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​In the headlines:

  • Eurozone: ESM – the devil is in the detail
  • US: Fed speak
  • China: Monetary policy
  • Germany: External trade predominantly in EUR 




Eurozone: ESM – the devil is in the detail

On 21 June, the Eurogroup established the technical details for the ESM’s direct bank recapitalisation instrument, which aims at avoiding a sharp rise in public debt if a banking system has to be recapitalised (the Spanish banking system bailout, for example, represents 10% of Spain’s GDP). This is an important step forward in reducing the feedback loop between sovereign debt and banking system crises. However, the eligibility criteria will be very strict and the funds available are limited to EUR60 billion initially given the need to preserve the ESM’s creditworthiness. Stakeholders, creditors and depositors will also be expected to participate in any banking system bailout, although an appropriate level of the resolution scheme (‘bail-in procedure’) has still to be agreed, and the member state involved will also have to share in the bailout. Retroactivity is to be agreed on a case-by-case
basis but, given that amounts already disbursed to the financial sectors in Spain, Ireland, Portugal and Greece total EUR140 billion, the initial cap may dilute the potential impact of the instrument.

US: Fed speak

Fed Chairman Ben Bernanke rattled financial markets last Wednesday when he unexpectedly said that, if the Fed forecasts prove correct, the Bank could taper bond purchases later this year and end QE by the middle of 2014. The Fed has become more optimistic, issuing stronger forecasts and describing the “downside risks … as having diminished since the fall.” The
housing market provided support, with existing home sales increasing by +5% mo/mo in May and prices increasing by +8.6% (+12.7% and +15.8% y/y, respectively). Also in May, housing starts increased by +6.8% mo/mo and +28.6% y/y. In addition, May leading indicators edged upwards, as did the Philadelphia Fed’s business conditions survey. Overall, while the financial markets may not like the idea, economic data appear to justify the Fed becoming less accommodative.

China: Monetary policy

The central bank yesterday indicated that it will take steps to manage the liquidity squeeze that has seen interbank interest rates spike sharply. The liquidity shortage has stemmed from seasonal money demands and a change in supply as capital inflows have fallen away. The striking feature, however, has been the lack of intervention from the central bank and absence of comment on the reasons for such abstention. Although a potentially risky tactic, the most likely explanation is that policymakers want to reinforce their intention to curb credit growth, which has been expanding rapidly, particularly the broader measure of total social financing. This also seems to fit with the new leadership’s apparent focus on re-balancing of the economy and preparedness for lower short-term economic growth.


Germany: External trade predominantly in EUR

Exports to non-European countries totalled EUR 340.2 billion in 2012 (+10.4% y/y), representing a share of around 31% of total exports of goods. In Q1, exports to these countries declined moderately, by -0.7% y/y, to reach EUR 82.6 billion. According to

the Federal Statistical Office, the EUR continued to be the most widely used currency in exports with non-European countries in 2012, with 64.6% of the total being transacted in that unit (down from 67% in 2011). A further 25.6% was conducted in USD (up from 24% in 2011) and the rest (9.8%) in other currencies. On the import side, inward movements of goods from non European countries were also most frequently denominated