Crude oil prices a record $147.27 a barrel in New York in mid July, and that helped push euro-zone consumer price inflation to more than a 16-year high, in the process making it harder for European Central Bank to cut interest rates, even as the region's economy slows.
The price of intermediate goods in Spain rose 7.3 percent from a year earlier, compared with 6.3 percent in June, signaling further rises in consumer prices are in the pipeline.
Oil has now fallen back 22 percent from its July record and it is likely that Spain's producer price inflation peaked in July. Also the economic slowdown should, in theory, make it difficult for companies to pass on higher production costs to consumers. But what is hard to understand at this point is why German producer prices - where oil costs cannot have risen very differently - are only up by 8.9% in July, or why German monthly consumer prices rose at 3.5%, while Spain's consumer prices gained 5.3 percent in July from a year earlier. This is hardly evidence of an economy that is responding and correcting going into the slowdown, in fact it is quite the opposite, and demonstrates the presence of an economy with a high level of structural rigidities and time delays in response, which will only, unfortunately, add to the pain during the coming long recession.
ECB To Make "Changes" Yves Mersch Says
ECB council member Yves Mersch said in an interview with Bloomberg - given at Jackson Hole - that the European Central Bank is about to announce changes to the rules governing its money-market auctions in coming weeks to head off the risk of abuse by financial institutions.
These comments comments the controversy which has arisen surrounding a recent press interview with Dutch policy maker Nout Wellink where Wellink stated that banks shouldn't become too dependent on the ECB for funding (see my last post for more details on all this).
Two items which are being widely talked about as the most likely candidates for such changes are risk control measures, and restrictions on the place of issue for marketable assets eligible as collateral. The first is to address the concern that some banks are creating securities (like cedulas hipotecarias) specifically for use as collateral at the ECB which are being accepted by the ECB as having investment grade despite only having been rated by one agency (as opposed to the two which was standard practice in the past).
The second addresses the concern that securities may be being issued in one country of origin, deposited in the vaults of the ECB as collateral for borrowing, and then the funds themselves transferred for lending to bank deposits in a third country - for example Dutch banks might be raising money in the Netherlands (or German banks in Germany) and then transferring funds for aggressive lending in Spain (in order to gain market share against Spain's highly stretched national banks). There is no direct evidence that this is happening, but JP Morgan did estimate back in May that 240 billion euros of securities had been specifically created by eurozone banks with a view to being deposited at the ECB, and Spains banks only owe the ECB a total of 49 billion euros, so someone somewhere is doing something with all that money.
It is hard to know really what has been happening, since if there is one thing the ECB isn't it is transparent, and so we are only left clutching at straws and making suppositions. One recent piece of evidence we do have is that U.K. mortgage lender Nationwide Building Society said Aug. 18 it's planning to expand into Ireland, a member of the euro region, to take advantage of ``funding opportunities.'' But this would seem to refer to a non zone institution leveraging funds for use outside the zone (in the UK for example, which may well be happening), but what I am suggesting may well be happening is some sort of Credit Default Swap type "put" by canny non-Spanish banks who want future market share in Spain raising securities and making risky loans in the full expectation that since there is going to have to be some type of bail out for Spain, then they will get bailed out too.
Anyway, this is likely to remain a rather obscure topic, since as Mersch says in the interview, the ECB's response to any abuse case ``would not necessarily be a question to be discussed publicly.''
I am sure it wouldn't.
Ref the increase, I think you might be forgetting the recent 10% increase in electric, the 15% average increase in water (at least in Andalucia), the increase in transportation costs (Spain having traditionally very low utility and worker costs against the Euro market) and the underlying increase in profit margins the large supermarkets have carried out in order to subsidise base costs (ie Mercadona increasing base cost of essential items, against the the UK model of dropping it down). Which totalled together might account for the increase in prices against other Euro markets.
ReplyDeleteHi David,
ReplyDeleteThanks for your points, which I think are very valid.
"I think you might be forgetting the recent 10% increase in electric, the 15% average increase in water (at least in Andalucia), the increase in transportation costs"
well exactly. Spain was "enjoying" comparatively cheaper energy at a time when the economy was going well, and when people were willing to subsidise the huge current account balance of payments deficit this produced.
Of course all this allowed Gas Natural and Endesa etc to do very good business selling installations for central heating and air conditioning that people are increasingly going to be unable to afford.
It's a bit like a printer for a PC, it seems cheap till you start to pay for the ink.
But what I have difficulty understanding is how you can hope to administer a country on this basis - ie use the good times to lock-into commitments which are going to cause you enormous problems during the bad times.
Hence it is now that energy has to go up, and come into line with everyone else, just when the price hike does most damage to an industrial sector that needs to export like never before.
"and the underlying increase in profit margins the large supermarkets have carried out in order to subsidise base costs (ie Mercadona increasing base cost of essential items, against the the UK model of dropping it down)."
Well again, the same thing. These companies have no idea how to "administer" a crisis, and they are responding to falling demand by raising base prices, which in economic terms is simply madness.
All of this is part of the price for having an economy which hasn't had a recession since 1992. Absolutely no one has any idea how to respond appropriately, and things simply deteriorate more.
Of cousre they will all "wake up" at some point, but in the meantime even more structural damage is being done.
This is what I mean really when I say:
"This is hardly evidence of an economy that is responding and correcting going into the slowdown, in fact it is quite the opposite, and demonstrates the presence of an economy with a high level of structural rigidities and time delays in response, which will only, unfortunately, add to the pain during the coming long recession."
There is no "plan" either for what to do about the problems in the financial sector, or the real economy. You simply give people back 400 euros as part of a 1980s type Reagan tax stimulus, try to give contracts to ailing construction companies, and hope 2009 will be a better year. Unfortunately, things aren't going to be like this.