A change of policy by the ECB may help Ireland’s continuing economic problems

After a day in which the US Dow Jones Industrial Average drifted lower again by some 39 points to 10176 we saw much heavier falls in Japanese equities last night/this morning. The Japanese Nikkei 225 index fell by 121 points to 8995. This leads me to a topic I have been following recently the divergence between Japanese and American equity performance which if we use the 2 indices I have just quoted is now some 1181 points or 13.1% of the Nikkei’s value. Indeed as the Nikkei has now fallen by 20% from its highs of this year some analysts now consider that a bear market has started for it. This will be reinforced by the “big figure change” from 9 to 8 at the start of its level.This is not an entirely auspicious sign because 2010 was supposed to be the year economic recovery took root which one would normally associate with stock market strength.

As to causes of the Japanese equity falls I think that the latest influence has yet again been the strength of the Yen which rose against the Euro to 106.95 and against the US dollar to 84.36. There has been talk in the media of the strength of the Yen versus the dollar but less so about its move against the Euro. After the sharp rise in the Yen I wrote about following the US FOMC’s QE-lite announcement we are now seeing further strength which when you consider the rate was at 125 as recently as the beginning of May must be worrying Japan’s exporters. Also we have the not so small matter of a fifteen year high against the US dollar.

We also saw a pick-up in commodity prices yesterday as the Commodity Research Board’s spot index rose by 3.29 to 453.39. The rise was driven by fats and oils and foodstuffs so there was an element of “agflation” in the move.

Ireland and her economic problems

This is an issue that appears to be returning to centre stage and the main problems are yet again her property and banking sectors. These two problems are intertwined and the Irish solution to the problem has been to set up a bad-bank for the worst of the property loans which is called National Asset Management Association. So far so good in my view. However some of her banking institutions have continued to struggle. For example as I wrote last week the nationalised Anglo-Irish Bank has had to go cap in hand to the Irish government for more funds in spite of the support from placing a lot of its bad debts in NAMA. The Governor of the Irish central bank feels that the support required for Anglo-Irish will amount to some 22 to 25 billion Euro’s. Some will be concerned by the fact that after all this time we have a range of figures rather than a known one and others are concerned by the fact that each time this subject comes up then Anglo-Irish’s performance appears to have deteriorated further. So NAMA has been a good idea that is in danger of being reduced in credibility if official sources continue to underestimate the scale of the problems in Ireland’s property and hence banking sector.

Yesterday we saw figures for tranche 2 of NAMA’s operations and we saw one organisation manage to outperform Anglo-Irish in terms of the poor state of the property portfolio put into NAMA. Step forward Irish Nationwide Building Society which was charged a 72.4% haircut on the assets it placed into NAMA which manged to exceed Anglo-Irish’s 61.9%. This is or rather was quite an effort particularly as its loans are said to include UK ones as the falls in prices in the UK have been lower than Ireland’s. Overall the 11.9 billion Euro’s placed with NAMA had to take a 55.6% haircut which is worse than tranche 1.


These figures will again raise concerns about Ireland’s property market and her banks. I felt that NAMA was a good innovation but the truth is that the deterioration in the performance of Anglo-Irish Bank compared to previous expectations is in danger of having knock-on effects on the credibility of both NAMA and the Irish government.Some private-sector analysts have projected the decline in Anglo-Irish’s performance forwards and now forecast that bailing her out will end up costing more like 30 billion Euro’s. In an economy the size of Ireland’s this is a significant sum.

As to NAMA itself it is hard to say whether the overall rise in the size of haircuts to 55.6% is a bad portent for future tranches as the detail we receive on each tranche is limited. However some have suggested that the fact that the haircuts have risen is good for the Irish taxpayer and bad for the banks. One has to be slightly careful with this as the two financial institutions which are the worst performers on this front are both nationalised and so whatever form the bill arrives it will end up with the Irish taxpayer.Also the Irish central bank is supporting Anglo-Irish Bank with loans so the position is complex as to where the bill will fall but all of the options are paid by the Irish taxpayer.

It is concerns about this area that have mainly driven the rise in Irish government bond yields. Last night her ten-year government bond yield closed at 5.42% and has recently been rising. To this absolute rise you have to consider that many other government bond yields are falling so relatively her position is worsening and spreads are widening. So she is now paying 3.1% more than the equivalent German bund or in some ways more concerning some 2.45% more than the equivalent UK gilt. Put another way the spread over the German bund is now back to the levels last seen just before the euro zone announced its “shock and awe” package on the tenth of May.

Europe’s Central Bank suggests a change of course

Friday gave us some insight into a possible change of course by the European Central Bank. The head of Germany’s Bundesbank and candidate for the same role at the ECB Axel Weber told Bloomberg Television that the ECB should continue providing unlimited liquidity on a weekly, monthly and three-monthly basis until at least the start of 2011. This is interesting on two counts. Firstly in terms of economics it would represent a change in ECB stated policy as up until now  the ECB has pledged to keep supplying unlimited weekly and monthly liquidity until early October 2010. Secondly it represents yet another delay in what Mr. Weber called “a normalisation procedure.” Put another way I have written often about central banks plans to exit their extraordinary monetary policies in 2010 and the fact that they keep being delayed. Well if Mr. Weber gets his way they will now be delayed to 2011 and he is a monetary hawk. One might reasonably wonder as to when the withdrawals will ever take place and what circumstances will make them possible.

There was also an element here of Mr.Weber treading on the toes of the current President of the ECB Mr.Trichet who might not unreasonably feel that such statements are his job. However I guess as we approach the end of Mr.Trichet’s term such acts are likely. If one was in any doubt that this was a type of election mandate then Mr. Weber’s adding of “It’s important to be a diplomat for the diplomatic corps. It’s not so important for a central bank” confirmed it as this lack of diplomatic skills has been highlighted by his opponents.


We are left with the theme that extraordinary monetary measures appear to be becoming somewhat less extraordinary and more permanent in their nature as central banks around the world struggle to reduce and reverse them. The Federal Reserve in the United States has in effect just increased them as it fears an economic slowdown and the problems in Japan I wrote about earlier are increasing pressure on the Bank of Japan to act again.So a delay in reducing them by the ECB is not such a surprise. Indeed in one avenue this week we have seen a small increase in them by the ECB as she purchased some 338 million Euros of debt under it s Securities Markets Programme last week which compares with much lower amounts recently. To link my stories today the market rumours centre on purchases of Irish debt.

Europe seems to be retaining some more economic momentum that either Japan or the US but the concern for the euro zone must be that most of it is in her economic locomotive Germany and that much less can be seen in the peripheral states. Another example of this appeared yesterday where the Markit Purchasing Managers Index for the euro zone fell to 56.1 whilst Germany’s rose to 59.3 on a scale where numbers above 50 mean expansion and growth. Now this is only a survey and caution is needed therefore but it does tally with other evidence. Also with the Euro falling as a currency one might expect Germany’s relative outperformance to carry on.

Today and Tomorrow the US Housing Market takes centre stage

We will be updated today and tomorrow on the state of the US housing market as today the National Association of Realtors releases its existing home sales numbers for July and tomorrow the Census Bureau releases its new home sales figures. As this market is at the heart of the US economy this could easily affect not only how markets behave but also give us another clue as to the state of the US economy which is the current “hot” topic in world economics.


5 thoughts on “A change of policy by the ECB may help Ireland’s continuing economic problems

  1. The Irish situation is worrying. The BIS Quarterly Review in June said ” Banks headquartered in the United Kingdom had larger exposures to Ireland ($230 billion) than did banks based in any other country. More than half of those ($128 billion) were to the non-bank private sector.”

    You have an ally in Herve Hannoun, Deputy General Manager of BIS, who wants to see clear limits, timelines and exits from unconventional monetary operations which distort long term rates and give central banks market risks as asset owners. He says ” ….. large-scale intervention by central banks in financial markets should be seen as an exceptional development. It is a by-product of the crisis with some dangerous side effects that are likely to become more harmful the longer the “medicine” is taken. The sustained bloating of their balance sheets means that central banks still dominate some financial market segments, thereby distorting the pricing of some important bonds and loans, discouraging necessary market-making by private individuals and institutions, and increasing moral hazard by suggesting that there is a buyer of last resort for some instruments.”

    • Hi Shireblogger
      Thanks for the ally although sometimes to be right you have to be willing to be alone… As to the issue between the UK and Ireland and our respective property and banking sectors then there are clear troubles. In the UK many of our commercial property problems will be tucked away in the Asset Protection Scheme but I agree our banks were exposed quite heavily in Ireland. What troubles me is the fact that it has never really been itemised and accounted for particularly the non-bank lending.
      Also since NAMA began Irish commercial property prices have fallen by 8% whilst those in the UK have risen by 9.2%. This makes me think we still have a fair journey to go on in the UK as regards our commercial property sector. For a start NAMA has not as I understand it sold anything yet and will have quite a few UK assets to sell before it is finished.

  2. Do any of the central banks or for that matter governments have real plans for a ‘return to market normality’? Looks to me like it’s either a case of Shaun’s can being kicked as far down the road as possible or ineffectual dabbling with financial instruments for the sake of politics?

    • Hi Mac
      I think the future will perhaps find us tripping up on a few of the cans kicked forwards in time. This strategy was predicated on the view that things would get better quite quickly and whilst historically this has often been true I personally feel that from its early stages the credit crunch showed quite a few divergences from the norm, accordingly authorities should have been more careful with the application of normal tactics. It is not only generals who plan to fight the last war rather than the next one.
      If you look at government bond yields they have gone from flashing amber to red over the past few days and yet inspite of their recent falls equity prices still reflect much more optimistic views. Currencies are moving quite quickly, a particular concern in Hungary and Japan tonight for example, so the future where we find these discarded cans is looking increasing unlike the one authorities planned for.

  3. Coincidently S&P lower the credit rating for Ireland the day after this post. This seems quite a quick response for a credit agency if it is based on “new capital injections into Anglo Irish Bank Corp. Ltd”.

    (I add this as you do not like returning to the same topic two days in a row, so may not mention this today.)

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s