Publication date: 5 April 2012 | Covering: January – March 2012
Quarterly Briefing
- ECB LTRO2: February 29 second long-term refinancing operation lends €529bn to 800 European banks at 1% for 3 years; Spanish/Italian bond markets stabilise
- Greece PSI: Private sector involvement agreed February; investors accept 53.5% haircut on €200bn of Greek bonds; largest sovereign restructuring in history
- Iran sanctions: US/EU impose oil embargo; Iran threatens Strait of Hormuz; oil spikes toward US$125/barrel Brent
- US payrolls: January 275,000, February 240,000, March 120,000; unemployment falls to 8.2%; US recovery firming
- Fed: Holds 0–0.25%; extends low rate guidance to ‘late 2014’; no QE3 yet; Operation Twist ongoing
- China: Q4 2011 GDP 8.9%; growth moderating from double-digit pace; property market cooling; NPC sets 7.5% 2012 target
- Eurozone: LTRO calm masks deeper structural issues; ECB bond-buying (SMP) supports Italy/Spain
- Jamaica: IMF Stand-By second year; fiscal targets met with difficulty; BOJ managing exchange rate
ECB LTROs Stabilise European Banks; Greek PSI Completed
The first quarter of 2012 saw a partial stabilisation of the European sovereign debt crisis, driven principally by the ECB’s two long-term refinancing operations that provided cheap three-year funding to the European banking system. The first LTRO in December 2011 had lent €489 billion to 523 banks; the second on 29 February lent €529 billion to 800 banks, both at 1 per cent. The LTROs did not directly address the sovereign debt crisis but allowed banks to use the cheap funding to purchase government bonds — an indirect form of monetary financing that reduced sovereign yields and eased immediate financing pressures. Spanish and Italian 10-year yields, which had approached 7 per cent in November 2011 at the height of the crisis, fell to around 5 per cent through January and February. The quarter also saw the resolution of the Greek private sector involvement — the largest sovereign debt restructuring in history — in which private creditors accepted a 53.5 per cent nominal haircut on approximately €200 billion of Greek bonds. The write-down was accompanied by a second bailout package and was considered necessary but insufficient to resolve Greece’s long-term debt sustainability.
Iran Sanctions; Oil Spike
The United States and European Union imposed comprehensive oil-related sanctions on Iran in early 2012 in response to the country’s nuclear programme, with the EU embargo on Iranian oil taking effect from 1 July. Iran threatened to close the Strait of Hormuz — through which approximately 20 per cent of global oil trade passes — in response, sending Brent crude prices toward US$125 per barrel in March. The geopolitical risk premium in oil prices was significant, as Iran was the world’s third-largest oil exporter. For Jamaica, higher oil prices were a direct headwind: the island imports all of its petroleum, and elevated energy costs increased the import bill, worsened the current account deficit, and added inflationary pressure that constrained the BOJ’s monetary policy options. The PetroCaribe arrangement — under which Jamaica purchased Venezuelan oil at preferential terms with deferred payment — partially offset the cost impact, but the underlying exposure to global energy prices remained significant.
Jamaica: IMF Stand-By Progress
Jamaica’s IMF Stand-By Arrangement, approved in February 2010, was in its second year of implementation through the first quarter of 2012. The programme had brought some fiscal discipline but had fallen short of its ambitious primary surplus targets in several reviews due to lower-than-projected economic growth and revenue shortfalls. Jamaica’s debt remained at approximately 130 to 140 per cent of GDP — one of the highest ratios in the world — and domestic interest rates, while off their peaks, remained elevated. The Bank of Jamaica was managing persistent inflation and exchange rate depreciation pressures, constraining its ability to ease monetary policy significantly. For the mortgage market, the high domestic interest rate environment kept commercial mortgage rates well above affordability thresholds for many Jamaican households, reinforcing the NHT’s role as the primary accessible housing finance channel. The property market was subdued relative to the mid-2000s boom but showed pockets of demand, particularly in upscale tourism-adjacent parishes.
Looking Ahead to Q2 2012
The LTROs’ calming effect on European markets is expected to be temporary if underlying fiscal and competitiveness issues are not addressed. The spring property season will be the key test for Jamaica’s mortgage market, with diaspora engagement and NHT volumes the principal metrics. The Iran situation — and its implications for oil prices — remains the principal commodity market risk for Jamaica as a net oil importer. Domestically, the next IMF programme review and the BOJ’s monetary policy stance will frame conditions through mid-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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