Merkel attacks central banks


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>   Karim writes:

>   Surprising comments show political difficulties of QE in Europe. With fiscal policy constrained
>   and the Euro strong, that means more pressure on ‘conventional’ monetary policy: ECB to
>   keep o/n rate low for long.

Yes, agreed. Shows no understanding of monetary operations whatsoever.

With the old German model they had tight fiscal to keep domestic demand and costs down to drive exports. And they also bought $US to keep the mark at ‘competitive’ levels.

With the euro they are also keeping fiscal relatively tight to keep a lid on domestic demand and costs to drive exports, but can’t buy $US for ideological reasons (that would look like the euro is backed by dollars, etc.) so instead of exports rising the currency appreciates to levels where exports remain stagnant.

Merkel attacks central banks

by Bertrand Benoit and Ralph Atkins

June 2(FT) —Angela Merkel, the German chancellor, criticised the world’s main central banks in surprisingly strong terms on Tuesday, suggesting that their unconventional monetary policies could fuel rather than defuse the economic crisis.

The attack on the US Federal Reserve, the Bank of England and the European Central Bank is remarkable coming from a leader who had so far scrupulously adhered to her country’s tradition on never commenting on monetary policy.

“What other central banks have been doing must stop now. I am very sceptical about the extent of the Fed’s actions and the way the Bank of England has carved its own little line in Europe,” she told a conference in Berlin.

“Even the European Central Bank has somewhat bowed to international pressure with its purchase of covered bonds,” she said. “We must return to independent and sensible monetary policies,
otherwise we will be back to where we are now in 10 years’ time.”

Ms Merkel’s decision to ignore one of the cardinal rules of German politics – an unwritten ban on commenting monetary policy out of respect from central bank independence – suggests Berlin is far more concerned about the route taken by the ECB than had hitherto transpired.

Berlin is concerned that the central banks will struggle to re-absorb the vast amount of liquidity they are pouring into the markets and about the long-term inflationary potential of hyper-lose monetary policies.

The ECB’s efforts have been focused on pumping unlimited liquidity into the eurozone banking system for increasingly long periods. But last month (May), it followed the US Federal Reserve and Bank of England in announcing an asset purchase programme to help a return to more normal market conditions.

The ECB announced it had agreed in principle to buy €60bn in “covered bonds”, which are issued by banks and backed by public sector loans or mortgages.

The covered bond purchases, however, were only agreed after extensive discussions within the 22-strong ECB governing council. According to one version of May’s meeting, the council had discussed a €125bn asset purchase programme that would also have included other private sector assets, but only the purchase of covered bonds was agreed.

Axel Weber, ECB council member and president of Germany’s Bundesbank, has been among those who expressed scepticism about direct intervention in financial markets. In a Financial Times interview in April he expressed “a clear preference for continuing to focus our attention on the bank financing channel”.

Mr Weber has also been among the most proactive council members in warning that the monetary stimulus injected into the economy will have to be reduced or even reverse quickly once the economic situation improves.

Details of the covered bond purchase scheme will be unveiled by the ECB after its meeting on Thursday. One likely solution is that the package will be split according to eurozone countries’ capital shares in the ECB, which would result in Germany accounting for about 25 per cent of the €60bn programme. Meanwhile, the ECB is widely expected to leave its main interest rate unchanged at 1 per cent, its lowest ever.


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Weber Says ECB Monetary Policy Increasingly Effective


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They wouldn’t dare give the rising budget deficits any credit.

Weber Says ECB Monetary Policy Increasingly Effective

by Christian Vits

May 18 (Bloomberg) — European Central Bank Governing
Council member Axel Weber said the bank’s monetary policy is
increasingly stabilizing the economy.

“Monetary policy is contributing significantly to the
stabilization of the economy and its effectiveness is
increasing,” Weber, who heads Germany’s Bundesbank, said in a
speech in Dusseldorf today. After a “massive” reduction of the
ECB’s benchmark interest rate, the present level of 1 percent
“is appropriate in the current environment,” he said.

In additional to cutting its key rate by 3.25 percentage
points since early October, the ECB has announced it will buy 60
billion euros ($81 billion) of covered bonds and extend the
maturities in its unlimited refinancing operations to 12 months.

Weber said providing banks with as much money as the need
is “of particular importance” and extending the maturities of
the loans “certainly will push the yield curve even lower.”
The plan to buy covered bonds is in line with the ECB’s strategy
of supporting the banking channel, he said.


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Eurozone Stress Tests


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The eurozone has decided to keep its banks running via government insured liabilities without regard to capital levels. The new ‘tests’ are most likely for show only.

All governments with non convertible currency and floating FX policy have this option, which allows banks to continue indefinitely with or without capital, however defined.

The only reason to shut a bank down due to capital concerns is to protect ‘taxpayer money.’

Moral hazard is less of an issue as all bank assets are regulated and supervised in any case.

Japan’s recovery was not dampened by its banking system which was there to make loans and service deposits with our without bank capital.

It was dampened by a lack of aggregate demand due to insufficient deficit spending- taxes too high or spending too low.

Every time the economy started recovering they slapped on a consumption tax, in the name of fiscal responsibility.

Taken at its word, the Obama administration seems intent on doing much the same.

EU To stress test banking system

by Jan Strupczewski

May 12 (Reuters) — The European Union will stress test its banking system to determine its resilience to the economic downturn and find out if it is adequately capitalised by September, EU sources said on Tuesday.

The stress tests will be conducted by national supervisors according to common guidelines and methodology issued by the Committee of European Banking Supervisors (CEBS), the sources
said.

“The decision was taken by the EU finance ministers. They decided to ask the Committee of European Banking Supervisors to organise a stress test,” one source familiar with the ministers’ deliberations said.

“But it is not a stress test of individual institutions like the Americans are doing. It is more a highly aggregated stress test, which should show the degree of resilience of the overall EU banking sector,” the source said.

“It would show if there are additional capital requirements or if banks are adequately capitalised for the present situation,” the source said.

A second source close to the EU finance ministers’ deliberations confirmed the stress test of the EU banking system was to be ready by September.


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EU President slams US policy


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Looks like the EU leaders don’t know much about how monetary systems work, either.

EU Presidency: Obama Plans ‘a Way to Hell’

by Raf Casert

Mar 25 (AP) — A top European Union politician on Wednesday slammed U.S. plans to spend its way out of recession as “a way to hell.”

Czech Prime Minister Mirek Topolanek, whose country currently holds the EU presidency, told the European Parliament that President Barack Obama’s massive stimulus package and banking bailout “will undermine the stability of the global financial market.”


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EU Finance Chiefs Rebuff US Calls to Boost Economic Stimulus


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Yes!

Europe Snubs US Calls for More Stimulus Before G-20

by Jennifer Ryan and Agnes Lovasz

Mar 10 (Bloomberg) — European finance ministers rejected calls from the U.S. to do more to battle the economic crisis, saying stimulus plans already in place need time to work.

“Recent American appeals insisting that the Europeans make an additional budgetary effort to combat the effects of the crisis were not to our liking,” Luxembourg Finance Minister Jean-Claude Juncker said yesterday after leading a meeting of euro-area finance chiefs in Brussels. “We want to see what the effect of the recovery package is going to be.”


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Re: The pressure increases on the eurozone


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These types of articles have gotten respectable and are getting more strident by the hour.

I do think a banking crisis where the national government can’t or won’t write the check freezes the entire payments system, as no one will want to keep any funds in a eurozone bank, nor will they have anywhere to go other than actual cash.

Gold had been benefiting by all this, but looks to me like a major bubble that breaks when the eurozone resolves itself one way or another.

>   
>   On Mon, Feb 16, 2009 at 5:27 PM, wrote:
>   
>   Even the euro enthusiasts are now starting to contemplate the break-up
>   of the European Monetary Union, which basically would finish the euro.
>   This problem is becoming evident to more people in the euro zone, but
>   not reflected yet in policy:
>   

Narrow-minded leadership hurts Europe

by Wolfgang Münchau

Feb 15 (Financial Times) — “It is justifiable if a factory of Renault is built in India so that Renault cars may be sold to the Indians. But it is not justifiable if a factory … is built in the Czech Republic and its cars are sold in France” – Nicolas Sarkozy, president of France.

This is a troubling statement indeed. But instead of launching a tirade against Mr Sarkozy, I would like to make an observation that is perhaps not immediately evident: his statement is entirely consistent with the way the European Union has reacted to the financial crisis.

To see the link between crisis management and the rise in protectionism, look at the initial policy response to last September’s financial shockwaves. European leaders have woefully underestimated the crisis and possibly still do. The European economy is now heading towards a depression, with German gross domestic product falling at an annualised rate of almost 9 per cent. The early misjudgment of the crisis resulted in stimulus packages with two defects. They were initially too small but, more importantly, they were not co-ordinated. One important aspect of the economic meltdown is the presence of strong cross-country spillovers, both globally and inside the EU. The policy response failed to take account of these spillovers.

For the bank bail-out programmes, the EU managed to set a minimum level of competition rules, but these programmes, too, were national and not co-ordinated. So how does the combined effect of these two unco-ordinated responses lead to protectionism?

If stimulus money is dispersed at national level, governments naturally try to make sure that the money stays inside their countries. The prospect that consumers might spend the money on imported goods was one of the reasons why eurozone governments were reluctant to cut taxes. Because of EU competition rules, the same logic also applies to government purchases. Under those rules, governments had to open public projects to EU-wide tenders. If you play by the rules, keeping the cash in your country is not easy.

Governments have since relaxed those rules. In other words, if you want to make sure that these programmes function in their warped way, you have to dismantle the single market. The same logic applies to the bank rescue packages. If the European Commission tried to block each uncompetitive bank rescue, it would be blamed for causing a financial collapse. Governments have found a way to circumvent the EU, by breaking so many rules at once, that the Commission cannot even begin to react effectively.

Expect to see three effects with progressively destructive force. The first is that the stimulus is much less effective than it could otherwise have been. When everybody tries to gain a competitive advantage over each other, the effects usually cancel out.

Second, the stimulus and bank rescue packages harm the single European market directly. The French subsidies are more blatant, as is the protectionist rhetoric of its president. But everybody in Europe plays the same game. It is not as though the single market is the default position for European commerce. Much of the service sector is exempted. Europe lacks an effective pan-European retail infrastructure and retail banking system. Reversing this programme long before it is completed would be a mistake.

Third, and most destructive, the combined decision on stimulus and financial rescue packages poses an existential threat to monetary union. A blanket loan guarantee to every bank, as most governments have granted, in combination with indiscriminate capital injections and a reluctance to restructure, will mean the transformation of private into sovereign default risk – aggravated further by the economic downturn. Some insolvent banks are now owned by the state, while the bulk of damaged, not-yet-insolvent banks are lingering on, hoarding cash. This programme is a drain of resources with no resolution in sight.

I would now expect several eurozone countries with weak banking sectors to get into serious difficulties as the crisis continues. There is a risk of cascading sovereign defaults. If this was limited to countries of the size of Ireland or Greece, one could solve this problem through a bail-out. But solvency risk is not a problem confined to small countries. The banking sectors in Italy, Spain and Germany are increasingly vulnerable.

When European leaders meet for their anti-protectionism summit on March 1, they will produce warm words to reaffirm their commitment to the single market. I suspect they will continue to misdiagnose the crisis. Protectionism is not the root of the problem. The protectionism we are experiencing now is caused by co-ordination failure. It is neither sudden, nor surprising.

The right course would be to solve the underlying problem – to shift at least some of the stimulus spending to EU or eurozone level and, ideally, drop those toxic national schemes altogether and to adopt a joint strategy for the financial sector, at least for the 45 cross-border European banks. But this is not going to happen. It did not happen in October, and it is not going to happen now. As a result of the extraordinary narrow-mindedness of Europe’s political leadership, expect serious damage to the single market in general and the single market for financial services in particular. As for the eurozone, I always argued in the past that a break-up is in effect impossible. I am no longer so sure.


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Eurozone going the wrong way


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This has been making the rounds and is not impossible:

But European banks may be in far worse shape. Bruno Waterfield of the London Daily Telegraph reports to have seen an eyes-only document prepared by the European Commission for the finance ministers of the various EU member countries. The problem revealed in the report is an estimated write-down by European banks in the range of 16 trillion pounds, or about $25 trillion dollars! The concern is that bailing out the various national banks for such an unbelievable amount would push the cost of government borrowing to much higher levels than we see today.

As my kids would say, “Really, Dad, you think so?” Europe is somewhat larger than the US, so think what my gold-bug friends would say if the US decided to borrow $25 trillion to bail out US banks. The dollar would be crucified! The euro is going to get a lot weaker if bank problems are even half of what the report says they are. The British pound sterling is already off almost 30% and, depending on what the real damage is to their banking system, it could get worse.

Waterfield reports, “National leaders and EU officials share fears that a second bank bail-out in Europe will raise government borrowing at a time when investors — particularly those who lend money to European governments — have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain to pay it back.

I’m not too worried about the UK. but the eurozone banks and national governments are at risk.

In fact, they may have failed last fall when the Fed stepped in with unlimited USD swap lines (could turn out to be fiscal transfers?) to the ECB to buy them some time.

Unfortunately it all gets a lot worse as the eurozone GDPs melt down.

“The Commission figure is significant because of the role EU officials will play in devising rules to evaluate ‘toxic’ bank assets later this month. New moves to bail out banks will be discussed at an emergency EU summit at the end of February. The EU is deeply worried at widening spreads on bonds sold by different European countries.”

Part of the problem is that European banks were far more highly leveraged than US banks. Some banks were reportedly leveraged 50:1. And they lent money to Eastern European projects and businesses which are now facing severe financial strain and plummeting local currencies.

Let that number rattle around in your head for a moment: $25 trillion. Even $5 trillion would be daunting. But the problem is that Europe does not have a central bank that can step in and selectively save banks from one country without taking on all euro zone member-country banks. Yet, as noted above, some countries may not have the wherewithal to save their own banks. It is reported that some Austrian banks are hoping that Germany will step in and help them. Given Germany’s problems, they may have a long wait.


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ECB’s Stark bravado


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No mention of the $300 billion they’ve borrowed from the Fed to stay afloat…

ECB’s Stark Says Euro Prevented Worse Crisis Fall-Out, RBB Says

Jan. 5 (Bloomberg) — The euro has shielded the nations using the single currency from greater fall-out from the financial crisis, European Central Bank Executive Board member Juergen Stark said in an interview with German radio station RBB.

“The euro has saved us in the euro area from worse economic consequences,” Stark said in the interview broadcast on Jan. 3 and posted on RBB’s Web site.

Before the introduction of the euro 10 years ago, turbulence similar to that experienced last year also led to “considerable tensions” between the European currencies and governments, Stark told the broadcaster. The euro prevented that, he said.

Stark said in the interview that the single currency has been a “large success” and that the ECB has handled its challenges well.


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Sector Analyis Update


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Euro Area Sector Analysis (Dec 17)

 
Karim writes:
Euro-middle of historical range. But with government deficits nearing Maastricht limits (though those limits will be bent, it will be grudging), not much chance for large enough fiscal stimulus to make a difference to private demand.

Yes, deficits seem too small to support higher levels of output and employment.

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US Sector Analysis (Dec 17)

 
Karim writes:
U.S.-still far below peak of early 90s. Nearing levels of earlier this decade, but much private demand growth in recent years fueled by credit (unlikely to be repeated, certainly not to same extent).

Yes, we are still paying the price for allowing the budget to go into surplus. The deficit needs to be substantially higher to restore output and employment, to ‘make up’ for the surplus years that drained the financial equity needed to support the credit structure.

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Japan Fiscal Balance as % of GDP (Dec 17)

 
Karim writes:
Japan-well off recent peaks, in some part due to some fiscal tightening in recent years. Fiscal policy starting to be loosened, but private savings still have ways to go to get back to levels that were associated with the moderate period of domestic demand growth from 2003-2006.

Yes, and with their higher propensity to not spend income they require a higher deficit to sustain output and employment.


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ECB’s Hurley Says Euro Economy to Contract Next Year


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Several months back, the eurozone national governments fell into ‘Ponzi’ as growth prospects went negative.

They now seem to be in that downward spiral of falling revenues, rising transfer payments, and rising credit default premiums.

Without a fiscal response to restore growth this will only get worse, and the National governements are, by treaty and by market dependence, in no position to enact a meaningful fiscal expansion.

Highlights

Trichet Says Decline in Oil Prices Is Helping Global Economy
ECB’s Trichet Says ‘Fragility’ of Financial System Is Challenge
Nowotny Says ECB Is Keeping Some ‘Fire Power’ on Interest Rates
ECB’s Hurley Says Euro Economy to Contract Next Year
Bini Says ECB’s Rate Decision Data Driven, Ansa Says
Italy’s EU20 Billion Bank Plan Wins Approval From EU
Germany Scales Down Second Stimulus Package, Sueddeutsche Says
Sarkozy Will Announce Measures to Help Auto Industry by Jan. 31
European Bonds Open Little Changed; Two-Year Yield 1.75 Percent


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