Could the fixed balance sheets restore financial stability?

The OECD’s Economic Outlook published on the 25th of May and the BIS’s 81st Annual Report brought out on the 26th of June characterize the global recovery as self-sustained. It is projected that the US economy will grow by 2.6% in 2011 and 3.1% in 2012, the GDP in Euro area will rise by 2% in each of upcoming two years and the Japan’s GDP increase by 0.9 % and by 2.2% in 2011 and 2012 accordingly. Consequently, the safeguards of financial stability recommend withdrawing fiscal and monetary stimulus due to the rising inflation. However, these suggestions bear a strong resemblance to the decisions how to fix balance sheets instead of restoring foundations of financial stability.

From my point of view, the described economy recovery of the advanced countries in the OECD’s and the BIS’s reports is lack of structural analyses. Once the pressure of the inflation is taking under considerations I would rather like to know whose industrial sectors are overheated and why their development requires suppression. Moreover, has anybody estimated how the imposed extra costs associated with the suggested growth of interest rates would affect other fragile industries?

Additionally, increased capital (10.5% - total capital requirements that involves minimum capital plus conservation buffer), leverage and liquidity standards for banks according to the Basel III requirements and other endeavours such as accepted “ringfence” concept – the British initiative that intends to protect essential banks’ operations (deposit taking and payment systems) in big diverse banks; regulators agreement on extra capital charges of 1% to 2.5% of risk-adjusted assets on the 30 global systematically important institutions as well as suggestions of the BIS and the BCBS to apply supplementary countercyclical capital buffers are attempts to absorb losses in bad times and keep clean balance sheets of financial institutions after the banks’ bail outs started in 2008. However, those achievements do not mean that losses of the Financial Crisis are vanished. In most cases, they are just transferred to the governments’ balance sheets and the particular focus is required to recover the fragile economies of advanced regions.

However, according to the BIS's Annual Report “very low interest rates in major advanced economies delay the necessary balance sheet adjustments of households and financial institutions”. Thus, it may imply that encouragement to increase interest rates is aimed to restore price stability rather that the soundness of the whole financial system.

Trends of voluntary aid

A meeting of Eurozone finance ministers in Luxemburg today, on 20 June, ended without approval to lend €12bn  ($17bn) to Greece until the country’s parliament passes new spending cuts and economic reforms worth of €28bn. The matter is time sensitive as Greece needs the €12bn by July to avoid defaulting on its debt. The Eurozone finance ministers require further austerity measures; however, Greece may also relay on some EU countries’ voluntary aid.

French President Nicolas Sarkozy and German Chancellor Angela Merkel announced on last Friday that they will support Greece by purchasing new Greek bonds when existing bonds mature and encouraged others to follow their suggestion on voluntary basis. Such decision may not be acceptable in regard to taxpayers of Germany and France but when the possible decline of euro is directly related to the worth of governed assets, a voluntary aid is fully understandable.

However, looking to the long term perspective sound investment programmes, but not just austerity measures, should be the main focus for the Eurozone finance ministers as long as European Investment Bank, European Investment Funds and European Bank for Reconstruction and Development were established for the purpose to make a long-term finance available.

Similarly, analysing the outlook of the US economy state, id.est accomplished QE2 programme, increasing debt obligations and additional borrowing needs; the raise of yields of US long term treasury bonds and depreciation of US dollar should be expected in short term perspective. Consequently, countries those use US dollar as reserve currency and possess trade surpluses most likely will suggest their voluntary aid and buy US long term treasury bonds so that the worth of their governed assets were preserved.

Thus, for those who follow short term trends, summer time should be an important period to observe. Most likely the capital flows will be based on a voluntary aid.

The shift of the US monetary policy and the OPEC's disagreement on oil production

Ben S. Bernanke, a chairman of Federal Reserve announced further course of the US monetary policy at the International Monetary Conference held in Atlanta, Georgia on 7 June. He told that the Federal Open Market Committee decided to complete its purchases of $600 billion of Treasury securities by the end of June and will keep low levels for the federal funds rate for an extended period as economic recovery in the US is proceeding in the moderate pace. However, financial strategies those were designed for the Federal Reserve’s extended QE programme were realized successfully as well.

The US dollar declined against the major peer currencies on 8 June, the price of WTI Crude Oil jumped more than $3 from $98.15 to $101.65 over four hours, Brent Crude Oil raised more than $2 from $116.00 to $118.40 at the same time due to the disagreement between the members of OPEC regarding the oil production. The 159th Meeting of the OPEC held in Vienna, Austria, on 8 June was closed with no formal decision according to mismatched official data about oil demand and supply that triggered instability in the international oil markets.

The 160th Meeting of the OPEC will take place in Vienna, Austria on 14 December 2011; however, if nobody consider about the clear methodology and improved data management the circumstances to predict market trends remain the same - two plus two is not equal to four and clearly identified square tends to be circle.