Publication date: 5 January 2012 | Covering: October – December 2011
Quarterly Briefing
- FRESH — ECB LTRO1: December 21 lends €489bn to 523 banks at 1% for 3 years; European bank funding crisis eased (15 days ago)
- Italy: Berlusconi resigns November 12 as borrowing costs become unsustainable; technocrat Mario Monti forms government; yields retreat from 7%
- MF Global: Files bankruptcy October 31; US$1.2bn in customer funds missing; largest financial firm failure since Lehman
- ECB cuts: Draghi’s first act as ECB President — cuts main rate to 1.0% at November and December meetings
- Libya: Gaddafi killed October 20; civil war ends; NTC government; oil production restoring
- US: Final troops leave Iraq December 18; nine-year war officially ends
- Eurozone summit December 9: fiscal compact agreed; eurobonds rejected; UK’s Cameron vetoes EU treaty change
- Jamaica: IMF Stand-By Arrangement; fiscal pressures; NHT mortgage activity ongoing
Eurozone Crisis Peaks; Draghi’s LTRO Provides Respite
The fourth quarter of 2011 saw the eurozone debt crisis reach its most acute phase to that point, with Italian 10-year bond yields rising above 7 per cent in November — the level at which Greece, Ireland, and Portugal had each required a bailout — and contagion spreading to France, Belgium, and even Austria. Italy, the eurozone’s third-largest economy and holder of the world’s third-largest government bond market, was too large to rescue through the existing bailout mechanisms. Prime Minister Silvio Berlusconi, whose credibility with markets and European partners had been severely damaged, resigned on 12 November and was replaced by Mario Monti, a technocrat and former EU Commissioner, who formed a government of experts pledging urgent fiscal reform. Monti’s appointment calmed Italian bond markets somewhat, though yields remained elevated. The most significant crisis-fighting action of the quarter came from the new ECB President Mario Draghi — who had succeeded Jean-Claude Trichet in November — who cut the main refinancing rate twice and then launched the first Long-Term Refinancing Operation on 21 December, lending €489 billion to 523 European banks at 1 per cent for three years. The LTRO provided immediate relief to the European banking system’s acute funding stress.
MF Global; Libya; US Exits Iraq
MF Global, the commodities broker led by former Goldman Sachs CEO and New Jersey Governor Jon Corzine, filed for bankruptcy on 31 October in what was the largest financial firm failure since Lehman Brothers in 2008. The bankruptcy was accompanied by the revelation that approximately US$1.2 billion in customer funds was missing — later determined to have been improperly used by MF Global to meet its own liquidity needs as the firm’s large bet on European sovereign bonds went bad. The episode was a reminder of the continuing opacity in parts of the financial system and the persistent tail risks from European sovereign debt. In Libya, the death of Muammar Gaddafi on 20 October brought the eight-month civil war to an end, opening the way for a transitional government and, ultimately, the restoration of Libya’s oil production — a positive development for global supply. The United States formally ended its military presence in Iraq on 18 December, marking the conclusion of a nine-year war that had begun in March 2003, at a cost of approximately US$800 billion and nearly 4,500 American military lives.
Jamaica Mortgage and Housing Market: Q4 2011
Jamaica’s mortgage and housing market closed 2011 in a constrained but stable condition. The IMF Stand-By Arrangement was in its second year, providing a framework for fiscal discipline but requiring difficult spending adjustments that weighed on domestic economic activity and consumer confidence. The high public debt level — requiring substantial domestic borrowing at elevated rates — meant that commercial lending rates remained well above what most Jamaican households could service, confining affordable housing finance primarily to the NHT. The fourth quarter is traditionally the quietest for property transactions in Jamaica, and 2011 was no exception, with the Christmas and New Year period reducing market activity. The diaspora community’s interest in Jamaican property remained a consistent source of demand, particularly for higher-value properties in resort areas and upscale Kingston suburbs.
Looking Ahead to Q1 2012
2012 opens with the European crisis’s immediate pressure eased by the LTRO, but the fundamental questions of fiscal union, competitiveness adjustment, and Greek debt sustainability unresolved. The Greek PSI negotiation and Spain’s banking system will be the early focal points. For Jamaica, the IMF programme reviews and the trajectory of domestic interest rates will determine the pace of mortgage market recovery. A further improvement in the global economic outlook, combined with continued US labour market gains and stable remittance inflows, provides a cautiously constructive backdrop for 2012.
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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