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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

ECB allowing corporate accounts threatens Germany

Posted by WARREN MOSLER on September 21st, 2011

First, I don’t have confirmation this is happening the way it’s being reported.

But if it is, it opens the door for German rates to rise with credit concerns.

Without direct ECB accounts, holders of euro balances have only credit sensitive options as depositories for their funds.
These include euro banks, where deposit insurance is only via their national govt., corporate liabilities including debt and equities, and national govt. debt.

With nowhere else to go, and Germany perceived as the safest of the lot, and therefore German yields have plunged relative to other debt instruments as risk perceptions have escalated.

However, if private companies can bank directly at the ECB, Germany can quickly lose it’s TINA (there is no alternative) status, and instead be valued as an alternative to an actual ‘risk free’ depository- the ECB itself- putting Germany in the same boat with the other member nations.

Additionally, the time seems right for a new (private sector) euro member bank to emerge that’s a pure ‘depository bank’ with its assets limited to deposits at the ECB, charging its depositors a fee for this service, much like a money market fund. This, too, would have the same effect on Germany.

So while Germany is the strongest of the euro member nations, it is none the less not the issuer of the euro, and has debt ratios that are far higher than what markets would ordinarily fund for non issuers of a currency. However, as long as it continues as the ‘investment of last resort’ for holders of euro rates can remain far lower than otherwise.

Siemens Shelters Up to $8 Billion at ECB
Published: Tuesday, 20 Sep 2011 | 12:46 AM ET

 
Siemens withdrew more than half-a-billion euros in cash deposits from a large French bank two weeks ago and transferred it to the European Central Bank, in a sign of how companies are seeking havens amid Europe’s sovereign debt crisis.

 
The German industrial group withdrew the money partly because of concerns about the future financial health of the bank and partly to benefit from higher interest rates paid by the ECB, a person with direct knowledge of the matter told the Financial Times.

 
In total, Siemens has parked between 4 billion euros ($5.4 billion) and 6 billion euros at the ECB’s facilities, mostly through one-week deposits, this person said. Only a handful of large companies have the banking licences that allow them to deposit cash directly with the ECB.

 
Siemens’ move demonstrates the impact of the eurozone’s deepening sovereign debt crisis on confidence in European banks.

 
It was not clear from which bank Siemens withdrew its deposits. A person familiar with BNP Paribas said, however, that it was not the bank involved.

 
Siemens and the ECB declined to comment.

 
The company’s move came almost a year after Europe’s largest engineering conglomerate prepared itself for a future financial crisis by launching its own bank, an unusual move for an industrial group outside the car sector, where companies run big car financing and leasing businesses.

 
In an interview last December, Roland Châlons-Browne, chief executive of Siemens’ financial services unit, said its banking business would enable the group to tap the central bank for liquidity and deposit cash at the ECB.

 
“In the case of another financial crisis, we will be able to broaden our flexibility and take out risk with our own bank,” Mr Châlons-Browne said at the time.

 
Siemens does not only use the ECB as a haven; it also gets paid a slightly higher interest rate than it would get from a commercial bank.

 
The ECB paid an average interest rate last week of 1.01 percent for its regular offers of one-week deposits, under which it withdraws from the financial system an amount of liquidity equivalent to the amount it has spent on eurozone government bonds.

 
That compares with an average overnight interest rate paid by eurozone banks of 0.95 percent.

17 Responses to “ECB allowing corporate accounts threatens Germany”

  1. gaius marius Says:

    “Only a handful of large companies have the banking licences that allow them to deposit cash directly with the ECB.”

    this would seem to limit the effect, barring the development of a ‘depository bank’ as you posit above.

    Reply

  2. Kristjan Says:

    If the depository institution was in place then money would be parked at ECB. Of course the banks would need funding and ECB would fund them. This is not how the system is supposed to work.

    There is no regulations to stop this from happening, is there?

    Reply

    WARREN MOSLER Reply:

    don’t think so

    Reply

  3. ESM Says:

    “However, if private companies can bank directly at the ECB, Germany can quickly lose it’s TINA (there is no alternative) status, and instead be valued as an alternative to an actual ‘risk free’ depository- the ECB itself- putting Germany in the same boat with the other member nations.”

    I don’t agree with this analysis. The risk of a Euro breakup is much greater than the risk of a German default. Given that the ECB has no taxing authority to maintain the value of the Euro, most investors would probably rather have their Euros in German bonds or German banks where they are more likely to be converted at a preferential rate into a strong Deutsche Mark in the event of a breakup.

    Reply

    WARREN MOSLER Reply:

    ok, it’s a possibility. that’s what makes markets

    Reply

  4. MamMoTh Says:

    Goldman is using a financial balances model for forecasts. Is this well known in the MMT community?

    http://www.zerohedge.com/news/goldman-fires-another-warning-shot-across-bernankes-bow

    Reply

    Kristjan Reply:

    @MamMoTh,

    May be this is how MMT will fade in. They will say ‘we always knew this’
    They already know that government can print money, they already know that interest rates are determined by central bank.
    But they don’t know yet that long term deficits are sustainable.
    If they found out that government has run long term deficit then they can say ‘we knew It’

    Reply

    WARREN MOSLER Reply:

    yes, they had Wynne Godley there for a while.

    Reply

    Adam (ak) Reply:

    @WARREN MOSLER,

    This is very interesting. You have finally answered one of a few fundamental questions I asked about 2 years ago (BTW a well-known Australian “deflationist” economist gave me an incorrect answer).

    “Does anybody actually use correct dynamic macroeconomic modelling frameworks to make economic decisions?”

    There IS somebody who uses dynamic stock-flow macroeconomic modelling to predict the short-term future (as opposed to the neoclassical models based on long-term equilibria like “TRYM” here in Australia)

    So “they” at GS can run a rather crude but nevertheless useful macro model which results are likely to be close to what will happen with the real economy in the near future (I am talking about probability) and then use the results of that model for trading.

    At the same time “they” can still pay all the clowns from the official economics industry to obfuscate the real knowledge.

    I have established a “rule of thumb” regarding books and documents. If something has been uploaded on one of the Chinese file sharing sites – it is worth reading.

    http://www.kancj.com/view-269283.html

    The message has been read and thoroughly digested I am afraid.

    Reply

    MamMoTh Reply:

    @Adam (ak),

    also available here, but in english i am afraid

    http://es.scribd.com/doc/58781483/GS-US-Economics-Analysis

    Adam (ak) Reply:

    @Adam (ak),

    The Chinese version only has a header in Chinese and the rest is in English. I have found a site from which I could download it already.

    The point which I wanted to make was that Keynesian-Kaleckian economics is thoroughly cultivated in China and this partially explains their successful macroeconomic management of the country since the market reforms were introduced in the early 1980ies.

    WARREN MOSLER Reply:

    Me, Randy Wray, and Jan Kregel met with ‘up and coming’ Chinese govt economists about 15 years ago in NYC and went through the whole thing.

    they got it

    Matt Franko Reply:

    @Adam (ak), “they got it”:

    http://www.chineseorjapanese.com/asians-good-at-math/

    Resp,

  5. WARREN MOSLER Says:

    Just got this comment privately:

    “I believe siemens now has a banking license so this may be poor reporting”

    http://finance.siemens.com/financialservices/ger/Produkte_Loesungen/bankgeschaeft/Seiten/bankgeschaeft.aspx

    “I use chrome to translate”

    http://finance.siemens.com/financialservices/ger/Produkte_Loesungen/bankgeschaeft/siemens-bank/Seiten/siemens-bank.aspx

    Reply

    MamMoTh Reply:

    @WARREN MOSLER,

    it is reported that Siemens has launched its own bank.

    Reply

    Andrew Reply:

    @MamMoTh,

    http://finance.siemens.com/financialservices/global/en/products_solutions/banking-business/siemens-bank/Pages/siemens-bank.aspx

    Siemens Bank web site says that since end of 2010 they have had the appropriate permissions to operate a bank in Germany and they are planning on expanding into Europe.

    The german version of the text say that Siemens Bank is 100% owned by Siemens.

    Why would any large company hold deposits with a private bank at the moment without 100% certainty the bank will pay out?

    Siemens had 4.5B on deposit in the french banking system owed 500B by Italy.

    Reply

  6. Charles Yaker Says:

    Warren’s comments about China are scary. They suggest that Eammon Fingleton http://www.fingleton.net/. Who wrote ” in the Jaws of the Dragon” is correct and China probably Japan as well is scamming us. Teach your children well learning Mandarin might be a good investment.

    Reply

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