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D i v i s i o n OF INTERNATIONAL FINANCE BOARD OF OOVENNORI H. 13 April 1, 196U. No. W t CAPITAL MARKET DEVELOPMENTS ABROAD I. Germany II. Nine Charts on Financial Markets Abroad I. Germany: Money and Capital Markets, March I96H The repercussions of new measures taken to cope with Germany's capital inflow and growing balance-of-payments surplus dominated German financial markets during March. The bond and the foreign exchange markets in particular were affected by official action, and the maintenance of high short-term rates beyond the mid-March tax date may have reflected,in part,commercial bank "money exports" especially induced by the new Bundesbank measures. Stock prices advanced further to new recent highs in the period under review and the spot D-mark remained strong. Table 1. Germany: Yield on German Railway 5-1/2 per " : cent Bond (1958-1963) (per cent per annum) 1963: 196k: December January 6 3 10 17 2h 31 6.05 6, Oh 6.01 5.89 5.8$ 5.84 February March 7 14 6 13 20 26 5»8l 5.79 5.80 5.81 5.84 6,07 "Source: T13RD. The bond market has responded dramatically to official attempts to reduce foreign purchases of new bond offerings. Early in February the decision to exclude foreign buyers from subscribing to new Federal Government securities for the first five days after the books are opened was succesisful in having an early-February offering fully subscribed within the five-day period reserved to domestic investors. However, the downward drift in bond yields noticeable since early January came to an end, (See Table 1.) As a result, official attempts to place a £-1/2 per cent coupon on new Federal offerings were frustrated; sales of a Bundespost issue opened to domestic investors on March 6 were sluggish because of market resistance to the lower coupon. Market speculation about the measures the authorities would /take to curb the foreign capital inflow contributed a general uncertainty and weak 1 tone to the bond market during the first three weeks of March. OFFICIAL USE ONLY (Decontrolled after six months) OFFICIAL USE ONLY Because of this pervasive uneasiness, the announcement on March 23 that Parliament would be asked to approve a 2$ per cent withholding tax on nonresident holdings of bonds was followed by a severe reaction in the bond market. March 26 the yield on the 5-1/2 per cent 1958-83 Bundesbank bond had risen from 5«8l per cent on March 13 to 6.07 per cent on Mar<?h 26. (See Table 1.) With this reversal, the bond market had lost all the gains it had made in I96U5 in fact, the 6,07 per cent yield reflected the lowest price quotation for the Bundesbahn issue since early November. According to the press, a wave of selling hit the bond market in the four days preceding the Easter holidays. Selling orders were estimated at $50 million (DM 200 million) "which smothered the exchanges and caused quotations to run hours behind." (Journal of Commerce, March 30, 196U> p. 3») This unexpectedly severe shakeout caused the authorities to postpone the new Federal Government loan which was scheduled to be offered in early April and which now undoubtedly will have a 6 per cent coupon when offered. The severity of the market reaction seems to underscore the prominent role foreign investors have been playing in the German bond market. The principal objection of foreign investors to the proposed tax measure may well be, as was the case in the earlier experience with a withholding tax in Italy, to the registration of the security and not to the payment of the tax. The attractiveness of the stock market has also caused some shift of funds from the bond market. Finally, financial markets probably continue to be affected by uncertainties about what additional steps the German authorities will take to cope with the large capital inflow. In the foreign-exchange market pressures on the D-mark eased in early March. The monetary authorities reactivated special arrangments to sell U.S. dollars forward to commercial banks (for investment in U.S. Treasury bills) at favorable rates. As a result, official reserve accruals slackened and the rates on the spot and forward D-mark eased slightly (see Table 7 and Chart 8) after mid-March, The German payments surplus in January was $129 million; in February the trade surplus (seasonally adjusted) exceeded $300 million and official reserves increased by $19U million. For the first two months of 196U, the overall German payments surplus was running much above the $1,2 billion annual rate recorded for 1 9 6 3 . Stock prices up 5 per cent in month, Buoyed up by continuing optimism about tne economic outlook, the stock market Has^recently been quite active. Continuing heavy foreign purchases, in part a shift in investor interest away from the bond market, have helped to push the Frankfurter Allgemeine Zeitung (FA2) stock index 5 per cent between mid-February and mid-March, (See Table 2 and Chart 7.) On March 20, in fact, the index stood 11 per cent above the end1963 level. However, reaction to Chancellor Erhard's remarks at the Christain Democratic Union (CDU) convention on March 16 regarding the government's intention to introduce economic stabilization measures brought a pause in late March to the market's almost continuous 3-month rise. . OFFICIAL USE ONLY -.3 - OFFICIAL USE ONLY Table 2, Aug. Sept. Feb. All time high: 1963 high: 1963 low: 1963 196U Germany: Sept . Oct. Nov. Dec. Jan. Stock Index, September 1963-March 1961; (December 31,1958=100) 31, I960 9 26 26U.60 19U.81 151.5U 191.89 186.05 180.80 187.71 193.73 197.1U 197.32 198.17 27 31 29 31 10 17 2h 31 196U high: March 17 low: Jan. 2 198,18 198.67 200.91 202.06 20U,U9 209.10 209.22 207.Ll 1961t Feb. 7 1U 21 28 March 6 13 20 26 210,35 189.08 1 Source: Frankfurter Allgemeine Zeitung. Money market tighter in late March. Possibly in response to governmental measures to encourage an outflow of short-term funds, money market rates remained higher than usual after the mid-March tax deadline, after remaining stable in February. (See Table 3*) Call money was up 1-1/2 per cent from early March to U-l/2 per cent on March 26 (as reported in the FAZ), and other rates were slightly higher * The fact that bank deposits with the Bundesbank were down roughly 12 per cent during the second week of March reflects seasonal pressures on liquidity* Although bank reserves appeared adequate, the Easter buying season coming at the end of March no doubt placed additional strains on liquidity, a/ Table 3« Germany: Money narKet Market nai.es Rates in rranxxur Frankfurt, November, 1963-January3 196U — (in per cent per annum) Three-month loans Day-to-day money December 8-15 16-23 21-30 31 2-7/8 2-2/8 2-3/U 2 2 - - 2-7/8 - 2-1/2 - 3-1A » 3 January 1- 7 8-1$ 16-23 21-31 2-1/2 2-1/8 2-1A 2-1/8 February 1- 7 8-15 16-23 2U-29 2-5/8 - 3-1/8 2-7/8 3 2-7/8 5-1/2 3 2-5/8 3 3 - 3-1/8 2-1A - 3-1/8 ii-7/8 5 5 - 5-i/U U-7/8 . 3-l/ti 3-X/li 3-l/li 3-l/U 3 "1/2 3-3/8 3-3/8 3-3/8 3-l/U - 3- V 8 3-l/li - 3-3/8 3-1/U - 3-3/8 3-3/8 a/Highest and lowest rates quoted each week by Frankfurt banks. Source: Deutsche Bundesbank. OFFICIAL USS ONLY- * OFFICIAL USE ONLY - h - Federal government moves to reduce capital inflow« The continuing inflow of foreign funds and the government's concern with "imported inflation" induced the German Federal authorities to take several steps to reduce or offset the capital inflow in the period under review. The government has: a, Reinstituted special mark/dollar swap arrangements. Beginning on March 10, commercial banks could buy dollars with special forward DM cover at a favorable rate from the Bundesbank for funds to be placed in U„S0 Treasury bills, Although the forward rate may be fixed daily, it has remained at 0=5 per cent per annum compared with the market's 0,88 per cent rate. The 11 special dollars" are available only in amounts over $1 million and for periods of time concurrent with the Treasury bills acquired, The Bundesbank sells amounts of Treasury bills in New York equal to the amounts the commercial banks buy, b« Prohibited interest payments on foreign-owned tine-deposits. Beginning on March 20, commercial banks were prohibited from making interest payments on new time deposits received from foreigners,^Savings accounts are exempted from the ruling, c, Increased to legal maximum the minimum reserves banks must keep against foreign deposits. Effective April 1, commercial bank reserves against foreign owned sight deposits will be increased from 13 to 30 per centj for time deposits from 9 to 20 per cent. These three measures are designed both to curb a short-term capital inflow (which in 1963 amounted net to only DM 138 million compared with the long-term inflow of DM 3*2 billion) and; perhaps more substantial in amount, to encourage a short-term capital export to offset reserve accruals, The higher reserve requirements for foreign deposits may encourage some short-term capital export, as well as make banks reluctant to receive new foreign deposits, since banks may include foreign assets in their reserves. But, according to the German press, the special mark/dollar swap arrangements thus far have generated relatively little outflow. In addition, the authorities announced the intention to ask Parliament to approve as quickly as possible new legislation: a, To extend to non-residents the 25 per cent tax on income from fixed-interest bearing securities; and b. To exempt new foreign security issues from the 2,5 per cent tax presently applied to all -foreign and industrial new issues. These proposed new measures are designed to hit directly the long-term capital surplus: the "withholding tax" provisions to discourage inflows and the "securities tax" exemption to encourage capital outflows, Since the proposal of the withholding tax has already produced a severe adjustment in the bond market.the actual enactment of the measure would presumably be effective as a curb on foreign purchases of German bonds, However ^ the measure may involve OFFICIAL USE ONLY OFFICIAL USE ONLY - 5 - renegotiation of some of Germany's double-taxation treaties with other countries. Also, approval of the "securities tax" exemption could be delayed by strong opposition from the Laender; the revenues from this tax accrue to the Laender governments• Trade surplus substantial. Continued strength in German exports, foretold in the very large expansion of export orders in late 1963, produced a surplus on merchandise trade account in February of DM 1,23 billion ($308 million) seasonally-adjusted. (See Table U.) With exports higher and imports down, the surplus was almost a half a billion D-marks larger than the January surplus. The growing backlog of export orders suggests a continuing large export surplus for the coming months • Table U. Germany: Merchandise Trade 1962-February 1961; (seasonally adjusted monthly averages, in billions of DM) El Exports, f»o.b. Industrial goods Imports Trade Balance 1962 Year U.38 u.15 2.95 •23 1963 Year U.81 u.38 - 3.26 .13 I li.UO h.15 3.07 ,25 3-3U M h-Qh U.li3 III h.99 It .66 3.UU -33 IV 5.01 U.27 3.17 -7U Nov, 5.08 U.33 3.22 .75 Dec, L.80 3.90 2.87 .90 Jan, 5.U0 U.61 a/ *79 Feb.V 5.51 lt.28 a/ 1,23 II 196k " : a/ Not available. ]5/ Preliminary., Sourcei Bundesbank, Monthly Report, Impressive rise in official reserves. The.Bundesbank registered a $193 million gain in its international reserves in February after a loss in January which was due to the unwinding of commercial bank year-end windowdressing, (See Table 5 » ) Official reserves rose only $lU million during the first half of March because of Bundesbank dollar sales to commercial banks under its special mark/dollar swap arrangements. Although newspaper accounts of the swap arrangement implied some advantage in it for the U.S. balance of payments, transactions under the arrangement amount merely to a transfer of short-term U,S* liabilities from official to private parties. OFFICIAL USE ONLY OFFICIAL USE ONLY Table 5» Ao Germany: Bundesbank gold and foreign exchange Gold Foreign exchange Total Changes in Reserve Position 1963-March 196k (in millions of U.S. dollars) Jan.— Dec. 196U 1963 Feb. IV I_ II III Dec. Jan. 1262 16U U91 W> 69 5 2U8 I ! 233 8 82 1 Bo Drawing rights on IMF 35 2 Co Commercial banks foreign exchange 73 223 Total A through C 763 22U Sources - 6 . — 35 62 309 8 25 258 3 .•268 -301 •M -212 March 1-23 5 189 m h 32 — i? n. a* 219 — i)0 n0a0 M n.a. 20 d IMF, International Financial Statistics; Bundesbank, Monthly Report. D-mark continues strong. The D-mark remained strong on the exchange markets from mid-February to mid-March, buoyed up by heavy foreign investment and trade demand and occasional revaluation rumors# The Bundesbank bought UoS. dollars in considerable amounts at times and kept the rate for most of the period within a close range of 25»162 to 25<>176 U„S„ cents to the mark. (See Table 6 and Chart 8„) The 1,0 per cent per annum premiun on 3-month D-mark at the end of February eased slightly in early March after the Bundesbank began making cover against U,S» dollars (used for U.S. Treasury bill purchases) available to the commercial banks at special rates» However, relatively few funds were attracted to these securities at the special rate, and a continuing demand for D-mark cover kept the 3-month premium against U.S. dollars at between 0*8 and 0,9 per cent per annum for most of March. In mid-March the Bundesbank paricipated with the Federal Reserve System and the Bank of England in a $1.0 billion currency credit to Italian authorities in support of the lira. OFFICIAL USE ONLY - OFFICIAL USE ONLY -7 - Table 6. Germany: Exchange Rate in U.S. Gents per DM and Three Montns Forwara Rates in per cent per annum . Cnoon buying rates) Par value Upper limit Lower limit 196U Sect Forward Oct. 31 Nov. 29 Dec. 27 25.1U6 25.161 25.156 -0.2 -0.2 0.0 Jan. 25.136 25.130 25.157 25.168 0.8 0.8 0.6 0.8 3 10 17 2k Source: 25.000 2^.188 2U.875 196li Jan. 31 Feb. 7 1U 21 28 Mar. 6 13 20 Spot Forwa 25.166 25.169 25.171 25.176 25.169 25.167 25.168 25.161 0.8 0.9 0.9 0.9 1.0 0.8 0.8 0.8 Federal Reserve Board. European and British Commonwealth Section. II. Nine Charts on Financial Markets Abroad Chart 1 - International Money Market Yields for U,S. Dollar Investors Chart 2 - Interest Arbitrage, United States/Canada Chart 3 - Interest Arbitrage, New York/London Chart h - Interest Arbitrage for German Commercial Banks Chart 5 - Short-term Interest Rates Chart 6 - Long-term Bond Yields Chart 7 - Industrial Stock Indices Chart 8 - Spot Exchange Rates - Major Currencies Against U.S. Dollar Chart 9 - 3-month Forward Exchange Rates OFFICIAL USE ONLY Table 7 ° Germany 8 Selected Money Market Yields and Exchange Rates (per cent per annum) 3-mo. Euro3-mo. inter- Spread dollar deposits bank loans in favor Frankfurt London London 1963-March April May June July Aug. Sept. Oct. Nov. Dec. 196U-Jan. 29 26 31 28 26 30 27 25 29 27 10 17 2U Feb. 3.69 3.72 3.8U 3»8U U=00 I4.0OO ii.09 U.12 U.12 L.25 U.00 U.00 U.00 31 7 Ucl2 21 h.06 Us 12 U.31 U.25 lU 28 March 6 13 20 U.00 a.00 u.,25 3.63 3.50 3.69 3.88 3.88 3.75 3.75 5.25 +0.06 +0.22 +0.25 -OoOU +0.12 +0.25 +0.3U -I0I3 U.9U —0.78 U.88 3.31 3.31 3.31' 3.31 3,31 3.31 3.31 3.38 -0o63 +0o69 +0.69 +0.69 +0»8l +0.69 +0.69 +0:75 +0JU n.ae k n.a, n,a. 3°moe U.S. $ into Marks Comm. . bank —/ Market +0.75 +0.75 +0.75 +0.75 +0.75 +0.75 +0.75 +0.75 +0.75 +0.75 +0.75 +0.75 +0.75 +0.75 +0.75 +0.75 +0J5 +0.75 +0.75 +0.75 +0.75 3-mo. Treas. bills +0.1 0.0 -0.3 =°0o3 +0.1 +0.2 -0.2 —0 .2 -0.2 0.0 +0o8 +0.6 +0.8 +0.8 +0.9 +0,9 +0.9 +1,0 +0,8 +0.8 +0.9 ./ a/ Special swap rate provided toy Bundesbank to domestic commercial banks for 2 to 6 month period. Table 8 , 1962-October November December 1963-January February March - April May June July • August September October November December 196)4-January "ebruary Digitized fora/FRASER Approved Germany: Selected Loans Deposit and Security Rates (end of month figures, per- cent per annum) Bond yields Comm. 6-12 mo. deposits ^-1/2% Public bank Railway authory loans Savings Time 1958-83 ities 7.50 7,50 3.50 7,50 7*50 3-50 7.SO 3.50 7o50 7o50 7,50 7.50 7.50 7,50 7,50 7,50 7,50 7,50 7,50 3.50 3.50 3.50 3.50 3.50 3,50 3.50 3.50 3.50 3.50 3.50 3=50 2.75 2.75 2.75 2.75 2=75 2.75 2,75 2.75 2,75 2,75 2,75 2.75 2.75 2,75 2,75 7.50 J l z L 1 1 . credits on current account. 6c0k 6.1U 6.08 5.99 5,99 5.99 5.97 6.00 6.03 6,10 09 09 07 oU 03 lit Share Yields Yield gap 6.2 2.1 6.1 2.7 2,U 6.2 2.8 6,0 2.2 6.0 6.0 6.0 6,1 6,1 6,1 6a 6,1 6,1 6.0 6,0 5o9 n r a. 2.U 3,56 3.19 2,U 2.9 3c26 3.20 2,9 3,09 3,08 3.17 3,26 3-16 3 = 01 2.8 3,0 3.0 2.9 *2,7 2,8 2 9 n,a, k h a n I INTERNATIONAL 3-MONTH EURO W«dn«tdoy figure: MONEY DOLLAR MARKET DEPOSIT YIELDS FOR U.S. VS. CERTIFICATE DOLLAR OF INVESTORS DEPOSIT P»r m l YIELDS U . S . CEETIFICATE OF DEPOSIT DIFFERENTIAL; U.S. N E W YORK FrlJ«y (I,,,., OFFER RATES ON EURO CERTIFICATE SELECTED TREASURY DOLLAR OF 3-MONTH BILLS- Fully \ A OVER DEPOSIT INVESTMENTS H e d g e d Z -'V COMMERCIAL PAPER-Fully U.K. HIKE PURCHASE ^ [CANADIAN FINANCE COMPANY U.S. FINANCE COMPANY, H e d g e d INTEREST A R B I T R A G E , Thursday figures 3-MONTH TREASURY UNITED STATES / CANADA BILL R A T E S RATE D I F F E R E N T I A L A N D FORWARD CANADIAN DOLLAR S P R E A D IN F A V O R O F C A N A D A + —i.... ~i RATE : i ... i— - i DIFFERENTIAL WITH i FORWARD i I n EXCHANGE : NET I N C E N T I V E IN F A V O R OF C A N A D A i~i COVER r + I I I I 1 I I I I I 1 I 11 I I I I I I I 1 1 I 11 1 II 1 I I 1 I I I I I I II M _J $ D < 1961 M „ J $ 1962 D M J $ 1963 D M J_ * 19*4 D INTEREST ARBITRAGE, NEW YORK/LONDON Friday f ig i 3-MONTH TREASURY BILL RATES AUTHORITY DEPOSITS RATE DEFERENTIAL AND 3-M'ONTH FORWARD STERLING ~ S P R E A D IN F A V O R OF - W x f RATE DIFFERENTIAL 1961 WITH FORWARD 1962 EXCHANGE * COVER 1963 19 64 INTEREST A R B I T R A G E FOR G E R M A N 3-MONTH TREASURY BILLS, EURO-DOLLAR DEPOSIT COMMERCIAL B A N K S INTERBANK LENDING RATES RATE A N D I I tURO^DqiUBApNDMj^ GERMAN TREASURY BILLS RATE D I F F E R E N T I A L AND FORWARD DEUTSCHE MARK F O R W A R D RATE D I S C O U N T ( —) I N T E R B A N K LOAN RATE T R E A S U R Y BILLS RATE DIFFERENTIAL NET INCENTIVE". WITH f ...*•• FORWARD EXCHANGE COVER , IN F A V O R OF F R A N K F U R T ( + ) INTERBANK LOAN R A T E / \ A 19 64 , 1 S H O R T - T E R M INTEREST RATES * h \ H i r V ' ' v ! L V I \ tueO-DQIUB I " j .koam a kJr^- , • »X » ~ h [zzzr " •• timAm -\yKJ 1 1 1 II 1 1 II 1II 11 1 II ! 1i i i n i i i i i i : i M i 11 M n ii i n n i i x u J MM* 1 l T V — — - j \c.« h j u •V ^ k y Y ^ k Y •*>rsf A A J - f v i v ' L l A > 1 1 1 i II II 1160 \ j a 1/ "X- 3- month Ireoiury bill rolei lor all counlriei j and Switzerland f3-monlh de poi il role). - i i i i i i i i i i i 11 It 62 Japon " SWIT2 ~ ^ 11 M ii 11 M i 1961 z w w x y u ^ u. i. , u.i 1163 i : i L : ,L.lLl,l. Ill HJri !•!%* i hi* on bonl loom ond diicount'O I LONG-TERM BOND YIELDS INDUSTRIAL STOCK INDICES , 9 5 8 =100 R 01 i o 11 o I« v VV/n/V-' ' New series Swiss Bank Corporation industrial st oc k i n de a * Japan- index of 2 2 5 industrial and other, stocks traded on the Tokyo exchange cho ." .1 SPOT EXCHANGE , RATES - MAJOR CURRENCIES AGAINST U.S. DOLLAR > . , c.m Above por FRENCH fRANC Below par i ~ i\~~!1 —t—— If\ / CANADIAN DOllAR 3 - M O N TH F O R W A R D EX C H A N G E R ATE. Frid oy fi g u f* * : AGAINST AGAINST AGAINST U.S. DOLLARS POUND POUND STERLING STERLING Percent - LONDON - LONDON PREMIUM + per onnom'
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