Breathe easy: Luxembourg’s banks have performed well in a national stress test. The two larger banks, Dexia and KBC, performed well in Europe-wide stress tests earlier in the year, so you’ll be forgiven for having been quite unconcerned about the small state’s banking sector.

The scenarios were concocted a while back, it seems. Of the four shocks, falling property prices or falling EU GDP have the greatest negative impact on the banks’ capital ratios. The good news is that the ratios remain comfortably above 4 per cent in each case. The bad news is that the shocks are independent, and it is more than plausible that house prices would fall and growth reverse at the same time. After all, we’ve seen that before, quite recently.

The shocks used are given below:

A decrease in Luxembourg’s real GDP growth of magnitude 4% starting in 2010 Q1 and ending in 2010 Q4

A decrease in Euro area real GDP growth of magnitude 1% for the first two quarters of 2010, magnitude of 0.5% in Q3 and no shocks in the subsequent quarters

An increase in real interest rates of 200 basis points in the first quarter of 2010 and a further increase of 100 basis points in 2010 Q3

A reduction in real property prices of magnitude 2% in 2010 Q1 and subsequent losses of 2% over the remaining quarters of 2010

• US stimulus boosted growth by up to 4.5% - FT
• CIC bond issuance faces criticism - FT
• Ireland angered by S&P downgrade - FT
• Graphic: the Ireland downgrade in context - Money Supply
• Turkey joins the Islamic bond revival - beyond brics
• Foreign buyers flock to Treasuries - FT
• US economy slowing faster than US recognised - Gavyn Davies, FT
• Demographics upset the balance of capital flows - FT
• Brazilian fiscal lessons for Greece - FT
• What policymakers should focus on at Jackson Hole - Lex

S&P joins Fitch in placing Ireland on a sovereign rating of AA- today; Moody’s rating remains a notch higher at AA. Ireland keeps its second position in the PIIGS’ line-up, however, which runs broadly: Spain, Ireland, Italy, Portugal and then Greece. Play with the graphic below for more.

The Bank of Thailand has raised the policy rate to 1.75 per cent from 1.5 per cent, citing faster-than-expected growth in Q2 in spite of the domestic political situation. Growth is expected to slow in the second half, said the Bank, and inflation is expected to remain low for 2010. However, the rising cost of production is set to push inflation up in 2011, possibly above the target range, and this is the main driver for the rate change. The move was widely expected.

• Economists question BoE nonchalance on spending cuts - FT
• Germans go to town - Money Supply
• European consumer confidence improves unexpectedly - Business Week
• The FOMC debate on monetary policy - Calculated Risk
• Increasing Irish haircuts - FT Alphaville
• Iran central bank seeks import reduction - AP
• Household leverage: the UK vs. the US - News n Economics
• Islamic bond issuance to reach $30bn this year? - beyond brics
• IOU currency: California lawmakers pass IOU bill - Bloomberg
• Comment: Road to safer banks runs through Basel - Sheila Bair, FT

What did German consumers do at the height of the crisis over eurozone public finances earlier this year? A good many went shopping, according to the country’s statistical office. A detailed breakdown of gross domestic product data for the second quarter shows consumer spending increased by 0.6 per cent compared with the previous three months. That followed three consecutive quarters of contraction.

Thus, private consumption became a positive factor that contributed towards an overall 2.2 per cent increase in second quarter GDP. Although it was not as important as exports or investment spending, that is a big deal for Germany, where consumer spending is notoriously sluggish, even in boom years.

Continue reading "Germans go to town"