Monthly Archives:

April 2012

The “safety race”: the systemic implications of the bank asset grab

Anyone monitoring the risks in the global financial system knows that those of us who lend to banks are increasingly asking for some kind of security in order to do so. Issuance volumes for covered bonds have increased and more countries have recently passed covered bond laws or are in the process of debating legislation. Andrew Haldane, Executive Director for Financial Stability at the Bank of…

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Sterling’s strength is hard to explain – but it poses big risks for the UK economy in 2012. Equivalent to a 1.8% rate hike?

So some panic buying of petrol in March saw UK retail sales grow 1.8% from February and almost certainly means that the first quarter of 2012 will see positive GDP growth.  As the final quarter of 2011 was negative for growth, this means that we’ll probably avoid the two consecutive quarters of falling growth that would have meant we were back in recession.

But a couple of things make me nervou…

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Hollande’s presidency, early elections in Germany, and the risks of political uncertainty in the eurozone

The next three weeks will mark uncertain political times in the eurozone. We could see the election of Francois Hollande as the next French president, the first multi-party coalition in Greece as well as some serious debates about early general elections in Germany. An Irish referendum on the eurozone fiscal treaty – and consequently Ireland’s role in the eurozone – will follow shortly after, b…

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What should Mervyn do with his QE gilts? Free finance.

Jim recently discussed the merits of officially cancelling the gilts bought back through QE, so I thought I would discuss another option that maintains the status quo through the Bank of England (BoE) simply rolling over the QE gilts into new gilts at maturity.

In order to understand the results of this process it is useful to re-examine how QE works.

Simply, QE is the willing exchange of gilts…

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Deutsche Bank 2012 Default Study – Default bark far worse than the bite?

This week saw Deutsche Bank publish their 2012 Default Study, aptly subtitled ‘5yrs of crisis – The default bark far worse than the bite..’ The annual piece is particularly interesting, especially because the market now has five years of data since the onset of the great recession.

At the risk of failing to do an in-depth report justice it drew out several significant points for credit investor…

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If the government simply cancelled the £300 bn+ of QE gilts held by the BoE, who would be unhappy?

The UK sits unhappily at the very boundary of what debt burden is acceptable for a AAA rated economy.  If growth continues to disappoint, or if more austerity becomes socially impossible, the UK will be downgraded – and neither of these possibilities look very remote.

At the moment the UK public sector net debt to GDP ratio is about 63%, equivalent to about £1 trillion (these numbers exclude th…

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