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Busch: Beyond Stimulus
As we know, China and the United States have been stimulating their economies via massive spending by the government. Although China was questioned on whether this was new spending, they have moved on another front to stimulate. China has pumped 4.58 trillion yuan (US$670 billion) of new loans into the economy in the first quarter to stimulate growth. This loan growth coupled with their stimulus/fiscal spending helped stabilize their economy and increased imports from South Korea, Taiwan, and Japan. This is why the central bank yesterday said the economy is doing better than expected. To keep the party going, they said they would keep easy monetary policy to ensure ample liquidity at banks.
The European Central Bank surprised with an announcement of a program to buy covered bonds. "The governing council has decided in principle that the euro system will purchase euro-denominated bonds issued in the euro area." The initial belief was that this would be a quantitative easing program, but Trichet now says that this is not the case. He also said the details of the program would be announced in June.
There had been some talk that the ECB would buy local currency bonds to assist Eastern European countries, but it looks like this will not be the case. However, the European Investment Bank will be allowed to borrow from the ECB now and this may generate an additional E40 billion in new lending. The EIB does lend to "partner countries" and links it via agreements to South and Eastern Europe. Stating the obvious, Trichet said the situation is complex.
The Bank of England announced today that they were leaving their interest rates at 0.50%, but that they were increasing the size of their QE program. The BOE said they will buy Gbp 50 billion more and take the total to Gbp 125 billion.
Lastly, the Federal Reserve is set to announce the full results of their stress tests today. Remember, the critical point was made during a 60 Minutes interview in March when Bernanke said no major US bank would fail. This meant that no matter how bad the test results for any of the 19 will be, the Federal Reserve and Treasury will provide a capital backstop for it. The results are a fait accompli showing what the government may inject to keep them afloat.
All of these are very good for stabilizing the global credit system and the global economy. All of these will encourage the markets to expand their risk taking.
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