Central banks and states will have to put an end to extraordinary devices without breaking the recovery
For the financial markets, 2009, a new crisis year, was a puzzling period. To get the economies out of the recession, to avoid reliving the nightmare of the 1929 crisis, central banks in Europe, the United States, the United Kingdom and elsewhere have put in place new means.
The payday loans have been wide open. After reducing key interest rates to zero or so, to make it easier for businesses and households to finance themselves, in 2009, central banks took even bolder measures.
Too bold in the eyes of some. And questions are multiplying as to the turn of events in 2010
Have central banks gone too far? Ben Bernanke, the boss of the US Federal Reserve (Fed), is nicknamed “Helicopter Ben” because he had explained in 2004 that to avoid deflation, the Fed could “pour money into the markets of a helicopter “.
In the absence of a helicopter, Bernanke opted in March for the quantitative easing method. A monetary creation policy consisting in the direct repurchase by the Fed of US Treasury bills and other debt securities. As a result, in a few months, the Fed’s balance sheet has grown from $ 1 trillion to $ 2 trillion. “The US central bank has become a real hedge fund,” said economist Jacques Attali.
If the Bank of England (BoE) followed the same path, the European Central Bank (ECB), more orthodox and fearful for its credibility, did not want to go so far, being content with exceptional lending measures.
The biggest risk is that by “printing money”, central banks are fueling new bubbles. And allow excess liquidity to artificially nestle in a market compartment (commodities, real estate, stock exchanges). In other words, ultra-accommodative monetary policies could make the bed of the next crisis. So the question is when and how to backtrack.
How to manage the crisis exit?
As the economic recovery takes shape, central banks seek to absorb the huge amounts of liquidity pouring into the markets. The easiest way would be to raise their key interest rates.
But this decision could destabilize financial markets, including bonds, and break the recovery. According to Barclays economists, growth in the eurozone should not exceed 1.5% in 2010. The central bankers are aware, and in the United States as in Europe, they hinted that nothing would be done in a hurry. In these two areas, their strategy is for the moment to gently lift unconventional devices in place.
Should we fear a bond crash? While central banks have flooded the liquidity markets, the states have been forced into debt in unprecedented proportions. To save the banks from bankruptcy, support the purchasing power of households, help businesses make ends meet, they had to spend thousands of billions of dollars they did not have. Result? According to the rating agency Moody’s, global sovereign debt is expected to reach 49,500 billion dollars (33,755 billion euros) by the end of 2009.
And 2010 should not show improvement. To finance the budget deficits, the states will have to borrow heavily. The eurozone is expected to issue nearly 1 trillion euros of sovereign securities and the United States more than 2 trillion dollars.
Will investors be able to absorb such amounts of securities? Nothing is less certain, especially if they start to anticipate a tightening of monetary policies. One would risk then to attend a bond crash, as in 1994.
Is the eurozone threatened with the explosion? It’s “the” disaster scenario that no one dares to consider. The revelation of Greece’s difficulties, in debt of 113% of its gross domestic product (GDP), revealed the deep divergences between countries in the euro area. On one side the bad students: Greece, Portugal, Ireland and Spain, cruelly nicknamed “PIGS” (pigs, in English) because of their initials. On the other: the countries with public finances in better condition, first and foremost Germany.
In the markets, investors make the difference. Greek debt is considered a risky product and at the end of the year, the 10-year Greek bonds were to offer investors 2.5% more than German loans. This turbulence helped to weaken the euro from $ 1.50 to $ 1.43 at the end of the year.
If the difficulties get worse or bigger, are the good guys ready to save the bad ones? For now, the ECB, while calling on Greece to implement a policy of rigor, has suggested that a dislocation of the euro area was unthinkable. No one would let anyone down …