eurointelligence: "Panic in the one-month Euribor market"

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30.11.2007
Panic in the one-month Euribor market

Il Sole 24 ore had an interesting article on some strange movements in the Euribor interest rate market, which was not picked up by other newspapers. The one-month rate shot up from 4.227 to 4.876% within a day, while the 3-months rates are 4.842%, and the annual rate 4.753%. With ECB policy rates at 4% this inverted money market yield curve appears to make no sense at all. Il Sole quoted technical factors as a possibly explanation as banks are rushing into the one-month market ahead of the closure of their 2007 accounts.

(A note from us: This suggests that problems in the banking are far from over, and almost certain to carry over into next year. This rush to meet the 2007 accounts deadline may also explain why the ECB has so been so keen to make more liquidity available)

Where is all the money?
The FT reports that US money market mutual funds have experienced an enormous inflow over the last few months. Money market funds received $13.38bn in new assets for the week ended November 27, according to iMoney.net, as investors were seeking a safe haven away from the mortgage market.

More Doves
The world of European central banking is full of doves these days. The latest who outed himself was Vitor Constancio, the ECB’s council member for Portugul, who said that the rise in inflation was temporary and that prices remain under control, the Irish Independent reports. Constancio did not mince his words: "We have to understand that this is temporary and that monetary policy won't permit this acceleration to generate a continuous inflationary period…There is no loss of control of inflation in Europe.” The article also said that Guy Quaden, the member for Belgium, argued that slowing growth would curb price increases.

Steinbruck blames “snooty” bankers
Peer Steinbruck, the German finance, who is best know for his decision to go on a Safari during a G7 meeting he was supposed to his, blamed the arrogance of bankers for the credit crisis. He told the FT in an interview: “The snooty attitude that we have sometimes seen – under the motto of ‘we are cleverer than the others’ – ended in disaster.”

A controversial minimum pay deal
German postal workers will receive a legally binding minimum wage of €9.80 an hour the German Grand Coalition decided. This was one of the most controversial issues inside the government, and has led to mutual recriminations. As the post office is about to lose its monopoly, the SPD wanted to secure workers’ incomes when the full force of competition hits the sector next year. Yesterday, the SPD claimed victory, Financial Times Deutschland reports.

Sarkozy’s purchasing power measures
Nicolas Sarkozy finally announced his purchasing power agenda on TV yesterday evening. The main measures are listed in Le Monde. Among the most concrete ones are his intentions to allow for Sunday work at double pay rate, the indexation of rents to an inflation index based on consumption rather than construction and the possibility to pay out overtime accounts. Companies could be relieved of the 35 hours week if they accept to pay higher salaries. Extra pay for extra working hours will also apply to civil servants who shall be paid as in the private sector. Sarkozy also announced university reforms and a social agenda for 2008 to be worked out in cooperation with trade unions and employers. The same morning, Socialists presented their 10 proposals for purchasing power in Parliament earlier that day.

UK Housing recession has started
UK house prices fell 0.8% in November, the highest monthly fall since the end of the last housing recession in the mid-1990s. The annual rate of house price inflation is still positive, 6.9%, but this is necessarily a lagging indicator. The survey also shows that price declines have spread throughout the country. The FT reports that there is a strong fall in the number of buyers, which has led to a glut of houses for sale, which is now beginning to drive the prices down. Sterling fell on the news both against the dollar and the euro.

Schadenfreude in Japan
In an article on the carry trade in the Financial Times, Gillian Tett noted that there is a lot of Schadenfreude in Japan at the plight of German and British banks. She writes that Japanese bankers are talking about a “German premium” or “British premium”, as rumours circulate about the health of European banks. Ten years ago, the Japanese suffered the indignity of the “Japan premium”, meaning higher bond rates.

Roubini on stock prices
In his blog, Nouriel Roubini writes about why the recent stock market rally is a “suckers rally”. He said the markets are fooling themselves into a belief that the Fed can prevent a recession. That is unlikely to be the case. The market is going to take a plunge, but he predicts it will before the end of the recession. But until then, it is going to be down.

The role of monetary policy in the credit crisis
In a comment on Economonitor, Ester Faia makes the point that monetary policy did play a big role in the crisis, and that central banks should pay more attention to asset prices. Central bankers have been living in a fools’ paradise where it was easy to achieve low and stable inflation. Her conclusion is that the two-pillar European system is superior to the pure inflation targeting strategies pursued by many central banks today.

Cecchetti, part 3
In third of four installments on the credit crisis, Stephen Cecchetti argues in Vox, that one of the big lessons of the current crisis is for central banks to be in charge of bank supervision. The UK is a country where that is not the case, and where the intellectual arguments in favour of separation have been made most forcefully. But the Northern Rock shows that the separation does not work in practice.

Price rises in Greece
Electricity prices are to rise drastically in Greece, writes Kathimerini. The development minister is to sign the request by the electricity provider for electricity price increases, to start immediately. The price increase concerns medium and industrial consumption mainly with prices that could go up by as much as 20%. Low electricity users as well as large families are to be spared.