GDP increase rescues eurozone growth, Germany stagnates in Q4
chairman Bernanke explains exit strategy
raises reserve ratio again
EU backing for Greece
Greece and its debt problems continued to have a major
impact on market developments. At the beginning of the week, it was announced that an informal meeting of EU heads of state or government would be held on
Thursday in Brussels; moreover, there were rumours that the EU would put
together a rescue package for Greece. But the news that ECB president Jean-Claude Trichetwas
cutting short his visit to Sydney to attend the meeting in Brussels really
unsettled market participants. In view of the possible rescue measures the EU
might take, yield spreads between 10-year Greek government bonds and benchmark
Bunds, which had risen to almost 400 basis points at times, began to narrow
again, and are currently at around 270 basis points.
As the tension eased somewhat, the euro strengthened
to about 1.38 against the dollar. On Thursday afternoon, however, after the EU
summit had ended, the euro started to tumble again. Some market players
attributed the euro‚Äôs renewed weakness to the ‚Äúdisappointing‚ÄĚ outcome of the
summit. And indeed, the statement issued by the government leaders was vague to
say the least, announcing that the eurozone member states would
take ‚Äúdetermined and coordinated action if needed to safeguard stability of the
eurozone‚ÄĚ. Greece, however, had not as yet asked for financial
At first glance, it looks as though not much has emerged
from the summit, but this is a misconception. The crucial point is that the EU
council has assumed official responsibility. If the worst comes to the worst,
the EU, i.e. the eurozone member states, has promised to help Greece. It is up to the finance ministers, who are meeting
next Monday and Tuesday, to propose, and if necessary introduce, concrete
But the euro‚Äôs slide to below 1.36 against the dollar
on Thursday and Friday was probably due more to other factors. US equity
markets have continued their recovery; furthermore, after three bad weeks,
initial jobless claims have dropped to 440,000. Conversely, eurozone Q4 GDP
figures, which have just been released, show a significant slowdown in growth.
Growth in the eurozone as a whole was a mere 0.1% compared to the previous quarter.
France was the only country to post solid growth of 0.6%; Germany‚Äôs economy stagnated, and Spain and Italy actually reported declines of 0.1 and 0.2%
Bernanke explains exit strategy
Fed chief Ben Bernanke testimony before the House
Financial Services Committee was postponed because of a snowstorm, but the
prepared statement was published anyway. In it, Mr Bernanke outlines the Fed‚Äôs
plans to revert to a normalmonetary policy stance. He indicates that the Fed is
not intending to reduce the central bank‚Äôs balance sheet substantially for the
time being (to do so, it would have to sell assets), and that liquidity is to
be removed from the financial system by means of term deposits and reverse repo
operations. The Fed is currently in the process of expanding the counterparties
for reverse repo operations beyond primary dealers ‚Äď to include money market
funds, for example. The new term deposit facility should be available some time
in the spring.
Provided that monetary policy tightening did not become
more urgent, the Fed would test its liquidity draining mechanisms on a small
scale initially; as a second step, the transaction volumes would be
significantly increased. Raising interest rates would then be the third step.
The interest rate on reserves (which now stands at 0.25%) would play a pivotal
role as a monetary policy instrument.
Mr Bernanke is trying to make it clear that there are no
imminent plans to tighten monetary policy. He therefore deliberately reiterates
that ‚Äúkeeping the fed funds rate at an exceptionally low level for an extended
period is warranted‚ÄĚ. However, the Fed is not just making hypothetical plans,
but pursuing a concrete goal. If, as we assume, growth in the coming months
were to remain more or less robust, the US money market could start tightening around the middle
of the year.
China raises reserve ratio again
The Chinese central bank, the People‚Äôs Bank of China,
has raised the deposit reserve ratio by a further 50 basis points to 16.5% for
large banks and 14.5% for smaller ones. China‚Äôs increased efforts to curb credit expansion are
fuelling speculation that the government could allow the yuan to appreciate. In
our view, however, the chances of this happening are rather slim: although exports
have recovered somewhat, the export industry is probably still working below capacity.
From China‚Äôs point of view, an appreciation of the yuan would
slow down the less dynamic part of the economy.
One final point: according to rumours, the SNB intervened
in the currency market again on Friday morning. Prior to that, EUR-CHF had
fallen below 1.4650. As long as the SNB continues to intervene, there is little
chance of the franc rising.
Stephan Rieke +49 69 718-4114
Grabbe / Klaus N√§fken
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