Brazil Cuts Rates to Record Low as Economy Stalls

Another central bank may have it backwards as lower rates turn out to be deflationary and slow things down via interest income channels?

Brazil Cuts Rates to Record Low as Economy Stalls

May 30 (Bloomberg) — Brazil’s central bank cut interest rates on Wednesday for the seventh straight time to a record low 8.50 percent, moving into uncharted territory in a bid to shield a fragile recovery from a gloomy global outlook.

President Dilma Rousseff has made lower interest rates one of the top priorities of her government which is struggling to steer the economy back to the 4 percent-plus growth rates that made Brazil one of the world’s most attractive emerging markets in the last decade.

The central bank’s monetary policy committee, known as Copom, voted unanimously to lower the benchmark Selic rate 50 basis points from 9 percent, in line with market expectations.

“At this moment, Copom believes that the risks to the inflation outlook remain limited,” the bank said in a statement that accompanied the decision. The statement used the exact same language as the previous statement when the bank cut the Selic rate in April.

With Wednesday’s cut, the central bank has now lopped 400 basis points off the Selic rate since August 2011, when it surprised markets by starting an easing cycle despite widespread concerns at the time about surging consumer prices.

Inflation has eased since then with some help from a sluggish global economy, bringing the annual rate to well below the 6.5 percent ceiling of the central bank’s target range.

That has allowed the central bank to test the boundaries on interest rates, ushering in what some economists predict might be a new era of lower borrowing costs for Brazil.

The size of Wednesday’s rate cut marked a slowdown in the pace of easing after two straight reductions of 75 basis points in March and April. The central bank signaled after its April policy meeting that future rate cuts might be more cautious.

The previous low for the Selic was set in 2009, when the central bank in the administration of former President Luiz Inacio Lula da Silva slashed the rate to 8.75 percent to fend off the global financial crisis.

Looking like a euro zone solution has evolved

Looks like the drama could be about over, with the ECB now deciding to support the entire banking system.

The ECB guarantees bank liquidity via lending to any member bank with qualifying collateral. The list of qualifying collateral is kept sufficiently inclusive and haircuts sufficiently low to ensure liquidity.

With national govt debt on the list of qualifying collateral, this allows the banking system to support national govt funding needs.

And it all comes at a time where euro zone deficit spending is sufficient to support flat to modest growth. And at a time when the politics are unlikely to push for additional material proactive austerity measures.

With modest growth and relative stability will come proclamations along the lines of ‘the austerity worked’, however, without the austerity it all would have ‘worked’ just as well, but from a starting point of a lower output gap.

Dallara Says Greek Euro Exit May Exceed 1 Trillion Euros

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>    Apparently, MMT is a hard concept for the IIF to grasp.
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Yes!
Incompetent disgrace.
No reason an exit has to cost them anything in real terms.

But because they believe otherwise they’ll work to keep Greece in.

Dallara Says Greek Euro Exit May Exceed 1 Trillion Euros

By Andrew Davis and Rebecca Christie

May 25 (Bloomberg) — The cost of Greece exiting the euro would be unmanageable and probably exceed the 1 trillion euros ($1.25 trillion) previously estimated by the Institute of International Finance, the group’s managing director said.

The Washington-based IIF’s projection from earlier this year is “a bit dated now” and “probably on the low side,”Charles Dallara said in an interview in Rome today. “Those who think that Europe, and more broadly the global economy, are really prepared for a Greek exit should think again.”

The European Central Bank’s exposure to Greek liabilities is more than twice as big as the ECB’s capital, said Dallara, who represented banks in their negotiations with the Greek government on its debt restructuring. As a result, he predicted the bank would be unable to provide liquidity and stabilize the euro-area financial sector.

“The ECB will be insolvent” if Greece were to exit the euro, Dallara said. “Europe would have to first and foremost recapitalize its central bank.”

FT: Big European funds dump euro assets

Thanks!

These are onetime events that tend to reverse after running their course.
Aka inventory liquidation

Big European funds dump euro assets

By David Oakley and Alice Ross

May 24 (FT) — Some of Europe’s biggest fund managers have confirmed they are dumping euro assets amid rising fears over a possible Greek exit from the eurozone and single currency turmoil.

The euro’s sudden fall this month caught many investors by surprise. Europe’s single currency has lost 5 per cent in the past three weeks after barely moving against the US dollar for much of the year. On Thursday, the euro hit a fresh 22-month low at $1.2514.

Amundi, Europe’s second-biggest private fund manager, and Threadneedle Investments, the big UK manager, have cut their exposure to the euro in recent days as frustration grows with political leaders’ efforts to resolve the crisis.

US-based Merk Investments, the currency specialists, has cut all of its euro holdings in its flagship fund this month.

“We sold our last euro on May 15,” said Axel Merk, chief investment officer. “We’re concerned about how dysfunctional the process is. No one is there to talk to in Greece.”

Amundi, which manages money for some of the continent’s biggest pension funds and companies, said the risk of the crisis spreading to the bigger economies of Spain and Italy was growing because policy makers had failed to convince investors it had built a sufficient firewall.

Other big fund managers fear the likelihood of a so-called “Grexit”, in the event of Athens leaving the euro, has risen sharply in the past week.

European leaders put off any decisions on shoring up the region’s banks at a late-night summit on Wednesday despite rising concerns that instability in Greece was undermining confidence in the eurozone’s financial sector. Citigroup says the euro could fall close to parity in the event of a disorderly exit.

Richard Batty, investment director at Standard Life Investments which has been underweight in European equities and bonds for the past two years, said: “This is a crisis that looks like worsening and that is why the euro has come under pressure.”

Neil Williams, chief economist at Hermes Fund Managers, which has reduced its exposure to European peripheral equities to close to zero, said: “There is a failure by the politicians to convince the markets they are tackling the problems in the eurozone.”

Trading desks at investment banks say that asset managers and pension funds in particular have been selling the euro in recent days.

Amundi, which was created through a merger of Crédit Agricole Asset Management and Société Générale Asset Management three years ago and has €659bn in assets under management, has switched some of its money out of euro-denominated bonds into dollar assets.

Eric Brard, global head of fixed income at Amundi, said: “Although we have reduced our exposure to the euro, a weaker euro could be good news for Europe and exporting companies in the region.”

He added: “Our baseline scenario is that the eurozone will not break up and Greece will remain in the monetary union. However, taking a pragmatic view, in recent weeks the market’s perception of risks of a eurozone break-up and Greece exiting have risen.”

Threadneedle, which has £73bn under management, has reduced its euro exposure through its absolute return fund in the belief the euro will fall further.

Frozen Europe Means ECB Must Resort to ELA

They have become resigned to the idea that the ECB must write the check for the banking system as do all currency issuers directly or indirectly as previously discussed.

And they now also know the ECB is writing the check for the whole shooting match directly or indirectly also as previously discussed.

With deficits as high as they are and bank and government liquidity sort of there, the euro economy can now muddle through with flattish growth and a large output gap. Ok for stocks and bonds and not so good for people.

Next the action moves to moral hazard risk in an attempt to keep fiscal policies tight without market discipline.

But that’s for another day as first the work on an acceptable framing of the full ECB support they’ve backed into.

Frozen Europe Means ECB Must Resort to ELA

By Dara Doyle and Jeff Black

May 25 (Bloomberg) — The first rule of ELA is you don’t talk about ELA.

The European Central Bank is trying to limit the flow of information about so-called Emergency Liquidity Assistance, which is increasingly being tapped by distressed euro-region financial institutions as the debt crisis worsens. Focus on the program intensified last week after it emerged that the ECB moved some Greek banks out of its regular refinancing operations and onto ELA until they are sufficiently capitalized.

European stocks fell and the euro weakened to a four-month low as investors sought clarity on how the Greek financial system would be kept alive. The episode highlights the ECB’s dilemma as it tries to save banks without taking too much risk onto its own balance sheet. While policy makers argue that secrecy is needed around ELA to prevent panic, the risk is that markets jump to the worst conclusion anyway.

“The lack of transparency is a double-edged sword,” said David Owen, chief European economist at Jefferies Securities International in London. “On the one hand, it increases uncertainty, but at the same time we do not necessarily want to know how bad things are as it can add fuel to the fire.”

Under ELA, the 17 national central banks in the euro area are able to provide emergency liquidity to banks that can’t put up collateral acceptable to the ECB. The risk is borne by the central bank in question, ensuring any losses stay within the country concerned and aren’t shared across all euro members, known as the euro system.

ECB Approval

Each ELA loan requires the assent of the ECB’s 23-member Governing Council and carries a penalty interest rate, though the terms are never made public. Owen estimates that euro-area central banks are currently on the hook for about 150 billion euros ($189 billion) of ELA loans.

The program has been deployed in countries including Germany, Belgium, Ireland and now Greece. An ECB spokesman declined to comment on matters relating to ELA for this article.

The ECB buries information about ELA in its weekly financial statement. While it announced on April 24 that it was harmonizing the disclosure of ELA on the euro system’s balance sheet under “other claims on euro-area credit institutions,” this item contains more than just ELA. It stood at 212.5 billion euros this week, up from 184.7 billion euros three weeks ago.

The ECB has declined to divulge how much of the amount is accounted for by ELA.

Ireland’s Case

Further clues can be found in individual central banks’ balance sheets. In Ireland, home to Europe’s worst banking crisis, the central bank’s claims on euro-area credit institutions, where it now accounts for ELA, stood at 41.3 billion euros on April 27.

Greek banks tapped their central bank for 54 billion euros in January, according to its most recently published figures. That has since risen to about 100 billion euros, the Financial Times reported on May 22, without citing anyone.

Ireland’s central bank said last year it received “formal comfort” from the country’s finance minister that it wouldn’t sustain losses on collateral received from banks in return for ELA.

“If the collateral underpinning the ELA falls short, the government steps in,” said Philip Lane, head of economics at Trinity College Dublin. “Essentially, ELA represents the ECB passing the risk back to the sovereign. That could be the trigger for potential default or, in Greece’s case, potential exit.”

Greek Exit

The prospect of Greece leaving the euro region increased after parties opposed to the terms of the nation’s second international bailout dominated May 6 elections. A new vote will be held on June 17 after politicians failed to form a coalition, and European leaders are now openly discussing the possibility of Greece exiting the euro.

A Greek departure could spark a further flight of deposits from banks in other troubled euro nations, according to UBS AG economists, leaving them more reliant on funding from monetary authorities. Banks in Greece, Ireland, Italy, Portugal and Spain saw a decline of 80.6 billion euros, or 3.2 percent, in household and corporate deposits from the end of 2010 through March this year, according to ECB data.

“ELA is a symptom of the strain in the system, and Greece is the tip of the iceberg here,” Owen said. “As concerns mount about break-up, that sparks deposit flight. Suddenly we’re talking about 350 billion, 400 billion as bigger countries avail of ELA.”

German ELA

ELA emerged as part of the euro system’s furniture in 2008, when the global financial crisis led to the bailouts of German property lender Hypo-Real Estate AG and Belgian banking group Dexia. While the Bundesbank’s ELA facility has now been closed, Dexia Chief Executive Officer Pierre Mariani told the bank’s shareholders on May 9 that it continues to access around 12 billion euros of ELA funds.

ELA was a measure that gave central banks more flexibility to keep their banks afloat in situations of short-term stress, said Juergen Michels, chief euro-area economist at Citigroup Global Markets in London.

“It seems to be now a more permanent feature in the periphery countries,” Michels said, adding there’s a risk that “the ECB loses control to some extent over what’s going on.”

The ECB was forced to confirm on May 17 it had moved some Greek banks onto ELA after the news leaked out, roiling financial markets. The ECB said in an e-mail that as soon as the banks are recapitalized, which it expected to happen “soon,” they will regain access to its refinancing operations. The ECB “continues to support Greek banks,” it added.

‘Life Support’

By approving ELA requests, the ECB is ensuring that banks that would otherwise not qualify for its loans have access to liquidity.

“The ELA is a perfect life-support system, but it’s not a system for what happens after that,” said Lorcan Roche Kelly, chief Europe strategist at Trend Macrolytics LLC in Clare, Ireland. “What you need is a bank resolution mechanism, a method to get rid of a bank that’s insolvent. In Ireland, and perhaps in Greece as well, the problem is that you’ve got banking systems that are insolvent.”

For Citigroup chief economist Willem Buiter, there is a bigger issue at stake. ELA breaks a key rule that is designed to bind the monetary union together, he said.

“It constitutes a breach of the principle of one monetary, credit and liquidity policy on uniform terms and conditions for the whole euro system. The existence of ELA undermines the monetary union.”

Still no political support to leave euro

*GREEK DATA RC POLL CONDUCTED MAY 21 TO MAY 23 ON 1,019 PEOPLE
*GREEK DATA RC POLL SHOWS 56% GREEKS SAY DRACHMA A CATASTROPHE
*GREEK DATA RC POLL SAYS 83% GREEKS WANT TO KEEP EURO
*GREEK DATA RC POLL SAYS 64% GREEKS WON’T ABANDON EURO
*GREEK DATA RC POLL SAYS 30% GREEKS THINK LIKELY TO LEAVE EURO
*GREEK DATA RC POLL GIVES DEMOCRATIC LEFT 3.3% SUPPORT
*GREEK DATA RC POLL SHOWS PASOK WITH 10.6% SUPPORT

macro update

The US economy seems to be muddling through at modestly positive GDP growth, supported by a still sort of high enough 8% or so govt fiscal deficit.

The year and fiscal cliff is a looming disaster but it’s too soon for markets to discount a high chance of it actually happening.

Lower oil prices are helping the US consumer and the $US.

The stronger $US works against US exports some and earnings translations a bit as well. Weaker global demand also works against US exports.

Deficit spending in the euro zone has also been rising some, and after the latest rounds of austerity and subsequent deficit increasing weakness may total something close to 7% of GDP.

That should be enough to muddle through as well. Austerity hikes unemployment and deficits to the point where the resulting deficit is sufficient to sustain things. Without another round of austerity there should be some sort of stability of output and employment.

That is, while it’s doubtful the ‘new europe’ will engage in meaningful fiscal expansion, it may not proactively raise taxes and/or cut spending in any meaningful way, either.

So as the member nations stumble their way through each successive securities auction, it won’t surprise me if their economies sort of stabilize around 0 growth or so. And then begin to pick up a tiny bit. All supported by the current, higher levels of deficit spending.

And the lower euro could help their exports some as well.

Yes, there will be all kinds of credit related vol, but under it all there will be sales and profits taking place. The businesses that are still around are the survivors who know how to get by in this kind of economy, where, while slower than it ought to be, there is still about $40 trillion worth of goods and services getting bought/sold in the US and Europe. GDP growth has gone to near 0, but not GDP itself.

Secret Greek Fund Revealed

Except it’s just about an ‘allowable entry’, not a ‘fund’.

The BOG, functionally a ‘branch’ of the ECB, just ‘accounts for’ negative member bank balances as loans.

Presumably on a ‘legally’ collateralized basis.

That’s what CB’s do in the normal course of business.

CB’s don’t ‘have funds’ in their currency of issue any more than the scorekeeper in a card game has any points.

Europe Shares Seen Higher; Secret Greek Fund Revealed

By Matthew West

May 22 (CNBC) — European shares were set to open higher on Tuesday as investors came to the conclusion that the markets were most likely over-sold and news emerged overnight of around 100 billion euros ($127 billion) of liquidity provided by the European Central Bank to the Greek central bank to prop up Greece’s financial system.