of England is authorised to buy private assets
foreign trade data show plunge in growth in Q4
forecasts further GDP contraction of 2.6% in fiscal year 2009
No end to crisis yet in
Over the past week, the currency markets reacted again as they
have so often done during the crisis: the dollar dropped against the yen,
USD-JPY fell from almost 91 to below 88.50. However, the US currency held its ground against most other currencies. EUR-USD
lost well over 3%, falling to 1.28. Once again, the pound sterling suffered the
biggest losses. This week, GBP-USD plummeted from over 1.49 to below 1.37.
EUR-GBP rose accordingly from 0.89 to 0.945.
New rescue package
weighs on pound
The British governmentâ€™s announcement of a new rescue package for UK banks put the pound under pressure. Firstly, the government is planning to protect
banks against further losses from troubled loans and assets. Under the new
scheme, future losses on portfolios of defined assets will be borne by the banks themselves up to a certain amount. The
government will cover 90% of the losses exceeding this amount. The Treasury is initially earmarking
ÂŁ25bn for the risk protection scheme, but sums of up to ÂŁ200bn are being quoted in the press.
Secondly, the government is offering to convert its preference
shares into ordinary shares. This will help banks which recently received
capital injections, as they have to pay preference shares dividends of 12%. In return for this, however, banks must commit
themselves to increase lending to the private sector. The government will thus have greater
influence over the banks of course. So far RBS appears to be the only bank interested
in this offer. A further important part of the package concerns the Bank of
England. In order to improve banksâ€™ liquidity, the BoE will be authorised to
buy up to ÂŁ50bn worth of (nontoxic!) non-government securities and loans â€“ commercial
paper, corporate bonds and syndicated loans. This in fact is the beginning of â€śquantitative
easingâ€ť in the UK.
The British financial sector is undoubtedly facing big problems
and the macroeconomic significance is high. However, it looks as though the UK currency is taking a particularly heavy battering for problems
which, as is becoming evident from 2008 balance sheets, exist in other
countries as well. There have also been negative headlines about the financial
sector in the US and Germany, for instance. Seen from this angle, the depreciation of the
pound against the euro could perhaps be regarded as somewhat exaggerated. The
lack of liquidity in the currency market could have played a part too.
Yen soars, but economy
A ludicrous constellation can be observed in Japan at present: while the yen is approaching its all-time high of
1982 against the dollar â€“ just under 80 â€“ the Japanese economy is collapsing. Industrial
production in Japan, which had already been falling in the first three quarters of
2008, will probably have plunged again in the fourth quarter by well over 10%
qoq. If the forecasts for December of â€“9% mom are confirmed, due to a statistical
effect, the first quarter will already be set back by 9%, even if industrial
production were to stagnate. Almost all major industrial sectors are affected,
from the car industry to mechanical engineering.
The main reason for this is the plunge in exports; in Q4, exports
plummeted by 20%. Imports fell too, almost as much, but this was due to
declining commodity prices. Therefore, in real terms, the development is even
more dramatic than in nominal terms (see chart). If we transpose the development
of the trade balance in real terms onto net exports, we get a negative growth
contribution in the range of 2.5 percentage points. As private consumption will
probably have been flat and investments are more likely to have made a negative
contribution, real GDP could have fallen in Q4 by 2.5 to 3% compared to the
The Bank of Japanâ€™s macroeconomic forecasts are not much more
optimistic either: GDP is expected to have dropped by 2.0% in the fiscal year 2008
which ends in March. For the fiscal year 2009, the BoJ is forecasting a further
decline of 2.6%. The economic outlook does not improve until fiscal year 2010.
The yen exchange rate is continuing to follow the pattern that
stress in the financial markets is good for the yen â€“ because the Japanese
unwind foreign investments and carry trades. However, there is growing disparity
between the appreciation of the yen and the macroeconomic situation in Japan.
Rieke +49 69 718-4114
Grabbe / Klaus NĂ¤fken
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