Publication date: 5 July 2010 | Covering: April – June 2010
Quarterly Briefing
- Greece first bailout: €110bn package from EU/IMF agreed May 2; austerity riots in Athens; largest IMF programme ever
- Flash Crash: May 6 Dow Jones falls nearly 1,000 points intraday; recovers; cause found in algorithmic trading feedback loops
- BP Deepwater Horizon: April 20 explosion kills 11; well gushes 60,000 barrels/day; ecological catastrophe; Obama declares moratorium
- European Financial Stability Facility: €750bn safety net established May; prevents contagion to Spain and Portugal temporarily
- Euro collapses: Falls from US$1.50 January to US$1.19 June; eurozone crisis undermines single currency confidence
- US housing: First-time buyer credit expires April 30; housing market stumbles; May existing home sales drop 2.2%
- Jamaica: IMF Stand-By Arrangement approved February 2010; “JDX II” debt management; Golding government
- Global G20: Toronto summit June 26–27; austerity vs stimulus debate; deficits targeted
Greece Bailout; Eurozone Crisis Erupts
The second quarter of 2010 saw the first acute phase of the European sovereign debt crisis explode into full public view. Greece, whose fiscal statistics had been systematically misreported for years and whose actual deficit and debt were far larger than previously acknowledged, was cut off from market financing as its 10-year bond yields rose above 12 per cent — unsustainably high for any country. On 2 May, the European Union, ECB, and IMF agreed a €110 billion bailout package — the largest IMF programme in history at that point — in exchange for a programme of severe fiscal austerity: pension cuts, public sector wage reductions, tax increases, and structural reforms. The announcement triggered violent protests in Athens in which three bank workers were killed when a petrol bomb was thrown into the building. The Greek bailout immediately raised the question of contagion: which other eurozone sovereigns might be next? The European Financial Stability Facility, a €750 billion emergency mechanism, was established in May to provide a backstop sufficient to address potential Spanish or Italian financing needs. The euro fell sharply through the quarter, from above US$1.50 in January to below US$1.19 in June, reflecting the existential challenge posed to the single currency by the revelation that monetary union could not prevent member states from running unsustainable fiscal policies.
Flash Crash; BP Deepwater Horizon
Two dramatic events marked the second quarter beyond the European crisis. On 6 May, the Dow Jones Industrial Average fell nearly 1,000 points in approximately twenty minutes before recovering most of the loss in an equally rapid bounce — the so-called Flash Crash, which was subsequently attributed to a cascade of algorithmic trading activity triggered by a large sell order in equity index futures. The episode exposed the vulnerability of highly automated markets to feedback-loop dynamics and led to a review of market circuit breakers and trading rules. The same day, coincidentally, also marked the height of the European crisis turmoil. The Deepwater Horizon oil rig, which had exploded on 20 April in the Gulf of Mexico killing eleven workers, continued to gush approximately 60,000 barrels of oil per day, creating the largest marine oil spill in US history. The ecological damage to the Gulf of Mexico ecosystem, the fishing and tourism industries of the Louisiana, Mississippi, Alabama, and Florida coasts, and the reputational and financial damage to BP were enormous. President Obama declared a moratorium on deepwater drilling, affecting hundreds of thousands of jobs and billions of dollars of economic activity.
Jamaica: IMF Stand-By Approved; Mortgage Conditions
The most significant development for Jamaica’s macroeconomic framework in 2010 was the IMF Executive Board’s approval in February of a Stand-By Arrangement providing access to approximately US$1.27 billion in emergency financing. The programme provided the framework for fiscal consolidation that Jamaica’s unsustainable debt trajectory required, and its approval gave international creditors confidence in Jamaica’s commitment to adjustment. The domestic debt management operations associated with the programme — the Jamaica Debt Exchange of 2010 — restructured domestic government debt to reduce interest costs. For the mortgage market, the high interest rate environment persisted: commercial rates remained well above affordability thresholds for most Jamaican households, and the NHT’s subsidised tiers were the primary vehicle for affordable home ownership. Jamaica’s economy remained under pressure from weak global demand, high oil prices, and the contractionary effect of fiscal adjustment.
Looking Ahead to Q3 2010
The European crisis’s near-term resolution through the EFSF buys time but does not resolve the underlying competitiveness and debt sustainability challenges. The US recovery’s durability — tested by the housing market’s weakness after the tax credit expiry — will determine whether the Fed needs to act further. For Jamaica, the IMF programme’s implementation progress and the BOJ’s monetary policy will be the key domestic variables for the mortgage and housing market through the second half of 2010.
Mortgage & Housing Finance Disclaimer: This publication is for general information only and does not constitute mortgage, financial, legal or investment advice. Mortgage products, lending criteria, interest rates and borrowing costs vary between lenders and may change without notice. Readers should obtain independent advice from a qualified mortgage adviser, financial adviser or legal professional before making financial or property decisions.
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