central banks weigh on pound sterling and Swedish krona
recession deepens, GDP contracts by 1.5% in Q4
Â·G7 finmins to
discuss crisis measures, financial market regulation, protectionism
Finance ministers in the spotlight
week, the markets have been focused on the two major political events in the US.
First, the US
Senate has approved the economic stimulus package, thus clearing the way for
the joint compromise plan to be approved by both houses of Congress. The
stimulus bill is to be signed into law by President Obama within the next few days.
Second, the new US Treasury Secretary Timothy
Geithner has unveiled his bank rescue plan.
participantsâ€™ hopes were pinned primarily on the bank rescue plan. They had
been expecting it to provide fresh impetus. And they were visibly disappointed
when it became clear that Mr Geithner had no clear-cut solutions to offer. The
new plan is based on much the same lines as before: recapitalisation of
financial institutions with the potential to survive, removing toxic assets
from banksâ€™ balance sheets with combined funds from the public and private
sector (this is new), reviving lending to consumers and SMEs by significantly
expanding funds to buy securitized loans (up to a volume of $1,000bn), and easing
restructuring of existing mortgage loans by offering government aid.
plan leaves a lot of important questions unanswered, however, particularly in
connection with removing toxic assets from banksâ€™ balance sheets. Mr Geithner
only touches briefly on the main
problem â€“ how to obtain a fair valuation of the assets, and how to avoid
favouring banks or private investors to the detriment of taxpayers. Against
this backdrop, gains on equity markets crumbled again, and credit spreads
widened. In the forex market, EUR-USD, which had been around
1.30 at the beginning of the week, retreated below 1.29. Weak economic data
and the eurozone strengthened this tendency. Both the German and the Japanese
trade balance figures show that foreign trade collapsed in December; very bad
euro area production data complete the picture. The GDP figures released on
Thursday and Friday show an unprecedented collapse in economic activity in Q4:
in the eurozone, real GDP fell by 1.5% quarter-on-quarter, and even more
dramatically in Germany
by 2.1%. The negative impact came mainly from the foreign trade side and fixed
pound sterling and the Swedish krona weakened significantly. In the previous
fortnight, the pound had recovered quite well: at the beginning of the week,
GBP-USD had improved from its low of around 1.35 to 1.50; at the same time, EUR-GBP
had lost about 8 pence to around 0.87. In
his statement on the release of the Inflation Report, BoE governor Mervyn King
clearly signaled that the economic situation and the tight financial market
situation might make further monetary policy easing necessary. He also
confirmed that the BoE was considering quantitative easing. A combination of
crumbling equity markets, dismal macroeconomic prospects and BoE interest rate
cut hints weighed on the pound: the euro rose to over 0.89, cable fell back to
Swedish krona suffered a similar fate when on Wednesday the Riksbank
rates by 100 basis points to a mere 1.0%. It referred to the rapid
deterioration in the economic situation: according to the Swedish central Bankâ€™s
revised estimates, real GDP will shrink by 1.6% in 2009, while the unemployment
rate could more than double to 8.0%.
the weekend, the G7 finance ministers and central bank governors are meeting in
to discuss measures to combat the financial and economic crisis. In our view,
they are not likely
come up with a magic solution. We see a slight danger here of the marketsâ€™
hopes of a quick solution being dashed â€“ which would support the dollar. In
addition, currency matters will probably be discussed in the normal manner. The
government has already signalled that it also considers the yuan undervalued.
The G7 statement is therefore likely to contain a reference to China
again. In the markets, there had been some speculation as to whether Japan
could bring up the subject of the appreciation of the yen. But finance minister
Shoichi Nakagawa has since denied this.
Rieke +49 69 718-4114
Grabbe / Klaus NĂ¤fken
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