The European Central Bank does not provide direct support to eurozone countries by buying new bonds. However, it can give indirect support by helping banks buy such bonds. In a move announced on 8 December, the ECB will increase the maximum term of its ‘longer-term refinancing operations’ (LTROs) from the current 13 months to three years. In other words, it will effectively provide three-year loans to banks by purchasing banks’ assets on a ‘repurchase (repo)’ basis, whereby banks agree to buy back the assets at the end of the three-year term.
The hope is that banks will use these loans (at an annual rate of 1%) to purchase new bonds from countries such as Italy and Spain. If banks are more willing to buy them, this should help reduce the interest rate at which governments are forced to borrow. Banks would benefit from the ‘carry trade’, whereby they borrow at a low interest rate (from the ECB) and lend at a higher rate to governments by buying their bonds.
To encourage banks to take advantage of these new longer-term repos,the ECB announced that the assets it was prepared to purchase would include securitised assets with a rating of single A (the highest rating is AAA). In other words, it would accept assets with a ‘second-best rating’.
But although the scheme would allow banks to make a clear gain from a carry trade, banks may be reluctant to use such loans to increase their holdings of sovereign debt of countries with large debt to GDP ratios, given concerns in the market about the riskiness of such assets.
Articles and podcast
ECB repo extension a fillip for sovereigns Financial News, Matt Turner (15/12/11)
Doubts over ECB move to boost bond sales Financial Times, Tracy Alloway (15/12/11)
ECB Chief Plays Down Hopes for Bigger Bond Purchases Wall Street Journal, Tom Fairless And Margit Feher (15/12/11)
Eurozone crisis ‘misdiagnosed’ BBC Today Programme, George Magnus (16/12/11) (second part of podcast)
Banks snap up €500bn in loans from European Central Bank Guardian. Larry Elliott (22/12/11)
Analysis: ECB cash to give indirect boost via banks Reuters, Natsuko Waki and Steve Slater (22/12/11)
Demand for ECB loans rises to €489bn Financial Times, Tracy Alloway and Ralph Atkins (21/12/11)
ECB’s rescue of eurozone banks is temporary BBC News, Robert Peston (21/12/11)
ECB Press release
ECB announces measures to support bank lending and money market activity ECB (8/12/11)
Questions
- Explain how repos work. What is the difference between repos and reverse repos?
- What is meant by the term ‘carry trade’?
- Why may banks be unwilling to gain from the carry trade possibilities of the ECB’s new 3-year LTROs by using them to fund the purchase of new sovereign bonds? What risks are entailed by their doing so?
- How do these new long-term repo operations differ from quantitative easing? Explain whether or not the effect is likely to be similar
- What are the arguments for and against the ECB engaging in a round of substantial quantitative easing?
In Gloomy prospects for UK consumer spending in 2012? we talked about how consumer spending can be affected by the financial position of households. Figures from United Kingdom National Accounts – Blue Book 2011 (see Tables 6.1.9 and 10.10) give the latest complete set of balance sheets for the UK household sector. The figures are for 2010 and in this blog we provide a brief overview of what these figures reveal.
In effect, there are two main balance sheets of interest for households (and non-profit institutions serving households (NPISHs), i.e. charities and voluntary organisations). The first details their net financial wealth and the second their physical wealth, also known as their non-financial wealth. We begin with net financial wealth. This is found by subtracting financial liabilities (debt) from financial assets. The household sector in 2010 had financial liabilities of £1.54 trillion equivalent to 1.6 times its disposable income for the year or 1.1 times the nation’s Gross Domestic Product. Of these liabilities, £1.2 trillion was mortgage debt, i.e. loans secured against property. On the other hand, the sector had financial assets of £4.3 trillion equivalent to 4.4 times its disposable income in 2010 or 3 times GDP. Of these financial assets, the value in pension funds and life assurance was £2.27 trillion.
The net financial wealth of households and NPISHs in 2010 was £2.8 trillion, 2.9 times the sector’s disposable income for the year or 1.9 times GDP. To this we need to add physical wealth of £4.9 trillion, a massive 5 times the sector’s disposable income or 3.3 times the nation’s GDP. The majority of this is residential buildings the value of which were put at £4 billion for 2010. This demonstrates the significance of housing to the UK household sector balance sheet.
If we now add physical wealth to net financial wealth, we find that in 2010 the household and NPISH sector had a net worth of £7.7 trillion. To put this in context, it is equivalent to 7.8 times the disposable income it earned in 2010 and 5.3 times the UK’s Gross Domestic Product. While these are enormous figures it is worth noting that in 2007 the sector’s net worth was £7.4 trillion, equivalent to 8.5 times annual disposable income.
A trawl through the figures clearly shows the impact of the financial crisis on the sector’s net worth. From £7.4 trillion in 2007, net worth fell in 2008 to £6.6 trillion or 7.2 times annual disposable income. However, 2009 and 2010 did see the households’ net worth increase again – including relative to its disposable income. This has been the result of its net financial wealth increasing. Net financial wealth in 2010 was 9.8 per cent higher than in 2007. However, the depressed housing market has continued to adversely impact on the sector’s net worth. Physical wealth in 2010 was 0.7 per cent lower than in 2007.
Of course, while these empirical observations are undoubtedly interesting, the key question for debate is how these patterns affect household behaviour. Of particular importance, is how changes in both the household sector’s total net worth and the components making up the total will translate into changes in consumer spending. Economists are increasingly recognising that in understanding consumer spending patterns we need to gain a deeper understanding of the impact of the balance sheets on consumer spending. It is quite likely that many retailers when forming their plans for the year ahead will be analysing the potential impact of household finances on spending behaviour. Developing strategies to respond to the state of the household balance sheets may be crucial to their success.
Data
United Kingdom National Accounts – Blue Book 2011 (datasets) Office for National Statistics (see Tables 6.1.9 and 10.10)
Articles
Debt levels head towards £30,000 for every adult Mirror, Tricia Phillips (2/12/11)
40% risk getting further in debt this Christmas Independent, Simon Read (3/12/11)
Uk’s debts ‘biggest in the world’ BBC News, Robert Peston (21/11/11) (This article looks at debt across all sectors, including corporate and government debt too)
Drowning in debt: Warning over 4,000% interest rates as 3.5m people say they will be forced to take out ‘payday’ loans in the next 6 months Daily Mail, Emily Allen (7/12/11)
UK households wealthier than Germany’s says UBS Telegraph, Jamie Dunkley (9/12/11)
Questions
- In the context of the household balance sheets, explain the difference between the concepts of stocks and flows.
- Illustrate with examples your understanding of what is meant by secured and unsecured debt. What factors are likely to affect the growth from one period to another in the stocks of secured and unsecured debt outstanding?
- Draw up a list of possible factors that could affect the value of the household sector’s net financial wealth. Now repeat the exercise for non-financial wealth.
- Draw up a list of ways in which you think changes to the values of items on the household balance sheets could affect consumer spending. After drawing up this list consider their significance in 2012.
- What sort of items would be included in the balance sheets of firms and of government?
Here’s a quiz for you. What one chart would you chose as an illustration of the most significant economic event(s), trends or data of the year? You could search out a chart, perhaps by looking through the news items on this site. Or you could construct a chart of you own in Excel or PowerPoint using economic data from a data site. You can find links to a whole range of data sites here.
To give you some ideas, the link to the BBC site below gives the charts selected by a range of eminent economists.
Top economists reveal their graphs of 2011 BBC News (13/12/11)
Questions
- Look through each of the 11 charts in the link above and explain their significance.
- Why did you choose the chart you did?
- Name five other economic events or trends during 2011 that you would consider to be highly significant and say why.
- Identify three likely economic events in 2012 that would, if they came true, prove significant and say why? Just how likely are they?
Ministers from around the world met in Durban in the first two weeks of December 2011 to hammer out a deal on tackling climate change. The aim was that this would replace the Kyoto Treaty, due to expire at the end of 2012.
International climate change agreements are particularly difficult to achieve, as there are several market failures involved. Also, there is considerable ‘gaming’, as each country seeks to negotiate a deal that benefits the world as a whole but which minimises the disadvantages to their own particular country.
The conference ended on the 11 December with a last-minute deal. Both developed and developing countries would for the first time work on a legally binding agreement to limit emissions. This would be drawn up by 2015 and to come into force after 2020. The following articles assess the significance of the agreement and whether it represents real progress or little more than a deal to work on a deal.
Articles
‘Modest’ gains as UN climate deal struck Independent (11/12/11)
Landmark deal saves climate talks Irish Examiner (11/12/11)
Durban climate change: the agreement explained The Telegraph, Louise Gray (11/12/11)
Durban climate conference agrees deal to do a deal – now comes the hard part Guardian, Fiona Harvey and Damian Carrington (13/12/11)
Climate deal: A guarantee our children will be worse off than us Guardian, Damian Carrington (11/12/11)
Durban climate deal: the verdict Guardian, Damian Carrington (12/12/11)
Australia hails Cop 17 agreement News 24 Australia (11/12/11)
Climate talks reach new global accord Financial Times, Andrew England and Pilita Clark (11/12/11)
Durban Climate Talks Produce Imperfect Deals Voice of America, Gabe Joselow (11/12/11)
Critics slam climate agreement t Sydney Morning Herald, Arthur Max (11/12/11)
Deal at last at UN climate change talks Euronews on YouTube (11/12/11)
World still in arrears on climate change pledges Reuters Africa, Barbara Lewis (11/12/11)
New UN climate deal struck, critics say gains modest Hindustan Times (11/12/11)
Climate change: ambition gap Guardian (12/12/11)
Canada leaves Kyoto to avoid heavy penalties Financial Times, Bernard Simon (13/12/11)
Durban Platform Leaves World Sleepwalking Towards Four Degrees Warming Middle East North Africa Financial Network, Ben Grossman-Cohen and Georgette Thomas (Oxfam) (13/12/11)
A deal in Durban The Economist (11/12/11)
Assessing the Climate Talks — Did Durban Succeed? Harvard University – Belfer Center for Science and International Affairs – An Economic View of the Environment, Robert Stavins (12/12/11)
Questions
- What was agreed at the Durban Climate Change Conference?
- Why is it difficult to get agreement on measures to tackle climate change? How is game theory relevant to explaining the difficulties in reaching an agreement?
- How would you set about establishing the ‘optimal’ amount of emissions reductions?
- Why will the market fail to provide the optimal amount of emissions reductions?
- Why was it felt not possible for a legally binding international agreement to come into force before 2020?
When people shop in supermarkets they often look for what’s on special offer. After all, everyone likes a bargain. About 35–37% of supermarket items are on special offer at any one time and around 50% of the money spent by customers is on such items.
But things aren’t always as they seem. Supermarkets use clever marketing to persuade people that they’re getting a good deal, while sometimes it’s nothing of the sort. Examples include putting up prices for a while and then reducing them again saying “huge reduction”; or promoting an offer of, say, “three for £2”, when you could buy an individual item for 60p; or using the word “now” £2.50 to imply that the previous price was higher, when in fact it wasn’t; or selling a double-sized “value pack” for more than double the price of the regular size. These tricks are commonplace in supermarkets.
Sometimes the wary consumer will be able to find out which offers are genuine, but it’s not always that easy. And even if you do buy something at a genuine discount, is it something you really want? Or have you been persuaded to buy it simply because it’s on offer? Supermarkets study consumers’ psychology. They find clever ways of promoting products to make us feel that we have done well in getting a bargain.
The following programme in the BBC’s Panorama series looks at the big four supermarkets in the UK – Tesco, Asda, Sainsbury’s and Morrisons – which between then have 68% of supermarket sales. It gives examples of some of the not so special offers and how consumers are being hoodwinked.
Webcast
Revealed: The truth about supermarket ‘bargains’ BBC Panorama (clip), Sophie Raworth (5/12/11)
The Truth About Supermarket Price Wars BBC Panorama (full programme), Sophie Raworth (5/12/11)
Articles
What you need to know about the supermarket price wars Totally Money (7/12/11)
Supermarkets accused of misleading consumers The Telegraph, Nick Collins (5/12/11)
Supermarket price war: Can they all be cheapest? BBC News, Anthony Reuben (9/12/11)
Are Our Retailers Criminals? International Supermarket News, Laura Elliott (6/12/11)
Supermarket deals “not what they seem” warns expert Retail Gazette, Gemma Taylor (6/12/11)
Questions
- What types of misleading offers are identified in the Panorama report?
- For what reasons are consumers “taken in” by such offers? Does this imply that consumers are irrational?
- Does intense oligopolistic competition between the big four supermarkets lead to lower prices?
- How is it possible for two supermarkets to claim that they are cheaper than the other? How would you decide which supermarket was generally cheaper?
- Why might it be difficult for an independent agency to do a comparison of prices of different supermarket chains?