Publication date: 5 July 2012 | Covering: April – June 2012
Quarterly Briefing
- FRESH — Greece: Re-run elections June 17 produce pro-bailout result; Samaras New Democracy leads coalition; Syriza averted (18 days ago)
- Spain: Bank bailout request June 9; €100bn EU credit line for Spanish banks; yields continue rising toward 7%
- LIBOR scandal: Barclays fined £290mn June 27 for rate manipulation; CEO Diamond resigns; systemic manipulation of global benchmark rate revealed
- JPMorgan ‘London Whale’: US$2bn+ trading loss disclosed May; ultimately US$6.2bn; Volcker Rule debate intensified
- Eurozone: Greek political deadlock May followed by second elections June; European Financial Stability Facility active; ECB holds
- US payrolls disappoint: April 77,000, May 69,000; Operation Twist extended June; no QE3 yet
- Facebook IPO May 18: largest tech IPO ever; troubled debut; shares immediately fall below issue price
- Jamaica: IMF Stand-By ongoing; BOJ managing inflation/exchange rate pressures
Greece: Political Crisis Resolved; Bailout Continues
The second quarter of 2012 was defined above all by two Greek elections: the 6 May vote that produced a hung parliament with no majority for the pro-bailout parties and elevated the anti-austerity SYRIZA party to the second-largest bloc, followed by the 17 June re-run that produced a narrow majority for the pro-bailout New Democracy party under Antonis Samaras. The intervening six weeks were among the most anxiety-laden in the eurozone crisis: capital flight from Greek banks accelerated, contagion to Italian and Spanish bond markets intensified, and the possibility of a disorderly Greek exit from the euro — a ‘Grexit’ — was openly discussed by policymakers and markets alike. The June 17 result — eighteen days before this edition publishes — averted the immediate cliff edge, with Samaras forming a coalition government and committing to implement the bailout terms. The relief was palpable but cautious: Greek finances remained in desperate condition, the bailout’s austerity measures were deeply unpopular, and SYRIZA had won sufficient popular support to remain a potent political force. The underlying eurozone architecture — a monetary union without fiscal union — remained unreformed and vulnerable.
Spain Bank Bailout; LIBOR Scandal
Spain requested a European credit line of up to €100 billion on 9 June to recapitalise its banking system, which had been badly damaged by the collapse of the country’s property bubble and was carrying enormous losses on real estate loans. The Spanish bank bailout was distinct from the sovereign bailouts of Greece, Ireland, and Portugal in that it targeted the banking system directly rather than the general government, though the credit was ultimately extended to the Spanish sovereign and thus added to Spain’s debt burden. Spanish 10-year bond yields continued to rise through June, approaching the psychologically important 7 per cent level that was widely regarded as unsustainably high for a country of Spain’s size. The banking system’s weakness was not confined to Europe: in late May, JPMorgan Chase disclosed trading losses of at least US$2 billion — ultimately totalling US$6.2 billion — from a derivatives position in the Chief Investment Office, the so-called ‘London Whale’ trade. The scandal intensified regulatory debate about the Volcker Rule’s restrictions on proprietary trading. The quarter also brought the revelation that Barclays had systematically manipulated the LIBOR benchmark interest rate, a rate that underpinned an estimated US$300 trillion of financial contracts globally, leading to a £290 million fine and the resignation of CEO Bob Diamond.
Weak US Payrolls; Operation Twist Extended
US economic data disappointed through the second quarter, with non-farm payrolls coming in at just 77,000 in April and 69,000 in May — well below the 200,000-plus prints that had characterised the first quarter and raised hopes of a self-sustaining recovery. The European crisis’s impact on business confidence and global trade flows was visible in the US data, and the Fed responded at its June meeting by extending Operation Twist — its programme of selling short-term Treasuries and buying long-term ones — by six months to year-end. The extension stopped short of a new round of asset purchases (QE3), but signalled the Committee’s readiness to act further if conditions warranted. The 10-year Treasury yield fell to 1.47 per cent in June — then a historic low — reflecting both safe-haven demand from Europe’s turmoil and expectations of continued Fed accommodation.
Jamaica Mortgage and Housing Market: Q2 2012
Jamaica’s mortgage market continued to operate under the dual constraints of high domestic interest rates and weak economic growth through the second quarter of 2012. The IMF Stand-By Arrangement’s fiscal discipline was maintained, but the macroeconomic stabilisation had yet to translate into meaningfully lower domestic borrowing costs. Commercial mortgage rates remained elevated, keeping the NHT’s subsidised tiers as the primary accessible pathway for home ownership among qualified contributors. The spring season generated modest property market activity, with demand concentrated in the affordable segment and in diaspora-driven purchases. The global volatility from Europe’s crisis had limited direct impact on Jamaica’s domestic market, though it was a headwind to risk appetite for Caribbean assets more broadly.
Looking Ahead to Q3 2012
The third quarter will be dominated by whether Europe’s crisis finds a new equilibrium — with Draghi’s upcoming Jackson Hole appearance and the ECB’s September meeting critical junctures — and whether weak US data eventually tips the Fed into QE3. For Jamaica, the summer diaspora season and the trajectory of the IMF programme ahead of its expiry will be the principal domestic drivers. The mortgage market’s recovery potential remains contingent on a fundamental improvement in the domestic interest rate environment.
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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