Benn Steil

Geo-Graphics

A graphical take on geoeconomic issues, with links to the news and expert commentary.

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Showing posts for "Financial Crisis and Recession"

From Greek Spreads to German Votes to . . . Greek Spreads?

by Benn Steil and Dinah Walker
Greece and Germany

The German federal elections on September 22 could be of enormous consequence for Greek solvency – and the future of the eurozone.  Today’s Geo-Graphic shows that Greek solvency may itself be of great consequence to the German elections.

As the figure shows, when the yield spread between German and Greek government bonds falls (and market optimism for Greek solvency rises), support for the small right-of-center, free-market German FDP party rises.  (The FDP is currently part of the Merkel-headed, CDU-led government.)   When that spread rises, however, support for the FDP falls, while support for the left-of-center SPD party rises.  (Support for Merkel’s CDU is invariant to shifts in Greek sentiment.) Read more »

Carney’s Forward Garble

by Benn Steil and Dinah Walker
unemployment targets

The Bank of England’s dramatic new “forward guidance” policy, announced on August 7 with great fanfare, struck the markets like a soggy noodle – the FTSE fell, gilts fell, and sterling rose, none of which could the Bank have wanted to see.

Why the disappointment?  Others have pointed to the multiple caveats and exit clauses, but we would highlight something much more tangible: the pledge to keep interest rates super-low at least until unemployment fell to 7% was meaningless, as 7% is nearly two full percentage points over what the Bank considers to be the long-term equilibrium rate of UK unemployment.  This is like a football coach pledging to keep throwing the football until his team is down by less than 50 points; it tells the defense nothing it didn’t already know. Read more »

Will Portugal Bring Down the Spanish Banking Sector?

by Benn Steil and Dinah Walker
spain exposure to portugal

In its recent evaluation of the Greek bailout program, the IMF revealed that the euro area leadership sought to delay a Greek sovereign debt restructuring back in 2010 because of contagion fears; that is, Greece’s creditors might get sucked into the bailout vortex. Among eurozone national banking systems, France had the largest exposure. At its peak in the second quarter of 2008, France’s exposure to Greece totaled $86 billion. That exposure has since plummeted, partly because French banks took advantage of the ECB’s Securities Market Programme (SMP) during 2010-11 to fob off Greek bonds, effectively forcing a eurozone mutualization of the debt. SMP was terminated in September 2012. Read more »

Fed Taper Talk Jolts Rate Expectations for 2015

by Benn Steil and Dinah Walker
taper expectations

From September 2012 to March of this year, the Fed had been remarkably successful at guiding the market’s expectations for future interest rates through publication of its unemployment projections.  As today’s Geo-Graphic shows, when the Fed lowered its unemployment projection for a given future date the market raised its projection for interest rates around that date proportionately.  It was a tightly correlated dance. Read more »

Mortgages and Monetary Policy Don’t Mix

by Benn Steil and Dinah Walker
QE and Mortgage Rates

From the beginning of 2009 through this past May 21st, the Fed amassed a portfolio of mortgage-backed securities (MBS) valued at $1.2 trillion.  Over this period, the average 30-year fixed mortgage rate fell from 5.33% to 3.65%, and the spread between that rate and the 10-year government borrowing rate fell from 2.8 percentage points to 1.7 percentage points. Read more »

Is the Fed Right to Calibrate Asset Purchases to Economic Data?

by Benn Steil and Dinah Walker
recalibration

The Fed is trying to have its cake and eat it too. Having earlier tried to anchor market expectations of future low interest rates by pledging that policy would remain accommodative into 2015, Fed Chairman Ben Bernanke is now saying that the Fed will consider “a recalibration of the pace of its [asset] purchases . . . in light of incoming information.” Read more »

Draghi’s Dilemma

by Benn Steil and Dinah Walker
ecb rate vs national rates and inflation

The Governing Council of the European Central Bank meets on May 2, with a possible rate cut in the offing. Yet a rate cut is not the no-brainer the Bank’s critics often suggest, as today’s Geo-Graphic shows.

The ECB’s official inflation-rate target is “below, but close to, 2%.” Both Portugal and Greece have inflation under 1% , but the transmission mechanism from ECB rates to business borrowing rates in those two countries has been virtually severed by the crisis. In short, they need a rate cut, but the ECB can’t deliver them one. Read more »

Why Easy Money Is Not Enough: U.S. vs. the Eurozone

by Benn Steil and Dinah Walker
unemployment dispersion

European Central Bank president Mario Draghi has promised to do “whatever it takes to preserve the euro,” and the bank’s Outright Monetary Transactions initiative last September, aimed at pulling down crisis-country bond rates, no doubt calmed market fears of a eurozone breakup. But whereas eurozone sovereign bond spreads have narrowed, the gap in real economic performance – particularly unemployment – between the best and worst performers, as shown in today’s Geo-Graphic, has continued to grow precipitously. Compare this to the United States, which has a fiscal and banking union as well as a monetary one. There, jumps in unemployment rate dispersion across states caused by financial and other shocks are reversed in relatively short order. Read more »

Dr. Strangelove or: How China Learned to Stop Worrying and Love the Dollar

by Benn Steil and Dinah Walker
currency wars

China has since 1994 operated some form of currency peg, harder or softer, between its yuan and the U.S. dollar. While China’s state-run Xinhua news agency has in recent years railed against U.S. management of the dollar, and has called for “a new, stable, and secured global reserve currency,” this week’s Geo-Graphic illustrates why China has little incentive to press for such a thing. Read more »