2 Comments

They Never Learn…

It seems that the ECB is going to raise interest rates soon although many people question this move, as inflation seems to be mainly up due to external factors that the ECB cannot influence, like rising oil and food prices, which are driven by strong demand from Emerging Markets. Furthermore, growth in the Euro Zone is rather low on average considering the huge drop before in 2009. In a time in which politicians cannot agree on proper measures to solve the Euro/debt crisis, many hoped that the ECB would provide some stimulus to the ailing economies of the periphery. See Ambrose Evans-Pritchard for his commentary on the ECB.

Meanwhile, Gresham’s Law is well and alive, as can be seen in Spain, where a town reintroduces the Peseta. One of the following two things could be at work here:

a) People seem to have realized that the Euro is going to be “sound money”, thus they are hoarding it, while paying expenses with their old Peseta, which would be basically worthless as soon as Spain leaves the Euro and devalues.

b) Money is tight in Spain. The ECB’s policies reduce money supply in the periphery of the Euro Zone, as Simon Ward repeatedly points out. When money is too tight it becomes useless as an medium of exchange (in extreme cases only, of course) and people search for other types of money to use and spend.

The first one does not seem probable, so I’d go for b), fully aware that I will receive comments on how outrageous my economic thinking is ;-), else I would have to name this post “Are Markets Expecting Spain To Leave The Euro”, which would probably draw even more enraged comments…

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2 comments on “They Never Learn…

  1. How do you think this will affect LIBOR?

    In the US, we have a lot of short-term rates based on LIBOR, and that could have an impact on delinquencies.

    • The situation is similar in Europe. As far as I know, most loans (including mortgages) in Spain are linked to Euribor rates. Money market rates like Euribor and EONIA have been inching up from about 0.5% to 1.0% during the last 6 months, so effective monetary conditions have been tightening for a while (the ECB did not really force short-term interest rates to follow the 1% target for a long time).

      Simon Ward’s data shows that monetary aggregates have been tightening massively during the last months in countries like Spain, so the rise in interest rates clearly has an effect. Mortgages and loans become more expensive to Spaniards, Greeks, Portuguese, and that is happening in times when they have to face cuts in public sector wages, pensions and so forth. So, all in all, this looks very contractionary.

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