 billion lower than last year.

This has been pretty much the pattern for the UK even in its better phase for economic growth which began back in 2013 where the improvement in the public finances has never quite matched the improvement in the economy as measured by GDP. I think we see yet another example where we should also look at GDP per capita or per person for a guide.

Also caution is required with the OBR as back in the days of the Coalition Agreement it told us that the average Gilt yield would be 5.1%. It is like the episode in Star Trek when Captain Kirk enters an alternative universe isn’t it?

Today’s Data

The headline news was welcome.

Public sector net borrowing (excluding public sector banks) decreased by £0.9 billion to £10.5 billion in August 2016, compared with August 2015.

However in spite of the relatively good news for August we are behind forecasts still.

Public sector net borrowing (excluding public sector banks) decreased by £4.9 billion to £33.8 billion in the current financial year-to-date (April to August 2016), compared with the same period in 2015.

It shows how hard it is to make progress as central government spending in the fiscal year so far up 1.3% compared to last year’s and revenue is up 4.4%. The main player in the revenue rise has been the changes to the rules regarding National Insurance.

social (National Insurance) contributions increased by £3.6 billion, or 7.8%, to £49.7 billion

The numbers were boosted by a rise of 8.2% in August when all taxes on income were strong as Income Tax rose by 12%.

Interestingly in spite of the lower bond yields and indeed RPI inflation ( for index-linked Gilts) this happened in the fiscal year so far.

debt interest increased by £1.1 billion, or 5.1%, to £22.5 billion.

The National Debt

Here is the headline figure which favours the UK.

Public sector net debt (excluding public sector banks) at the end of August 2016 was £1,621.5 billion, equivalent to 83.6% of gross domestic product (GDP); an increase of £52.0 billion compared with August 2015.

Here is the more internationally comparable Euro area version.

Maastricht debt at the end of March 2016 has been revised upward by £2.7 billion to £1,651.9 billion (equivalent to 87.9% of GDP).


There are several things we cab draw from these numbers. Firstly we have another number suggesting that the initial post Leave vote economy was doing okay. Of course we have a long way to go but those who predicted a plummet face strong receipts for taxes on income in August. Next we have the familiar rendition that whilst these may be good monthly number we are not doing so well if we look at the fiscal year so far.

However in the new world of lower bond yields we are left with the question of hos much this matters now? At least to politicians who seem able to get “independent” central banks to bend to their will in the manner of Uri Geller and provide them with the ultra cheap funding of their dreams.




Central banks face up to Super Wednesday

One of the features of the times is the way that financial markets spend so much of their time front-running central banks. This creates quite an atmosphere today as they wait for the Bank of Japan early tomorrow UK time and then later in the day the US Federal Reserve. We have seen already an example of skittish trading as the Euro pushed above 1.12 versus the US Dollar for no apparent reason. Also it will be a nervous day in bond markets where the “tantrum” I wrote about on the 12th if this month is ongoing and of course has pushed markets in the opposite direction to all the central banking bond buying. The ten-year bond yield in Germany has nervous poked its head into positive territory albeit only at 0.02% as I type this and yet the ECB QE (Quantitative Easing) bond buying continues and across all the eligible Euro area nations (not Greece) it had reached some 1.034 trillion Euros as of the end of last week.

Bank of Japan

This faces quite a list of problems which adds to its conundrum as in many ways it is the central bank which has gone furthest. If you do a check list you go negative interest-rates, QE albeit called QQE, corporate bond purchases, commercial paper ( where it is as far as I recall alone)  as well as equities and commercial property via exchange traded funds.

Those wondering about the equity purchases might like to look back to my article on the Tokyo Whale as the Bank of Japan must own two-thirds of that market by now. Here is an update on this subject from Bloomberg last week.

The central bank is on course to become the No. 1 shareholder of 55 companies in Japan’s Nikkei 225 Stock Average by the end of 2017, according to estimates compiled by Bloomberg last month.

The Yen

This will be on the mind of the members of the Bank of Japan because it is not behaving as they would have hoped and expected. In the early days of Abenomics the Yen fell and against the US Dollar reached a nadir of just below 124 in early May 2015. The rally in the Yen began at the start of 2016 and has seen it move by 20 points from just below 122 to just below 102. Even worse for the Bank of Japan a fair bit of the strengthening followed this announcement in January,

The Bank will apply a negative interest rate of minus 0.1 percent to current accounts that financial institutions hold at the Bank. It will cut the interest rate further into negative territory if judged as necessary.

We saw that the application of negative interest-rates with the hint of more worked for 24 hours in Yen terms. It went on a wild ride where it weakened for about a day but then surged and has with the occasional halt and back track continued in the same direction until now.

So another Ivory Tower has come crashing down as more QE ( called QQE in Japan as QE has become discredited) and negative interest-rates have led to a stronger and not weaker Yen in 2016.


This is a clear area where things are made awkward for Abenomics as the stronger Yen means that there will be downwards pressure on inflation as commodities and oil get cheaper. That makes it harder for the Bank of Japan to hit its target of consumer inflation rising at 2% per annum. Here is the latest data on the subject.

The consumer price index for Japan in July 2016 was 99.6 (2015=100), down 0.2% from the previous month, and down 0.4% over the year….  The consumer price index for Ku-area of Tokyo in August 2016 (preliminary) was 99.6 (2015=100), up 0.1% from the previous month, and down 0.5% over the year.

As you can see prices are falling again which collapses another row of Ivory Towers as expanding the monetary base on this scale should lead to inflation in their models.

Now we get to something awkward which is that the lower rather than higher inflation is achieving an Abenomics objective. It has given Japan some real wage growth but by a completely different route to the one envisaged. Under Abenomics higher inflation was supposed to be accompanied by some sort of wages fairy which would sprinkle magic dust on the numbers.

So by an unexpected route Japan is getting an economic boost. Accordingly I can only completely disagree by this from Gavyn Davies in the Financial Times.

As a result, the inflation credibility of the BoJ has sunk to a new low, and the policy board badly needs to restore confidence in the 2 per cent inflation target.

The economy

This is not going so well as Bank of Japan policymaker Funo told us last week.

Looking ahead, sluggishness is expected to remain in exports and production for some time, and the pace of economic recovery is likely to remain slow.

He was more specific later on the numbers.

the medians of the Policy Board members’ forecasts for the economic growth rate are 1.0 percent for fiscal 2016, 1.3 percent for fiscal 2017, and 0.9 percent for fiscal 2018, and the economy is expected to continue growing at a pace above its potential through the projection period.

Is he really saying that growth at such a low-level is above potential?Yes he is.

Japan’s potential growth rate, as estimated by the Bank, has declined to the range of 0.0-0.5 percent,


On a collective level we got news today on the population and ageing problem that Japan has. According to its Statistics Bureau the population fell by another 300,000 in the 6 months to the beginning of this month making it 126.6 million now. There are now 10.5 million people over 80 which only the “dismal science” would conclude is a bad thing.

Deposit Rates

Have raised the issue of people saving more when interest-rates get very low let me give you the Bank of Japan data on deposit rates. The ordinary depositor gets 0.002% and if you do a time deposit for a year you get 0.016% and for ten years between 0.2% and 0.3% per annum.

The Federal Reserve

It has been a dreadful year for Forward Guidance from the US central bank. The “three to five” interest-rate increases promised at the start of 2016 by John Williams of the San Francisco Fed have morphed into zero so far. As we approach the election changes will be less likely but not impossible. So it is now or after the election you would think. Except now relies on someone as cautious as Janet Yellen taking a risk. So I think we can expect yet more Open Mouth Operations and promises of future rises just like we have seen all year.


My job as an options trader in UK interest-rate markets used to involve predicting what central banks will do and whilst I had quite a few successes it is also true that sometimes it teaches you some humility. Let me remind you of another view of Japan which I have been pointing out on here in 2016. On an individual or per capita basis its performance is in fact okay and might point at us in the UK. So in my view it does not need all the monetary splashing around. Where the catch comes is the level of the national debt compared to output which in gross terms is very high (250% or so of GDP according to the IMF) and rising due to the fiscal deficit which does not fit well with a shrinking and aging population. Is it all about the debt then? Pretty much I think the idea that it will boost the economy is all Imagination.

It’s just an illusion, illusion, illusion

Illusion, illusion, illusion, illusion



Whatever happened to the Carry Trade?

Tucked away at the end of the quarterly review from the Bank for International Settlements or BIS was a reminder of an issue that has been a theme on here for some time but hits the headlines rarely now. Well until the next crisis! This is the Carry Trade which is where borrowers who may be institutional, corporate or most dangerous of all an ordinary person borrow in another currency to which they use every day and more particularly earn in. This poses two clear and present dangers of which the first is the risk to those who do this as they are exposed to currency moves. Ironically if done on a large-scale as happened back in the day with the Swiss Franc and the Japanese Yen it lowers the currency and so not only is the interest cheaper but you have a capital gain. What could go wrong? Well we will come to that. But this same effect turned out to make things uncomfortable for both Japan and Switzerland as their currencies were pushed lower and lower.

What’s going on?

If we ask Marvin Gaye’s famous question we find that the BIS can give us some answers. Here is something which was already known but it does no harm to be reminded of the scale of it.

McCauley et al (2015) have demonstrated that since the Great Financial Crisis, the outstanding US dollar credit to non-bank borrowers outside the United States has increased from $6 trillion to $9 trillion.

Actually initially the US Federal Reserve would probably have welcomed the downwards push on the US Dollar but as we note a stronger period for the US Dollar something of a squeeze will have been put on the borrowers. A real squeeze was put on places like Russia and Ukraine when their currencies fell due to lower oil prices and the invasion of Crimea as they had US Dollar borrowings. The BIS regards this as causing bank deleveraging.

The Euro and QE

According to the new data there was a change when the ECB began its QE program back in January 2015. Not only is there more activity it is concentrated in particular locations.

For advanced European countries outside the euro area, the euro share in cross-border bank lending (32%) is almost equal to that of the US dollar (35%). In emerging Europe, the share of euro-denominated claims (40%) exceeds that of US dollar claims (31%). By contrast, non-European EMEs borrow only a small fraction in euros (6.5%).

As to the exact numbers the BIS records a rise as QE began but then the numbers get confused as there is always so much going on in the fog of finance but we do get a conclusion.

More concretely, higher shares of euro-denominated claims were associated with greater expansions in cross-border bank lending. This result appears to be driven primarily by lending to advanced economies outside the euro area.

Looking at the individual data I note that there seems to be borrowing in Euros going on in what is called emerging Europe again. Greek banks seem to be especially involved in Poland and Hungary which is troubling considering what happened last time around. Spanish banks seem to be active in this area full stop. For a small country Luxembourg seems to be involved a lot. So worrying signs which are just hints at this stage.

As to the players last time around it is harder to say as for example there is activity in what is classified as “others” but Austria is grouped in there with quite a few other countries. The Italian banks seem to be doing less than last time but of course many of them have what might euphemistically be called different circumstances these days.

There are echoes of the past here and whilst the BIS uses neutral language it poses more than a few questions.

The results are particularly relevant for policymakers in borrowing countries that rely heavily on cross-border bank lending.

Also there is this.

For example, euro lending by Swiss banks to Poland can be affected by the ECB’s monetary policy, even though neither country is part of the euro area.

This warning is more general and may even be aimed at the US Federal Reserve for this week.

our findings suggest that policymakers should closely monitor the currency denomination of cross-border bank lending as they assess the potential impact of possible policy moves, both in their own economies and abroad.

It sounds a bit like “Be afraid, be very afraid” ( the film The Fly I think) does it not?


On Saturday I pointed out on BBC Radio 4 a consequence of negative interest-rates in Sweden which is not predicted in conventional economics which is increased saving. Well here is Bloomberg from earlier this month on another one.

The G-10 currency is cheap, thanks to the Riksbank’s negative interest rates. Traders have been borrowing in low-yielding kronor and using the funds to invest in higher yielding currencies, such as Australian and New Zealand dollars, according to Royal Bank of Canada.

The Riksbank will welcome this in the same way I described for the US Federal Reserve as it wants a lower currency to help push inflation higher. Of course the ordinary Swedish worker and consumer will not welcome this at all and there is a deeper danger as should this end the experience of Switzerland and Japan shows that it blows up with a painful currency surge.

What could go wrong with this sort of thing?

In the past three months, selling the krona to buy the kiwi and Aussie dollars, as well as higher-yielding currencies such as South Africa’s rand and Brazil’s real, has returned 9-16 percent, beating the 6-12 percent paid by euro-funded deals and the 4-10 percent generated when using the U.S. dollar.

What about mortgages in Eastern Europe?

I decided to take a look at what was something of a disaster last time round as cheap interest-rates on Swiss Franc and Euro denominated mortgages turned into large foreign-exchange driven capital losses. From the National Bank of Poland.

Banks hold a large, long on-balance-sheet FX position related to the portfolio of foreign currency loans.

The information in the latest Financial Stability Report is as shown below as we get flashes of what was the position at the end of 2015.

The direct costs of restructuring, i.e. conversion of the principal of all loans at the KWO rate, can be estimated at about 35 billion zlotys. If, however, restructuring is used only by borrowers from the years 2007-2008, the costs would be approx. 29 billion zlotys.

There were also indirect costs.

The current value of such reduction in revenue, assuming that all borrowers would take advantage of compulsory restructuring, may be estimated at approx. 21 billion zlotys.

An idea of the amount of individual distress is shown below.

The total value of foreign currency loans with LtV greater than 100% can be estimated at around 77 billion zlotys.

Hungary another country where this issue was particularly prevalent there was a socialisation of the issue a while back. From the Financial Times.

Hungary’s government agreed with banks to convert up to €9bn of foreign currency loans into forints at the then market rate.

Those who took out foreign currency mortgages in Cyprus also faced falls in the value of the asset. From the Central Bank of Cyprus.

Given that until 2015Q1 house prices in real terms had dropped by 34,5% from their peak, in order to complete the correction of the bubble they should theoretically be reduced by a further 9,7% in real terms (4,7% in nominal terms). This would bring house prices at levels corresponding to 2006Q2.

Cyprus Property News told us this on the 7th of this month.

Although Swiss Franc loans declined €274 million in the first half of the year, 80 per cent of the remaining €1,778 million are non-performing according to the head of the Cyprus Central Bank’s Supervision Division.

Time for Ms Britney Spears.

Don’t you know that you’re toxic?
Don’t you know that you’re toxic?


There is much to consider here and we have an issue which is only likely to be made worse by the way that so many countries now have negative interest-rates. Great care is needed with any numbers in this arena as they invariably turn out to be inaccurate but what we do know is that there is great risk here. Also we know that this is a risk exacerbated by all the monetary stimulus that is going on.

Speculating in currencies is a dangerous game for those with lots of capital backing. I fear that in the future we may discover that one more time the unwary have been seduced into it.

BBC Radio 4

I was on Money Box on Radio 4 over the weekend. It was live on Saturday lunchtime and then repeated last night. Here is the clip.