More Problems Than Clarity

More problems than clarity

EU banks’ stress tests might lack the credibility to improve confidence in the financial sector. The tests are being criticized for failing to measure the consequences of a Greek bond default. Germany’s Helaba is refusing to let the European Banking Authority publish the bank’s full results.

Not now

The U.S. Commodity Futures Trading Commission put off implementation of swaps-market rules because it needs more time to write them. The delay could last into next year, the CFTC said.

Last ditch effort

With talks on raising the U.S. debt limit deadlocked, the Senate began work on a bipartisan plan to avert a default. The approach is based on a proposal by Senate Minority Leader Mitch McConnell, R-Ky., that would give President Barack Obama authority to raise the debt ceiling. McConnell’s “Plan B” aims to ensure that Obama would assume all political consequences of increasing the debt limit.

No to ring fencing

Former Federal Reserve Chairman Paul Volcker said he is skeptical of a British proposal to ring-fence retail banking and trading to prevent losses from bringing down a whole company. “The question will inevitably arise as to the financial and regulatory logic of maintaining a ‘retail bank’ as part of what in most cases would appear a much larger, highly diversified and ‘systemically significant’ organization,” he said.

For sure

Major banks and foreign investors are quietly warning the Obama administration that there is no way to avoid severe market disruption if the U.S. debt limit is reached and the government defaults, sources said. Failure to pay any obligation would undermine the U.S. financial system and alienate investors, Treasury Department officials reportedly were told.

Too long too dangerous

The European Central Bank’s special measures, including unlimited funding for banks, run the risk of undermining price stability if left in place longer than necessary, the ECB said in its July bulletin. “If non-standard measures are maintained for too long … they may encourage excessive risk taking by financial market participants, distort incentives and delay the necessary process of balance sheet adjustment by private and public sector entities,” according to the bulletin.

S&P is sounding its alarm

Standard & Poor’s said it might downgrade the U.S. credit rating from AAA to AA, even if the debt limit is raised before the Aug. 2 deadline. A downgrade is likely in the next 90 days if the White House and Congress can’t reach a credible solution to the government’s debt burden, the credit rating agency said.

No guarantee

It is widely believed that Democrats and Republicans will eventually agree to prevent the U.S. from defaulting on its debt, but it is not a sure thing, according to The Economist. Both parties have taken positions based on principles that would be difficult to abandon. “This is a season of dangerous brinkmanship in America,” the magazine’s Lexington columnist writes. “Compromise may still be possible, but there is nothing inevitable about it.”

LIBOR what?

Once a key interest-rate indicator, the London Interbank Offered Rate has faded in importance. Demand for bank credit has dropped dramatically since 2008, and banks are borrowing less from one another, dragging down interest rates.

Fell by a tick

Marketable U.S. debt held by foreign central banks fell $8.02 billion, to $3.445 trillion, in the week that ended Wednesday, the Federal Reserve said.

Shopping spree continues

The world’s biggest mining company, BHP Billiton, plans to acquire Petrohawk Energy for $12.1 billion, to take a major position in the U.S. natural gas industry. The deal will give the Australian company about 1 million acres of oil and gas fields in Texas and Louisiana

Surprise surprise

China’s move to allow trading partners to settle cross-border transactions in the yuan has brought unexpected consequences. Internationalization of the currency has opened a channel for “hot money” to enter China, created ways to make money from interest-rate disparities domestically and abroad, and contributed to inflation.

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