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.

Not much of a plan, but note that it now makes ECB centric proposals respectable.

This is serious progress:

Ex-ECB Chief Trichet Unveils Bold Plan to Save Euro

May 17 (Reuters) — Europe could strengthen its monetary union by giving European politicians the power to declare a sovereign state bankrupt and take over its fiscal policy, the former head of the European Central Bank said on Thursday in unveiling a bold proposal to salvage the euro.

The plan offered by Jean-Claude Trichet, who stepped down last November as ECB president, would address a fundamental weakness of the 13-year-old single currency, the survival of which is threatened by the Greek crisis.

The monetary union has always defied economic principles, because the euro was launched ahead of European fiscal or political union. This has caused strains for countries running huge budget deficits – namely Greece, Portugal, Ireland, Spain and Italy – that have led to financing difficulties and over-stretched banking systems.

For the European Union, a fully fledged United States of Europe where nation states cede a large chunk of fiscal authority to the federal government appears politically unpalatable, Trichet said.

An alternative is to activate the EU federal powers only in exceptional circumstances when a country’s budgetary policies threaten the broader monetary union, he said.

“Federation by exception seems to me not only necessary to make sure we have a solid Economic and Monetary Union, but it might also fit with the very nature of Europe in the long run. I don’t think we will have a big (centralized) EU budget,” Trichet said in a speech before the Peterson Institute of International Economics here.

“It is a quantum leap of governance, which I trust is necessary for the next step of European integration,” he said.

His proposal was presented in Washington on the eve of the G8 meeting of the world’s major economies, hosted by U.S. President Barack Obama who will press Europe to intensify its efforts to resolve the sovereign debt crisis, which threatens a fragile global recovery.

It also comes ahead of a critical meeting of EU leaders on May 23 to discuss ways to support growth. Its strict budgetary policies to date have led to recessions in many countries, political unrest and in Greece a political stalemate after recent elections.

Trichet said the building blocks already are in place for moving ahead with his fiscal plan.

Countries have agreed to surveillance of each other’s budgets and they have agreed to levy fines on countries that run excessive budget deficits, giving them fiscal oversight authority.

The next step would be to take a country into receivership when its political leaders or its parliament cannot implement sound budgetary policies approved by the EU. The action would have democratic accountability if it were approved by the European Council of EU heads of states and the elected European Parliament, he said.

The idea earned a warm reception from leading economists and prominent Europeans attending the session.

“It is a very radical proposal, couched as a modest step,” said Richard Cooper, international economist at Harvard.

Caio Koch Weser, former German economics minister, said he found it “very attractive” because it addresses the problem of a strong European Central Bank, a weak European Commission which acts as the EU’s executive branch, and a confused European Council, which provides political leadership.

US economy muddling through, growing modestly, particularly given the output gap, but growing nonetheless.

Lower crude prices should also help some.

I had guessed the Saudis would hold prices at the $120 Brent level, given their output of just over 10 million bpd showed strong demand
and their capacity to increase to their stated 12.5 million bpd capacity remains suspect. And so with the Seaway pipeline now open (last I heard)
to take crude from Cushing to Brent priced markets I’d guessed WTI would trade up to Brent.

But what has happened is the Saudi oil minister started making noises about lower prices and when ‘market prices’ started selling off the Saudis ‘followed’ by lowering their posted prices, sustaining the myth that they are ‘price takers’ when in reality they are price setters.

So to date, contrary to my prior guess, both wti and brent have sold off quite a bit, and cheaper imported crude is a plus for the US economy. Which is also a plus for the $US, as a lower import bill makes $US ‘harder to get’ for foreigners.

But the trade for quite a while has been strong dollar = weak US stocks due to export pricing/foreign earnings translations, and also because US stocks have weakened on signs of euro zone stress, which has been associated with a weaker euro. So when things seem to be looking up for the euro zone, the euro tends to go up vs the dollar, with US stocks doing better with any sign of ‘improvement’ in the euro zone.

It’s all a tangled case of cross currents, which makes forecasting anything particularly difficult.

Not to mention possible dislocations from the whale, which may or may not have run their course, etc.

And then there’s the news from Greece.

First, they made a full bond payment yesterday of nearly 500 million euro to bond holders who did not accept the PSI discounts. This is confounding for the obvious reasons, signals it sends, moral hazard, credibility, etc. etc. But it’s also a sign the politicians are doing what they think it takes to keep the euro going as the currency of the euro zone. Same goes for the decision to fund Greece as per prior agreements even when there is no Greek govt to talk to, and lots of signs any new govt may not honor the arrangements.

Even if that means tricking private investors out of 100 billion, rewarding those who defy them, whatever. Tactics may be continuously reaching new lows but all for the end of keeping the euro as the single currency.

It also means that while, for example, 10 year Spanish yields may go up or down, the intention is for Spain, one way or another, to fund itself, even if short term. Doesn’t matter.

And more EFSF type discussions. The plan may be to start using those types of funds as needed, keeping the ECB out of it for that much longer, regardless of where longer term bonds happen to trade.

As for the euro zone economy, yes, growth is probably negative, but if they hold off on further fiscal adjustments, the 6%+ deficit they currently are running for the region is probably, at this point, enough to muddle through around the 0 growth neighborhood. The upside isn’t much from there, as with limited private sector credit growth opportunities, and substantial net export growth unlikely, and strong ‘automatic stabilizers’ any growth could be limited by those automatic fiscal stabilizers. Not to mention that this type of optimistic scenario likely strengthens the euro and keeps a lid on net exports as well.

And sad that this ‘bullish scenario’ for the euro zone means their massive output gap doesn’t even begin to close any time soon.

For the US, this bullish scenario has similar limitations, but not quite as severe, so the output gap could start to narrow some and employment as a percentage of the population begin to improve. But only modestly.

The US fiscal cliff is for real, but still far enough away to not be a day to day factor. And it at least does show that fiscal policy does work, at least according to every known forecaster with any credibility, which might open the door to proactive fiscal? Note the increasing chatter about how deficits don’t seem to drive up interest rates? And the increasing chatter about how the US, Japan, UK, etc. aren’t like the euro zone members with regards to interest rates?

Same in the euro zone, where discussion is now common regarding how austerity doesn’t work to grow their economies, with the reason to maintain it now down to the need to restore solvency. This is beginning to mean that if they solved the solvency riddle some other way they might back off on the austerity. And now there is a political imperative to do just that, so things could move in that direction, meaning ECB support for member nation funding, directly or indirectly, which removes the ‘ponzi’ aspect.

Italy, Then and Now

One of Marshall’s regular TV appearances.
Darn, he’s getting good at this!

CTV National Affairs

Obviously neither the author nor CNBC understands the fundamental difference between the issuer of the euro and the users of euro.

In fact, the ECB as per the treaty has no capital requirement, nor does it have any particular use for capital.

However, a general belief has been expressed by various higher ups to the effect that negative ECB capital would somehow be inflationary, and therefore the current imperative for the ECB to have sufficient capital, whatever that means.

So the presumption is any losses the ECB realizes will be ‘matched’ by capital calls to the member nations. Hence the reluctance by the ECB to give Greece, for example, any discounts on the Greek bonds in the ECB’s porfolio.

European Central Bank Leveraged Like Lehman: Author

By Patrick Allen

May 10 (CNBC) — The European Central Bank is indebted to the hilt and is beginning to look like one of the banks it has done so much to save, according to author Satyajit Das.

Having subsidized the European banking industry with its 1 trillion euro ($1.29 trillion) long-term refinancing operation (LTRO), funds that were distributed at well below market prices, the central bank is leveraged to levels Bear Stearns and Lehman Brothers might have felt comfortable with in early 2007.

“If the European Financial Stability Fund was a collateralized debt obligation, the ECB increasingly resembles a highly leveraged bank. The ECB balance sheet is now around euro 3 trillion, an increase of about 30 percent just since Mario Draghi took office in November 2012,” said Das in notes sent to CNBC before an interview on “Squawk Box Europe” on Thursday.

Why the Eurozone is destined to fail

By Bill Mitchell

Spotted by Sean Keane

It was also interesting to note an easily overlooked article in Greek online newspaper Kathimerini saying that the European Commission is pressuring the European Investment Bank to withdraw a clause that it recently inserted into its new loan contracts that were signed with a number of Greek companies. The new clauses allow for the repayment of debt in Greek Drachma instead of Euro, should the Greeks decide to leave the EU at some point in the future. Clearly the EC is displeased at one of the foremost European lending institutions legally embedding the possibility of something happening which the Commissioners all insist is impossible. Commissioner Olli Rehn reportedly called the clauses “unfortunate and incomprehensible2”. A cynic might note that the EIB has taken an appropriately commercial and realistic approach to the loans, free of the politics that surround the EC.

Yes, larger deficits are needed to support aggregate demand at desired levels.

However, the problem is the national govts are currently like US states and as such are revenue constrained.

So relaxing the deficit limits without some kind of ECB funding guarantees can cause markets to abstain from funding the nat govts.

Said another way, without the ECB the euro members are currently deep into ‘ponzi’.

Brussels to relax 3pc fiscal targets as revolt spreads

By Ambrose Evans-Pritchard

The European Commission is preparing a major shift in economic strategy, fearing that excessive fiscal tightening will inflict unnecessary damage on a string of eurozone countries.

Euro-Area Construction Declines for Third Month Led by Germany
Bundesbank Says Euro Nations Must Set Aside Growth Concerns
Merkel Gives Spain No Respite, Says Debt Cuts Key to Yields
Germany wants IMF funding raised to $1 trillion
IMF Lowers Additional Funds Target To $400bn-Plus: Lagarde
Spain weighs financing options
Spain Reduces Flexibility of Labor Reform, Expansion Reports
Bank of Spain Questions Budget Forecasts, Calls for Prudence
Spain Is Back in Recession, Central Banker Warns
Spanish Banks to Set Aside $71 Billion for Real Estate Cleanup
IMF’s Lagarde Sees Scope for ECB Monetary Easing, FAZ Reports
IMF sees Italy missing budget deficit targets
Italy Probably Shrank 0.7% in First Quarter, Bank of Italy Says

If the Spanish banking system is now capital constrained with regard to buying more Spanish govt debt, liquidity adjustments by the ECB won’t matter.

In my opinion, global markets are not even close to discounting the systemic risk, as they are over discounting the capability of central bankers to deal with what might happen.

Looks like it was at least the Spanish banks that got the nod to buy their govt’s bonds when the LTRO was announced.

Problem is they can only buy them to the extent their capital allows, and as raising more capital isn’t happening, it was probably a one time buying binge.

That’s why subsequent LTRO’s won’t do much for banks whose capital is already fully extended.

And losses serve to weaken their capital positions.

Spanish Banks Face Bond Losses in LTRO Aftermath: David Powell

By David Powell

April 11 (Bloomberg) — The European Central Bank may have pushed the Spanish banking system closer to collapse through its three-year longer-term refinancing operations.

Banks in Spain have been saddled with losses of about 1.6 billion euros as a result of the liquidity operation conducted in December, according to Bloomberg Brief estimates. Spanish lenders purchased 45.7 billion euros of government bonds during the months of December, January and February, according to monthly data from the ECB, and the average of the current prices of two-, six- and 10-year government bonds of Spain is 3.5 percent below the average of the average of those prices from Dec. 22 to March 1. [Note: The prices for six-year bonds are used instead of those for five-year bonds because the price history for the current five-year generic government bond of Italy starts only in January.]

International assistance will probably be needed to break the cycle. Spanish sovereign yields surged last year as investors worried about the solvency of the state given unrecognized losses in the banking system linked to the real estate bubble. Interest rates later declined after Spanish lenders purchased government debt during those three months, probably with the proceeds of the first three-year longer-term refinancing operation. Those purchases are now creating additional losses for the banking system.

The losses stemming from those bonds were essentially transferred to the domestic banking system from private bondholders with the assistance of the central bank.

The damage may be mitigated by low levels of margin calls from the ECB. Deposits related to margin calls at the central bank totaled only 0.3 billion in the week ended April 4, according to the Eurosystem’s weekly financial statement.

That suggests commercial lenders posted assets as collateral that have maintained their values. Those probably consisted primarily of the “residential mortgages and loans to small and medium-sized enterprises (SMEs)”, which the central bank said were eligible for use in its Dec. 8 statement. Those illiquid assets may be unaffected by the mark-to-market process because there are no developed markets for them. The deposits related to margin calls probably would have risen if banks had posted government bonds as collateral.

The situation for financial institutions in Italy is less dire than for those in Spain. Italian government bond prices on average are 2.1 percent above the distressed levels at which they traded from Dec. 22 to March 1. That suggests Italian banks may be sitting on profits of about 425 million euros after they purchased 20.3 billion euros of government bonds during that period.

Losses for both banking systems would probably have been created if they purchased government bonds with the proceeds of the second three-year longerterm refinancing operation. The funds from the second auction are excluded from this analysis because it settled on March 1 and the latest data from the ECB on government bond purchases of euro-area banks runs through the end of February. The data for March will be released on April 30.

As Ronald Reagan quipped, “The nine most terrifying words in the English language are: ‘I’m from the government and I’m here to help.’”

It’s now not over until the ECB writes the check, the whole check, and nothing but the check.

Monti under fire as crisis deepens

(FT) — “We are not standing down,” said Susanna Camusso, leader of the leftwing CGIL. Workers are to down tools next Friday over pension reforms passed in December and will strike again when parliament debates Mario Monti’s controversial labour reform legislation. Rather than feeling mollified by concessions made by Mr Monti over changes to rules on the firing of workers for economic reasons, Ms Camusso made it clear the union felt emboldened by its mobilisation. “The text is very bad,” Emma Marcegaglia, head of Confindustria, told the Financial Times, saying it would be better to scrap the entire labour reform legislation if it were not amended in parliament. A senate committee will start examining the bill on Wednesday.

Shaken Spain seeks to restore confidence

(FT) — Luis de Guindos, the economy minister, has said in interviews with local and foreign media that Spain does not need a bailout of the kind provided to Greece, Ireland and Portugal by the European Union and the International Monetary Fund. Mr de Guindos told Germany’s Frankfurter Allgemeine Zeitung that the government’s next step would be a reform of the health and education systems “that is, a rationalisation of spending in the autonomous regions”. Spain needs to cut more than 3 percentage points of gross domestic product from its public sector deficit, reducing it from 8.5 per cent of GDP in 2011 to 5.3 per cent this year in line with EU targets. In 2013, the deficit is supposed to fall further to 3 per cent of GDP.

Spain Economy to Start Growing From 2013, de Guindos Tells Ser

(Bloomberg) — Spain’s economy will start growing next year, Economy Minister Luis de Guindos says in interview with Cadena Ser radio station today.

Labor situation to stabilize from final quarter of this year, de Guindos says.

Italy Fights Spain for Investors as ECB Boost Fades: Euro Credit

(Bloomberg) — Competition between Italy and Spain for international investors’ funds will heat up this quarter as domestic buying stoked by the European Central Bank fades.

Italian and Spanish bonds slumped last week after demand dropped at a Spanish bond sale and Prime Minister Mariano Rajoy said his country is in “extreme difficulty.” The decline reversed a first-quarter rally sparked by more than 1 trillion euros ($1.3 trillion) of ECB loans to the region’s banks via its longer-term refinancing operation. Spain’s 10-year yield spread to German bunds widened to the most in four months, while Italy’s reached a six-week high.

“Spain and Italy are coming back down to earth after an incredible first quarter,” said Luca Jellinek, head of European interest-rate strategy at Credit Agricole SA in London. “The LTRO bought some time, but not a massive amount of time. Now the second quarter will be harder than the first unless policy moves convince foreign investors to come back in.”

Italian 10-year bonds fell for a fourth week, with the yield advancing 40 basis points to 5.51 percent. The yield difference over bunds widened to 378 basis points, compared with an average of 381 basis points in the first quarter. Spain’s 10- year yield spread to Germany reached 410 basis points last week after averaging 333 basis points in the first three months.

The joke used to be: ‘what’s the difference between bonds and bond traders?
Bonds eventually mature.

Except in the euro zone, post the Greek PSI ‘bond tax’, markets are starting to trade like maybe the don’t.

Yes, the ECB can come in and buy again, and probably will with more deterioration, but now it’s known that merely increases the risk of holding the remaining outstanding bonds, as the ECB’s bonds become ‘senior’and don’t get taxed.

So with deficits looking higher due to economic weakness due to mandatory austerity, the sustainability maths pointing to the bond tax route, and the ECB buying further adding to risk of loss, something has to give.

And it all remains potentially catastrophic for the global financial infrastructure, with aggregate demand remaining on the weak side globally and fiscal consolidation pending in most places.

• Austerity everywhere keeps domestic demand in check and export channels muted
• Non govt credit expansion pretty much stone cold dead in the US and Europe
• Rising oil energy prices subduing global aggregate demand
• US federal deficit just about enough to muddle through with modest GDP growth
• Rest of world public deficits also insufficient to close output gaps, including China which has calmed down considerably
• Zero rate policies/QE/etc. in the US, Japan, and Europe doing their thing to keep aggregate demand down and inflation low as monetary authorities continue to get that causation backwards
• All good for stocks and shareholders, not good for most people trying to work for a living
• Europe still in slow motion train wreck mode, with psi bond tax risk keeping investors at bay and ECB waiting for things to get bad enough before intervening

So still looking to me like a case of

‘Because we fear becoming the next Greece, we continue to turn ourselves into the next Japan’

The only way out at this point is a private sector credit expansion, which, in the US, traditionally comes from housing, but doesn’t seem to be happening this time. Past cycles have seen it come from the sub prime expansion phase, the .com/y2k boom, the S&L expansion phase, and the emerging market lending boom.

But this time we’re being more careful of ‘bubbles’ (just like Japan has done for the last two decades). So I don’t see much hope there.

Still watching for the euro bond tax idea to surface, which I see as the immediate possibility of systemic risk, but no real sign yet.

LTRO’s and bank liquidity not withstanding, Spanish rates reversed and began moving higher immediately after they thumbed their noses at the markets and announced they had decided not to take additional austerity measures to meet their immediate deficit targets.

Not being the issuer of the euro, like all the euro member nations, they are fully exposed to a Greek like liquidity crisis, as they can not spend without prior funding, much like the US states.

Click here for larger version

From Morgan Stanley
Note the talk of a PSI (bond tax):

5. Portugal: Portugal’s five-year bonds are trading at ~16%, right around the level where Greek bonds traded last April when Eurozone officials began to turn their attention to forcing losses on private sector creditors. The key area of concern in the market is a €9.7B bond maturing in September 2013 that is not covered by the country’s €78B bailout. Portugal needs ~€25B-€30B to fund itself through 2015. Portuguese officials hope that a pickup in market confidence will allow it to return to the bond market in time to refinance the 2013 bond. The Portuguese funding concerns have been widely discussed in the press. While there has been speculation that the country could be next in line for a debt restructuring, this outcome has been disputed by both Portuguese and troika officials.

Spend in euro denominated tax credits.

Central banks pay ecb rates on said deposits charged to issuer.

Eurachma
Esceuro
Passeuro
Punteuro
Leuro

All perfectly legal under current institutional arrangements

‘Must’ is a good choice of words because if they fail the consequences are financially catastrophic.

*BINI SMAGHI: EU MUST RECOGNIZE PORTUGAL MAY NEED MORE AID

*BINI SMAGHI SAYS EU MUST ACT TO SHOW GREEK PSI AN EXCEPTION


*FORMER ECB OFFICIAL BINI SMAGHI COMMENTS IN FT OPINION ARTICLE

*BINI SMAGHI SAYS PORTUGAL MAY NEED EU100 BILLION *BINI SMAGHI SAYS IRELAND MAY NEED ADDITIONAL EU80 BILLION

>   
>   (email exchange)
>   
>   One prominent Irish minister said explicitly that we should use Greece as a bargaining chip >   to renegotiate the promissory note. The whole government and press went crazy saying that >   she was completely out of line etc.
>   

that’s how it starts?
;)