Notes From Underground: On the Periphery

Two central banks met today to make a decision about interest rates and monetary policy within their respective countries. First, the Norge Bank of Norway raised the base lending rate 25 basis points to 1.75%. We bring this to everyone’s attention because it is important to pay attention to the peripheral economies to get a sense of the overall global economy. When rates rise on the margins, it is a sign the global growth is beginning as it takes less effort to generate growth in the smaller economies. It also tells us about the movment on the crosses and the Euro/Nokkie did move one percent after the surprise rate increase. Norway with its large energy reserves and now higher rates will be a good barometer of the global macro picture.

The FED, as we all know, stayed the course and the only change was the announced intention of removing the FED emergency measures at the previously announced expiration dates. Some analysts thought that this was a big deal, but if you look at the amount of funding being done thru these ad hoc facilities it really amounts to a little more then nothing. From a currency perspective, the ending of the dollar swap lines that were provided to other Foreign Central Banks is of greater interest for it shows that even with Dubai and Austria in debt crisis, there is no dollar funding problem. Now if the DOLLAR moves higher it will be for other reasons.

The Greek debt market rallied to close the gap between German/Greek by almost 20 basis points. Many investors believe that Greece will be “lent” the necessary funds to prevent a default. We remain skeptical of how this plays out. Wolfgang Schauble, the German finance minister, clouded the picture even more by warning of the fiscal crackdown coming in Germany. Next year the German public sector deficit is predicted to grow to 6% (recall that Maastricht limits it to 3%). Schauble let all the good burghers know that EVERYONE will bear the cost of closing the deficit gap. If you think the FED hawks talk tough, listen to the fiscal conservatives in Germany and you will have thoughts of Andrew Mellon dancing in your head. The question must be asked: If Germans are being asked for austerity measures to close the budget deficit in Germany, just how much tolerance will there be for a large wealth transfer to other European states? No matter what Trichet and the politicians of Brussels say, the situation within Europe is very complex and will not be resolved painlessly. There has been large amounts of wealth parked in euros as an alternative to the dollar–that is what unnerves global markets now. As we pointed out yesterday, if the YEN cannot strengthen in this environment its role as the funding currency will be restored.

A story that moved center stage today was the announced intentions of Saudi Arabia, Kuwait,Bahrain,Qatar to create a currency union. While this has been discussed for a long time, it is interesting to hear it brought forward now. Is this for economic concerns or are the Saudis trying to send a message by threatening to create an alternative to the dollar? The United Arab Emirates are not part of this as they are unhappy with riyal being the center of this potential currency union–they of course want Dubai. The world’s energy producers have certainly grown tired of receiving a depreciating asset for their petroleum.

As we noted, this story perenially makes the headlines but its timing is interesting. Is it calling the question on Iran by backing the U.S. into a corner ?Just another piece of the stress puzzle and challenges the benign neglect dollar policy of the Obama administration. With the financial world in such confusion, it makes us wonder when the Russians will jump in and add some more fuel to the fire, for the more uncertainty that exists the greater the Russian propensity for mischief.

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One Response to “Notes From Underground: On the Periphery”

  1. Michael Greenberg Says:

    Just “found” your blog. Pretty impressive.

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