by Calculated Risk on 12/08/2011 10:05:00 AM

From Mario Draghi, President of the ECB: Introductory statement to the press conference

Based on its regular economic and monetary analyses, the Governing Council decided to lower the key ECB interest rates by 25 basis points, following the 25 basis point decrease on 3 November 2011. [this lowers the rate to 1.0%]
...
In its continued efforts to support the liquidity situation of euro area banks, and following the coordinated central bank action on 30 November 2011 to provide liquidity to the global financial system, the Governing Council today also decided to adopt further non-standard measures. These measures should ensure enhanced access of the banking sector to liquidity and facilitate the functioning of the euro area money market. They are expected to support the provision of credit to households and non-financial corporations. In this context, the Governing Council decided:

First, to conduct two longer-term refinancing operations (LTROs) with a maturity of 36 months and the option of early repayment after one year. The operations will be conducted as fixed rate tender procedures with full allotment. The rate in these operations will be fixed at the average rate of the main refinancing operations over the life of the respective operation. Interest will be paid when the respective operation matures. The first operation will be allotted on 21 December 2011 and will replace the 12-month LTRO announced on 6 October 2011.

Second, to increase collateral availability by reducing the rating threshold for certain asset-backed securities (ABS). In addition to the ABS that are already eligible for Eurosystem operations, ABS having a second best rating of at least “single A” in the Eurosystem harmonised credit scale at issuance, and at all times subsequently, and the underlying assets of which comprise residential mortgages and loans to small and medium-sized enterprises, will be eligible for use as collateral in Eurosystem credit operations. Moreover, national central banks will be allowed, as a temporary solution, to accept as collateral additional performing credit claims (namely bank loans) that satisfy specific eligibility criteria. The responsibility entailed in the acceptance of such credit claims will be borne by the national central bank authorising their use. These measures will take effect as soon as the relevant legal acts have been published.

Third, to reduce the reserve ratio, which is currently 2%, to 1%. This will free up collateral and support money market activity. As a consequence of the full allotment policy applied in the ECB’s main refinancing operations and the way banks are using this option, the system of reserve requirements is not needed to the same extent as under normal circumstances to steer money market conditions. This measure will take effect as of the maintenance period starting on 18 January 2012.

Fourth, to discontinue for the time being, as of the maintenance period starting on 14 December 2011, the fine-tuning operations carried out on the last day of each maintenance period. This is a technical measure to support money market activity.

From the Financial Times: ECB launches new support for banks

From the WSJ: Draghi Announces New ECB Crisis Moves

Also from the WSJ: EU Nearing IMF Loan Deal

The European Union is nearing a deal to lend €200 billion ($268.26 billion) to the International Monetary Fund—including €150 billion coming from the 17-nation euro zone—that the IMF could then use to shore up the troubled euro-zone sovereign debt market, euro-zone officials said Thursday.

Bond yields for Italy and Spain increased this morning. The Italian 2 year yield is up sharply to 5.98%, and the 10 year yield is up to 6.31%.

The Spanish 2 year yield is up to 4.62%, and the 10 year yield is up to 5.67%.

by Calculated Risk on 12/08/2011 08:30:00 AM

The DOL reports:

In the week ending December 3, the advance figure for seasonally adjusted initial claims was 381,000, a decrease of 23,000 from the previous week's revised figure of 404,000. The 4-week moving average was 393,250, a decrease of 3,000 from the previous week's revised average of 396,250.

The following graph shows the 4-week moving average of weekly claims since January 2000.

Click on graph for larger image.

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased this week to 393,250.

This is the fourth week in a row with the 4-week average below 400,000, and this is the lowest level for claims since February.

And here is a long term graph of weekly claims:





All current Employment Graphs

by Calculated Risk on 12/07/2011 06:09:00 PM

A few excerpts from a Financial Times editorial: We cannot afford another half-baked solution (ht Pat)

... there are but hours to save the euro ... The world cannot afford another half-baked solution. ... What [Merkel and Sarkozy] laid out was little more than a stability plan on steroids, based on a misdiagnosis of the crisis that divides the eurozone into nations that are fiscally virtuous and those deemed to be profligate “sinners”.

A politically sustainable plan needs ... the hope of rebalancing within the eurozone, not just an endless vista of austerity.

In the short run, some fiscal agreements combined with ECB intervention will help. And it looks like the ECB will take more action tomorrow, from Bloomberg: ECB to Consider More Measures to Stimulate Bank Lending

The European Central Bank may announce a range of measures tomorrow to stimulate bank lending ...

Options on the table include loosening collateral criteria so that institutions have more access to cheap ECB cash and offering them longer-term loans to grease the flow of credit to the economy ... an interest rate cut is likely ...

But that isn't enough. Some time soon, private investors will have to be enticed to buy sovereign bonds - and somehow the eurozone has to be rebalanced. "An endless vista of austerity" will not survive the polling booths for long.

by Calculated Risk on 12/07/2011 02:26:00 PM

As the economy slowly recovers, an important question is: What will happen to the participation rate over the next few years?

On Sunday I pointed out that demographers expected the participation rate to start declining even before the great recession started. The expected gradual decline was due to the aging of the overall population.

Note: The participation rate is the percentage of the working age population in the labor force.

One difficultly in projecting the participation rate is that the age group participation rates change over time. The participation rate for the '16 to 19' age group has been declining for some time, and the participation rate has been increasing for older age groups - perhaps because of necessity, perhaps because of fewer "back breaking" jobs.

Here is a graph showing the trends by age group since 1990.

Click on graph for larger image.

The participation rate is low for those in the '16 to 19' age group. The rate increases sharply for those in the '20 to 24' age group, and the rate is at its peak from 25 to 49 - and drops off a little for the '50 to 54' age group.

After 55 workers start leaving the labor force, and the participation rate falls off with age.

The participation rate has been declining for the younger age groups, although some of the recent decline for the '20 to 24' age group is probably related to the recession (perhaps more people staying in school).

Even though the participation rate is rising for the older age groups, the increase doesn't offset the aging of the population. As an example, when the current '55 to 59' age group moves into the '60 to 64' bracket, the participation rate for that cohort will decline from 73% to 55% or so. And with a fairly large cohort moving into the older age brackets, the overall participation rate will probably decline.

Forecasting the participation rate is important (along with population growth and other factors) in projecting how many jobs are needed to bring the economy back to full employment. So I'll be writing more about this ...

by Calculated Risk on 12/07/2011 11:28:00 AM

Not much news yet ... although the ECB is expected to cut interest rates ...

From the Financial Times: Germany insists on new treaty for Europe

Germany has thrown down the gauntlet to its European partners, insisting that they must agree on treaty change for the whole European Union, or at the least a binding new eurozone treaty, to bring lasting stability to the common currency, and reassure the financial markets.
Excerpt with permission

From the WSJ: Crisis Live Blog: Sarkozy, Merkel Issue Treaty Proposal

In an open letter to European Council President Herman Van Rompuy, Mr. Sarkozy and Ms. Merkel issued an ultimatum to the 27 EU governments, saying they must decide whether they will accept greater central control over their national budgets.

Should some countries decide not to participate, the 17 countries in the euro zone will press ahead with a more integrated union by signing a new agreement outside EU treaties, they said.

The Italian 2 year yield is up slightly to 5.6%, and the 10 year yield is up to 6.02%. Both were above 7% not long ago.

The Spanish 2 year yield is up sharply to 4.4%, and the 10 year yield is up to 5.44%. The ten year was at 6.7% on November 24th.