The weekend brought some political news from the EU. Brian Cowen gave up his leadership of the Fianna Fail Party but vowed to stay on as prime minister. However, the GREEN PARTY, who is the junior partner in the coalition, balked at the uncertainty caused by PM Cowen and pulled their support, which would force the dissolution of Parliament after this week’s vote on important budgetary matters. It is not as significant as it could be for elections were scheduled for March and the ruling party has been expected to suffer a total defeat. The most important outcome is that some of the leadership challenging Cowen within Fianna Fail will lose some precious time to secure their support within the party.
Portugal held its presidential election this weekend and Anibal Cavaco Silva, its conservative sitting president and a highly respected economist, was reelected. The Portuguese people appeared not to want to rock a leaking boat and opted for a proven hand to be a part of the government that will need to make very tough economic decisions in the near term.
Besides the elections around Europe, a situation arose that may eventually appear in the U.S. Italian municipalities are suing Deutsche Bank, Depfa Bank, JP Morgan and UBS regarding fraudulent selling of swaps. The banks, in turn, are suing the Italian Municipalities in London courts about non-performance as the swaps have turned negative for the local governments. The banks are pressing ahead in the British courts where they believe the judicial system is not weighted against them. Some municipalities have won cases against the banks in Italian courts so the big international banks are rushing to get their cases filed before the municipalities do in order to ensure the venue is London. This may become an issue in the U.S. as stressed municipalities with large losses on swap positions—THINK JEFFERSON COUNTY, ALABAMA–seek relief from the losses by suing for fraud. Nothing pending yet but just a heads up on a future problem facing the banks.
Another emerging market placed restrictions on the inflow of “hot money” on Friday. The Bank of Israel, chaired by the highly respected Stanley Fischer, placed a 10 percent reserve requirement for foreign exchange derivative transactions by non-residents. Fischer has been battling a rising SHEKEL by using intervention but has now followed the path of Brazil, South Korea, Taiwan and others. Many emerging markets are trying to stem the inflow of money searching for positive real rates of return in the more rapidly growing emerging economies. The FED’s negative real rate interest policy is forcing investors to head to the smaller, dynamic economies but huge amount of funds overwhelms the economies that offer attractive yields.
The Chinese have also warned the U.S. that this negative interest rate policy will not be tolerated forever. In present conditions, the U.S. has been able to prolong the fiscal profligacy and QE2 that is needed to improve its unemployment problem but the world’s other economy won’t be tolerant indefinitely. If U.S. growth does not allow the FED to raise rates or Congress to rein in its spending soon, the unrestricted flow of global capital will be threatened. Countries around the world are carefully utilizing tactics to stem the flows but one has to wonder when more severe restrictions will be implemented. It is not only the U.S. that is on the hot seat. The U.K., with an inflation rate of 3.7 percent and an overnight lending rate of 50 basis points, is also a culprit. As the intellectual mentor of Bernanke was wont to say, THERE IS NO SUCH THING AS FREE LUNCH.
Tags: Anibal Cavaco Silva, Bernanke, Brazil, Brian Cowen, Deutsche Bank, EU, Fed, Fianna Fail Party, Green Party, hot money, Ireland, Israel, Italy, Jefferson County, JP Morgan, lawsuit, Portugal, QE2, South Korea, UBS
January 24, 2011 at 5:24 am |
Tepper, Appaloosa AM (CNBC Squawk Box) said “QE2 worked” and the “US economy is doing better”. More risks and uncertainty in China and Europe.
January 24, 2011 at 6:18 am |
Arthur–as we have discussed for months–it did work as Bernanke told us it is “portfolio balance channel”—now he must hope that the increased portfolios lead to the increase of “animal spirits”—Tepper is right on as you know as well as anybody
January 24, 2011 at 8:23 am |
Yra,
What is your position on the Central Bank of the Republic of Turkey? Turkey fits the profile of a hot money recipient you discuss, yet they are one of the only central banks to cut short term interest rates in hopes of decreasing the incentive to push capital there way. Is there any sizable chance that this policy will succeed at stemming unwanted capital inflows/decreasing bank lending growth (a stated goal) without creating a potent amount of inflation and hopefully allowing the Turkish equity markets to perform positively?
January 24, 2011 at 8:46 am |
Danny—Turkey is interesting as it is taking the obvious route of cutting rates to dissuade foreign hot money—we shall see if they win the game and if they do othere emerging markets will follow—the history of inflation in the emergers just scares the new found conservative nature of so many of the Emerging markets central banks,so Turkey will certainly be worth watching.If there is a huge improvement in productivity Turkey may well succeed in this attempt—