Financial markets

Continuing tensions in financial markets
In September, the sovereign debt crisis in the Euro area was again the focus of tensions in financial markets. Although the German Constitutional Court’s decision to support financial aid to Greece eased tension during the first week of September, subsequent news and the measures adopted by the Federal Reserve with its plan to buy long-term debt raised investors’ mistrust, which was again reduced after the German Parliament’s support to increase allocations to the European Financial Stability Fund (EFSF). At the close of this report, volatility increased because of the postponement of the decision on the disbursement of the sixth tranche of the loan to Greece, the delay in implementing the agreements reached by the Euro Group in July and the possibility of a new recapitalization of Europe’s banks.

The monetary authorities have taken extraordinary measures

Regular meetings of the major central banks on both sides of the Atlantic were held throughout the month of September, maintaining interest rates and the orientation of monetary policy. The Bank of Japan (September 7th) maintained the official interest rate between 0% and 0.1% with the aim of boosting economic growth. Also, at its meeting on September 8th, the European Central Bank kept interest rates at 1.5%. On that same date, the Monetary Policy Committee of the Bank of England (BoE) also decided to keep the base rate at 0.5% and its as¬set purchase programme in place to boost the economy.
 

On September 15th, in a co-ordinated action in an attempt to reduce tensions in the fi¬nancial system, the European Central Bank, the U.S. Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank agreed to three injections of liquidity into the finan¬cial system until the end of the year in the form of 3-month dollar swaps due to difficulties being experienced by European banks to find financing. The ECB, in addition to the usual injections in this currency, scheduled three additional auctions at a non-specified fixed rate, on October 1st, November 9th and December 7th (this calendar will also be followed by the BoE).

Meanwhile, on September 21st, the Federal Open Market Committee (FOMC) of the Federal Reserve (Fed) kept the target rate for Federal Funds within the range of 0% and 0.25%, where it has been since December, 2008, and announced the launch of an economic stimulus op¬eration which will result in the purchase of long-term Treasury debt (with maturities between six and thirty years) amounting to up to 400 billion dollars by selling short-term Treasury bonds (ma¬turing in less than three years, with the aim of reducing longer-term rates and the slope of the in¬terest rates curve). At the press conference and in subsequent statements, the Fed Chairman con¬firmed that the programme will continue until the middle of next year and that interest rates will remain at the current levels for a prolonged period (at least until mid-2013) to support economic recovery.

Finally, further regular meetings of the central banks of Japan, the United Kingdom and the European Central Bank were held on October 6th. On the one hand, the Bank of Japan (BoJ) maintained the official interest rate between 0% and 0.1% as a deflation containment measure and to help to reactivate its economy, which shows signs of weakness. The Monetary Policy Com¬mittee of the Bank of England (BoE) also left its official interest rate unchanged (“Official Bank Rate”) at 0.5% (last changed on March 5th, 2009) but modified its current monetary policy by reviving the asset purchase programme, which had remained unchanged since early 2010, and raising it from 200 billion pounds to 275 billion pounds (315 billion euros), as an economic stimu¬lus measure. Finally, on the same day the European Central Bank’s Governing Council kept the official interest rates unchanged; however, it announced various measures to support liquidity through special auctions with full allocation on various dates to be extended at least until July, 2012. It also announced the implementation, from November on, of a programme for purchasing covered bonds (mainly bank bonds) in the amount of 40 billion euros and which will end in Octo¬ber, 2012.

In the case of Spain, it was announced on October 6th that the deposit guarantee funds for banks, savings banks and credit co-operatives were to merge into a single entity.

Short-term interest rates continue to be stable
Even though, during the first half of the year, short-term rates extended the upward trend that began in late February 2010, the interbank market interest rates in the euro area stood at levels to the ones they reached in August. Thus, shorter terms (three and six months) stood on Oc¬tober 5th at 1 bp above the end of August level and the twelve-month term was 2.083%. The aver¬age level of the 12-month Euribor in September stood at 2.067% versus 2.097% in August.
The stability of short-term rates is the result of downward rate expectations (as evidenced by the decrease of 22 bp in the Overnight Index Swap for one year during the above period to stand at 0.63%) offset by increased tensions in the interbank market (measured by the 22 bp in¬crease of the Euribor-OIS spread, reaching 145 basis points).

Increased risk premium due to the lower yield of German bonds

The purchase of peripheral country debt by the European Central Bank managed to reduce the risk premiums of these countries in August, but doubts about the resolution of the Greek problem led to new episodes of tension in the debt markets, continuing forcefully in the first two weeks of September, although the measures taken by central banks and the German release of bailout funds to Greece have lowered the tension slightly. In the case of Spain, from late Augubp compared to the end of August. In the case of Italy the debt crisis has also affected its risk premium, placing it above Spain’s risk premium at the end of this period. The table below shows the evolution of public debt yields in other euro area countries.

Sharp Stock declines in September
The stock markets, influenced by the events listed above, increased their volatility during this period. In September, the indices continued with the heavy losses experienced in August. Thus, in the period between August 30th and October 5th, the IBEX 35 fell by 2.8%, the Eu¬rostoxx 50 by 5.3% and the Dow Jones was up 5.8%, accumulating losses since the beginning of the year of 14%, 22% and 5.5%, respectively. In Japan, the Nikkei 225 index, after falling by 6.4% in this period, accumulated a decrease of 18% on the year. The rest of the European indexes, as shown in the table below, followed the same trend.

The euro slips on the currency markets
From late August to October 5th, the euro depreciated by 7.7% against the dollar, 7.5% against the yen and 2.6% against sterling in the currency markets. With this depreciation, the European currency has lost the cumulated gains since the beginning of the year, depreciating 0.2% against the dollar, 5.9% against the yen and appreciating 0.3% against the pound sterling, closing as of the date of this report at 1.3337 dollars, 102.25 yen and 0.86300 pounds sterling. In nominal effective terms, the euro remains at the same level as at the end of 2010.

Moderate growth of M3 in the euro area
Lastly, with regard to monetary aggregates in the euro area, the M3 broad aggregate picked up speed slightly in August, recording a year-on-year growth of 2.8%, up by 0.7% over July. This increased growth was due to the acceleration of cash in circulation, at-sight deposits and repurchase agreements, as reflected in the attached table.

Private sector financing in the Euro area loses momentum...
The main counterpart of M3, the resident private sector credit in the euro area, re¬corded year-on-year growth of 1.8% in August, 0.2% down on July. It is noteworthy that the slowdown was due to securities, as loans grew by 0.2% (to 2.6% from 2.4% in July). Loans to households and non-financial corporations maintained the growth experienced in July but those granted to other financial intermediaries accelerated for the third consecutive month.

...and in Spain
According to data on finance to non-financial sectors resident in Spain, published by the Bank of Spain on October 4th, private sector financing fell in August to record a year-on-year growth rate of -1.5%, from -1.2% in July. Funding for both businesses and families decreased. In the former, the drop was due mainly to the decline in bank loans (-3.4% versus -2.9% in July) and for families it was due to the fall in bank loans other than those for home purchase, as the latter fell at the same rate recorded in July.