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ECB 1 year term repo

Posted by WARREN MOSLER on June 22nd, 2009

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This should bring down the term structure of rates at least out to one year, especially if the program is ongoing at this fixed rate.

And, operationally, it’s a similarly simple matter to set ‘risk free’ rates out the entire curve.

So, for example, bringing down rates out to a year could steepen the entire curve, but a follow up program to do the same for longer term rates could then flatten the curve.

And ‘turning the program on and off’ can add volatility as well.

Asikainen : Long Term Repo Operation (LTRO)

Next Thursday, the ECB will offer the market a funding tender which will let members of the system borrow at 1.0% for up to a year. Yes – term funding, secured by the ECB, at bargain-low rates for a year. You can pledge anything that is BBB or higher, and the ECB will fill unlimited supply at 1.00%. If they get EUR100 billion pledged? Filled. If they get EUR 2 trillion pledged? Filled.


23 Responses to “ECB 1 year term repo”

  1. Curious Says:

    If the ecb just bought anything BBB or better, the effect would be the same and the ecb would have the flexibility of reversing its action whenever needed. With 1 year repos they have to reverse their action in 1 year, so it seems more restrictive. Why are they doing it this way?


  2. Matt Franko Says:

    This Operation looks like it went for E442B ($620B).



  3. warren mosler Says:

    if they bought the stuff they have the credit risk on their books. by accepting it as collateral they are buffered by the capital of the bank on the other side of the transaction as well as by the haircut on the price


  4. warren mosler Says:

    also, they want to peg the one year bank cost of funds.

    buying the collateral would involve other securities.


  5. Matt Franko Says:

    Where are the monetary types decrying this transaction?
    The silence is deafening.
    The ECB has “expanded it’s balance sheet” by $620B (in one day!).
    Aren’t they “printing money”, “debasing”?


  6. warren mosler Says:

    they are ‘printing money’ under the outdated narrow definition of money.

    i think by now most of the half intelligent monetarists have recognized there is no transmission mechanism from the ‘monetary base’ to loans.

    and those still concerned are unsecure enough in their position to keep their mouths shut until ‘something’ actually happens.

    it’s pretty clear that in Japan and now in the US ‘quantitative easing’ did nothing apart from somewhat altering the term structure of rates


    Scott Fullwiler Reply:

    If that’s true, then there are a lot of monetarists that are far less than “half intelligent.”


    Mike S Reply:


    On a more serious note, so many economists are completely ignorant that there is even an alternative viewpoint to the commonly accepted monetary creation process. The result of this is that otherwise intelligent commentators

    have completely batty policy prescriptions because of a need to balance the budget.


    Jim Baird Reply:


    It would be comical if it wasn’t so sad. You’d thikn the libs over Yglesias would be more amenable to the modern money view, but they seem to just like finding excuses to raise taxes.

    I myself had a recent run-in with some goldbugs. I keep telling myself I’ll stay away, but sometimes I just can’t resist:

    Scott Fullwiler Reply:

    Valiant effort, Jim

    When the last guy suggested a reading list, the question “how many Austrians do you think will be on the list?” popped into my head, and of course the first listed was von Mises. At least they’re consistent, I guess (except that he’s not a historian, as far as I know, which was the point I thought you were discussing).

    Mike S Reply:


    I remember when I first heard the paradigm. I could not understand it despite the simple premise because the concept was so removed from my current understanding.

    Most liberals like govt programs but think the only way to pay for them would be to raise taxes. As a result, they would rather pay taxes than see govt programs go away. They are bound to a balanced budget because the glory years for U.S. liberals were during balanced budget years.

  7. knapp Says:

    My read of the monetarist meme is that the Fed has “printed” too much money as evidenced by excess reserves and this will lead inexorably to inflation (even hyperinflation). The delay of a rise in inflation expectations thus far is due to the market’s overconfidence in the Fed’s ability to pull off a clean “exit strategy” and drain the reserves in time. The fact that Christina Romer is having 1937-redux concerns about reversing policies too fast and the fact that she endorses a weak dollar, just emboldens the monetarists. They are quiet because they are confident (and wrong).


  8. zanon Says:

    KNAPP: Good point. It is remarkable how much disconfirming evidence someone paid not to understand can ignore. The monetarists believe that they are vindicated. Look at Scott Sumner and Paul Krugman.


  9. knapp Says:

    Scott Sumner links to an article: Don’t Believe Hyperinflation Hype—dare-to-make-cuts.html

    Here’s the money quote:

    “Tim Congdon – a hard-money Friedmanite from International Monetary Research – says the Fed is still not easing enough, perhaps because it is spooked by so much criticism or faces a mutiny by its own hawks. “If Ben Bernanke and his officials are listening to this sort of stuff and taking it seriously, they are making the same mistake as the Fed in the early 1930s,” he said. The US “output gap” is near 7pc. That is a powerful lid on inflation.”

    “Mr Congdon’s prescription is what Britain did in 1931 and 1992: monetary stimulus à l’outrance (today: bond purchases), offset by spending cuts. This mix – easy money/tight fiscal – would halt debt deflation without ruining the public finances of the US, Britain, and Europe in the way that Keynesian schemes ruined Japan. “The markets would rocket,” he said.”

    I didn’t know Tim Congdon was a “hard-money Friedmanite”; must not be the same guy who endorsed SCE.

    Also, on paying interest on reserves Sumner cites Bob McTeer:

    Bob McTeer argues that the decision to pay interest on reserves is a mistake on par with the Fed’s decision to double reserve requirements in 1936-37. I have made the same argument. He is the former president of the Dallas Fed. If only some of the current members of the FOMC understood this.


    Matt Franko Reply:

    I saw an interview with McCulley from PIMCO here. Req Windows Media Player)
    From laymans perspective seems like he’s basically in paradigm.
    But I would point out that he thinks paying interest on excess reserves is okay (sounds in conflict with McTeer re your post).
    If you watch it, I would appreciate some feedback on my interpretation of McCulleys position r.e. interest on reserves: I interpret that he (McCulley) thinks that it will now be easier for the Fed to raise policy (Discount/FF) rates (once the time comes for that) because the Fed can now just adjust the rate paid on reserves and that will become the new policy rate? vice open market operations to sell securities and thru the market mechanisms raise the rates like the Fed has done up to now?


    knapp Reply:

    I agree that McCulley seems to understand this particular technical point of paying interest on reserves but otherwise his “in paradigm” record is very mixed. In fact, I recall Warren deconstructing one of McCulleys commentaries once and it wasn’t pretty.

    Overall, he’s a self-described old-school Keynesian with a fixation on Minsky yet an inability to follow Minsky’s analysis to its logical conclusions.


    Scott Fullwiler Reply:

    Matt . . . FYI . . . you might be interested in my paper from 2005 at called “Paying Interest on Reserve Balances.” In short, McCulley’s right about that point, at least. Agree with Knapp on the rest.

    Matt Franko Reply:

    As you proposed in this paper wrt non-use of TTL accts., after the Fed announced they were going to pay the interest on reserves on Monday, Oct. 6,2008, five weeks later (to the day), Monday Nov. 10 2008 was the last time the Treasury did a withdrawl from the Fed Reserve account to the Tax and Loan Note account. The number has stayed at its current $223,225M ever since in this FY without one daily transaction.

  10. zanon Says:

    “Easy money/tight fiscal”. That says it all.


  11. warren mosler Says:

    I’ve spoken with Tim and he certainly seems to understand how it all works in casual conversation.

    It seems to me he understands the ‘money supply’ numbers indicate what’s going on rather than directly cause it.

    That said i haven’t read anything by him lately


  12. knapp Says:

    FWIW, Steve Kirchner (a New Classical endogenous money guy) reviews Tim’s monetary method here:

    “Congdon subscribes to the ‘active money’ paradigm, which is at odds with the mainstream academic view that money plays an essentially passive role in an economy because it is endogenous to the determination of official interest rates and money demand. The ‘active’ money view is, however, probably closer to popular conceptions of how monetary policy works. Popular commentary on monetary policy is often framed in terms of some vaguely defined notion of ‘liquidity,’ even though monetary aggregates play only an incidental role in the determination of official interest rates.”


  13. Matt Franko Says:

    Can anyone think of an “easy money” or “no brainer” trade for these Euro institutions to do with this new E442B for 371 days at 1%?
    Could a new “carry trade” develop?


    warren mosler Reply:

    there is none. one year rates of all types adjust to the lower ‘risk free’ rate pretty quickly, along with the risk the ecb may change course


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