It was the week of central bank announcements – Japan (we will describe it below), Britain and ECB. Bank of England and ECB policy remained unchanged which means that interest rates are at the same low levels and the BoE maintained bond purchases. Monetary theory teaches us that once the rates are low central banks try to help economy. Or in other words if everything is OK as politicians have declared more than 5 month we will be witnessing higher rates. Mario Draghi had to answer to zerohedge´s questions what happens if any member of the Euro zone would quit (Cyprus, Greece or Spain). The answer was very indicative: “Well you really are asking questions that are so hypothetical that I don’t have an answer to them. Well, I may have a partial answer. These questions are formulated by people who vastly underestimate what the Euro means for the Europeans, for the Euro area. They vastly underestimate the amount of political capital that has been invested in the Euro.“ What does it mean? They are very probably to prepare to do whatever and at any cost to safe the project of our currency. Mario Draghi also said that the Eurozone countries need the Bank-Loss regulation earlier than in 2018. EU leaders have set a June deadline to agree on principles how governments should handle bank failures, including through so- called creditor bail-ins. According to the Commission data EU injected into the banking system 1.7 trillion euros since the 2008 and it is no longer possible. In the meantime the unemployment rate within the euro countries hit the record levels on 12 %. The euro-zone economy has contracted for five straight quarters and this unfortunate trend is forecasted to continue in the first three months of this year as well. And the data from the EU does not show any more optimism. This week announcement of the Manufacturing PMI was not very optimistic. The PMI falls across the Europe. Only Germany has modest decline but France, Spain and Italy have steep downturns.
The International Monetary Fund will contribute 1 billion euros to the bailout package for Cyprus and the rest (9 billion euros) will be on the shoulders of euro-zone taxpayers. Conditions of the help are pretty tough and include privatization of state-owned assets, budget cuts and decreasing of budget deficit – actually it is planned to be a 4 % budget surplus. So we will see how many times they will need to change the deal. The part of the deal is also nationalization of uninsured deposits which finally means that some depositors lose 60 – 80 % of all money they have in bank accounts. So who is the next? We speculated last week about Slovenia but we have to admit that there are many more adepts. Is one of them Netherland – one of the biggest allies of Germany once the austerity question came on the table? It could be. Netherland is experiencing the same deterioration of housing market as we witnessed in Spain. Netherland´s banks have a total of about €650 billion in mortgage loans on their books. Consumer debt amounts to about 250 percent of available income (125 % in Spain). In February, the government was forced to nationalize SNS Bank, the country’s fourth-largest bank, because it had a large portfolio of bad loans for commercial real estate.
Journalists released information about 2.5 million records from tax havens about 130,000 people who at one time or other moved their money offshore. There are three interesting points about the issue. The report shows that people who are many times in power (politicians, people behind them) and who prepare tax laws for their inhabitants in their home countries are on the list as well. The second point is that this is quite explicit empirical evidence that people do not want to pay high taxes. So do not we need to adjust our taxing systems and accordingly public expenditures? And the last point. Why it was the report released right now after the Cyprus nationalization bank deposit case? Does anybody plan to prepare public for general rules about taxing (nationalizing) uninsured bank deposits? We will see in a short future. But there are already some attempts to follow Cypriot example. One example is Canada. The proposal to force creditors of the bank to absorb losses of banks was buried deep in last month’s federal budget and nobody almost noticed it. Do you need another example? What about New Zealand. Finance Minister Bill English is suggesting strategy to deal with major bank failures. If a bank fails all depositors will have their savings reduced overnight to fund the bank’s bail out.
Governor Kuroda has fulfilled expectations. The Bank of Japan will set up new monetary measures which are very similar to measures used in the U.S. They are going to purchase all kind of bonds with maturities as much as 40 years and the BoJ will increase its holding of exchange-traded funds and real-estate investment trusts as well. The monthly amount will be very close to the US amount – on 7.5 trillion yen or $78.6 billion. Currency wars in the whole beauty.
Politicians are sometimes irredeemable. President Obama´s administration wants to enforce more home loans to people with weaker credit. They want to use usual taxpayer-backed programs that insure home loans of less valuable creditors against default. It seems to me that one housing bubble was not enough. And if you want to see how to use arms properly you can watch and learn from Kim Jong-un: