Alea

Volume dropped in february:

Trading volume on HDAT in February amounted to EUR 18.86 billion worth of transactions, compared with EUR 21.09 billion in January. The daily average turnover was EUR 992 million, compared with EUR 1.11 billion during the previous month.

and that won’t help liquidity

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Slaves of defunct economists

Activity in the CDS market for developed country sovereign debt increased significantly as investors adjusted their exposure to sovereign risk. This market was virtually non-existent only a few years back, when sovereign CDS were mostly on emerging market economies, but has since grown rapidly. This increase in activity resulted in significantly higher outstanding volumes of CDS contracts. Nevertheless, the amount of sovereign risk which is actually reallocated via CDS markets is much more limited than the gross outstanding volumes would suggest. The sovereign reallocated risk is captured by the net outstanding amount of CDS contracts, which takes into account that many CDS contracts offset each other and therefore do not result in any actual transfer of credit risk. Net CDS positions on Portugal amounted to only 5% of outstanding Portuguese government debt. For other countries, including Greece, the ratio of sovereign CDS contracts to government debt was even lower.

Net notional CDS volume as a percentage of government debt

Source: BIS Overview: sovereign risk jolts markets

Source: Bank of Greece, secondary market volume on the HDAT platform, total monthly nominal value in EUR (last datapoint: january 2010)

Excerpt:

Recent press reports mention one off-market swap operation and several securitisation transactions undertaken by Greek government in the period 2000-2001. When the European system of accounts (ESA 1995) was adopted, these kinds of operations were not usual practice for governments of Member States and therefore, specific statistical rules for such government transactions did not exist. In consequence, Eurostat together with the EU statistical community elaborated specific guidance notes for the recording of government securitisation operations (issued by Eurostat in July 2002) and for the recording of financial derivatives (issued in March 2008).

Regarding the securitisation operations, Eurostat, after being informed by the Greek authorities of these operations in the framework of the regular consultations relating to deficit and debt EDP notification, asked the Greek statistical authorities in September 2002 to reclassify these operations as part of government debt according to the Eurostat guidance.

Concerning the specific off-market swap operation, Greek authorities had not informed Eurostat about this kind of government transaction. On the contrary, during a Eurostat visit to Greece on 15-19 September 2008, i.e. after the setting of the statistical rules, the Greek authorities declared that, in Greece, government units are not allowed by law to engage in off-market financial derivatives.

On 12 February 2010, Eurostat requested the Greek statistical authorities to provide information on all currency
off-market swaps for 2001-2009 and their recording in EDP and national accounts. The Greek statistical institute sent on the evening of 23 February a package of information.

Eurostat’s preliminary analysis is that although the information on swaps is incomplete, for the first time the Greek authorities have declared the existence of an off-market swap operation in 2001.

Full text

Paper by Piti Disyatat [BIS]

A central proposition in research on the role that banks play in the transmission mechanism is that monetary policy imparts a direct impact on deposits and that deposits, insofar as they constitute the supply of loanable funds, act as the driving force of bank lending. This paper argues that the emphasis on policy-induced changes in deposits is misplaced. A reformulation of the bank lending channel is proposed that works primarily through the impact of monetary policy on banks’ balance sheet strength and risk perception. Such a recasting implies, contrary to conventional wisdom, that greater reliance on market-based funding enhances the importance of the channel. The framework also shows how banks, depending on the strength of their balance sheets, could act either as absorbers or amplifiers of shocks originiating in the financial system.

Paper by Stephen G Cecchetti, M S Mohanty, and Fabrizio Zampolli

The financial crisis that erupted in mid-2008 led to an explosion of public debt in many advanced economies. Governments were forced to recapitalise banks, take over a large part of the debts of failing financial institutions, and introduce large stimulus programmes to revive demand. According to the OECD, total industrialised country public sector debt is now expected to exceed 100% of GDP in 2010 – something that has never happened before in peacetime. As bad as these fiscal problems may appear, relying solely on these official figures is almost certainly very misleading. Rapidly ageing populations present a number of countries with the prospect of enormous future costs that are not wholly recognised in current budget projections. The size of these future obligations is anybody’s guess. As far as we know, there is no definite and comprehensive account of the unfunded, contingent liabilities that governments currently have accumulated.

Paper by Jaime Caruana, General Manager of the BIS

Abstract:

This paper analyses systemic risk and considers appropriate policies to reduce it. It examines systemic risk as a negative externality in two dimensions: the cross-sectional and the time dimension. Policies to reduce externalities in the cross-sectional dimension seek to limit the damage that can arise from interlinkages and common exposures. Policies to address procyclicality in the time dimension seek to build up capital and liquidity margins of safety during the upswing that can be drawn upon in the downturn. The paper further argues that financial regulatory policies are not enough to address systemic risk. Other policies – especially monetary and fiscal policy – also have a role to play. It also argues that policy coordination is essential, nationally among monetary, fiscal and macro- and microprudential policies, as well as internationally. Already, the Basel Committee on Banking Supervision, working with the Financial Stability Board, has made great progress in addressing the regulatory shortcomings highlighted by the financial crisis.

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