Category Archives: ECB

Re: View from Europe (cont.)

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>   
>   On Tue, Dec 23, 2008 at 2:43 PM, Russell
>   wrote:
>   
>   Warren:
>   
>   You have known I have been negative on this
>   market collapse for a long time.
>   

Yes!

I was more hopeful for the right political response after it went bad in July. :(

>   
>   And what happens on a day to day basis only
>   stirs the pot. The reason for trucks not being
>   able to lift anything at the ports is that trade
>   finance has disappeared and the reason why
>   the Baltic Dry Index declined 98% in 90 days.
>   The banks are technically bankrupt. I said that
>   about Citi way back when.
>   

Yes, they weren’t bankrupt back then, and they were open for business. Now that the government has let it go bad after an OK Q2, previously sort of OK/money good assets have further deteriorated and are no longer money good if this is left to its own ways.

A $1 Trillion of the right fiscal response turns it all around.

Idle Cranes From Long Beach To Singapore

Idle shipping cranes at Frozen Ports From Long Beach to Singapore portend a bleak 2009-2010.

Chris Lytle, chief operating officer of the port of Long Beach, California, took in a panorama of the slumping world economy from his rooftop observation deck one day this month. Shipping cranes stood still, truck traffic trickled and a cargo vessel sat idle, moored to a pier.

“You never see that,” Lytle said. “It’s quiet. Too quiet.”

Port traffic has slowed from North America to Europe and Asia as a recession erodes consumer demand and the credit crisis chokes off loans to export-dependent companies. International trade is set to fall by more than 2 percent next year, the most since the World Bank began measuring it in 1971. Idle ports around the globe are showing how quickly a collapse in trade can spread, undermining growth in each country it reaches.

“Everybody expects 2009 to be a bleak year,” said Jim McKenna, chief executive officer of the Pacific Maritime Association, a San Francisco-based group representing dock employers at U.S. West Coast ports. “Now, it looks like 2010 is going to be just as bleak.”

Coal is piling up at the Mozambique port of Maputo. Brazil’s exports of cars, household appliances, machinery and furniture fell in November from a year earlier. The port in Singapore, the world’s busiest for containers, posted its first month-over-month decline in seven years in November, at 1.5 percent.

“You take it for granted until it blows up,” said Bernard Hoekman, trade economist at the World Bank, in an interview. “Now it’s blowing up.”


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Re: ECB ending Fed swap lines!

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>   
>   On Fri, Dec 19, 2008 at 9:25 AM, Scott wrote:
>   
>   ECB says to discontinue US dollar swap OPS from end Jan.
>   
>   I guess they don’t want euro to strengthen!
>   

Exactly!

This is the new century version of ‘competitive devaluations.’

Paulson moved first by talking foreign CB’s out of buying USD reserves.

Bernanke thought he was helping with rate cuts.

China said ‘no mas’ a while back started ‘letting’ the yuan depreciate, probably via USD purchases.

Japan recently announced ‘no mas’ and that they were prepared to resume USD buying to abort yen appreciation.

If the ECB in fact cuts off its banks ‘cold turkey’ from the Fed’s $ the shock can be enormous.

Ramifications:

Upward pressure on USD LIBOR.

Downward pressure on the euro.

Upward pressure on eurozone credit default premiums.

Falling US equities.

Etc.

ECB to Discontinue Dollar Swap Tenders From the End of January

By Jana Randow

Dec. 19 (Bloomberg) — The European Central Bank said it will discontinue its euro-dollar foreign exchange swap tenders at the end of January due to “limited demand.”

Right! Only $300 billion outstanding.

The ECB will continue to loan banks in Europe as many dollars as they need for terms of 7, 28 and 84 days in exchange for eligible collateral, the Frankfurt-based central bank said in a statement today. Dollar swaps “could be started again in the future, if needed in view of prevailing market circumstances,” the ECB added.

Those circumstances being the strong euro?


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Re: Emergency Liquidity Assistance in the euro area

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Very interesting.

Seems the ECB can use this facility to ‘replace’ lost deposits of any bank, which would seem to remove the ‘bank run’ risk.

However, it is supposed to be only for very short term liquidity needs.

>   
>   On Wed, Dec 3, 2008 at 2:54 AM, Dave wrote:
>   
>   Not sure if any of the following is new info but was an interesting read
>   
>   DV
>   

Emergency Liquidity Assistance in the euro area

A Belgian newspaper (La Libre Belgique) is currently running a fascinating series of articles on the collapse of Fortis and Dexia.

In one article (lalibre.be/economie/actualite/article/464148/chapitre-7-la-trahison-des-hollandais.html) it mentions that Fortis benefited from an Emergency Liquidity Assistance from the NBB at the end of September for an amount of about €50bn. This confirms our own findings that showed such a loan on the balance sheet of the NBB (most of it was in $, see NBB loans to Fortis: About €50bn at the end of September 2008, 16 October 2008).

What is interesting is that it sheds a bit more light on a mechanism that is available on a euro area basis, and that up until now had been referenced only infrequently by the ECB. For example, the December 2006 edition of the Financial Stability Review (p.171) has the following description:

“One of the specific tools available to central banks in a crisis situation is the provision of emergency liquidity assistance (ELA) to individual banks. Generally, this tool consists of the support given by central banks in exceptional circumstances and on a case-by-case basis to temporarily illiquid institutions and markets. This support may be warranted to ease an institution’s liquidity strains, as well as to prevent any potential systemic effects, or specific implications such as disruption of the smooth functioning of payment and settlement systems. However, the importance of ELA should not be over-emphasised. Central bank support should not be seen as a primary means of ensuring financial stability, since it bears the risk of moral hazard. Furthermore, ELA rarely needs to be provided, and is thus less significant than other elements of the financial safety net, which have increased in importance in the management of crises.”

Apparently, these credit lines can be given by the various national banks, against collateral (including all the buildings of the retail banks network, in the case of Fortis!) and a ‘high’ rate of interest. But these credit lines need to be approved first by the ECB Governing Council and all 15 governors of the individual central banks. According to press reports, in a few days at the end of September, there were no less than 15 ECB teleconference calls to approve such ELAs to Belgian banks (Fortis and Dexia) but also German and Irish banks (probably Hypo Re since the bailout was at about the same time).

Looking at the balance sheets of the individual central banks it is quite difficult to have a complete picture of how much of these ELAs have been extended: while it was relatively clearly identified on the NBB balance sheet, it does not look like it was the case on the Bundesbank balance sheet, and to our knowledge the ECB as such has not given any figure on such credit lines. It is interesting, though, that such a mechanism existed. It is still available if needed in case of emergency, even if to a certain extent the existence of the guarantee schemes (introduced after this) may make its use slightly less necessary.

In addition it seems that Trichet was quite involved in the discussions, warning that Fortis did not have enough liquidity even after the capital injection that occurred over the weekend of 27-28 September (the ELA was probably extended from the Monday onwards, and it was after the next weekend that the Fortis share price really took a dive to below 1).


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ECB expected to cut rates 50 bps today

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ECB to Cut Rates as Slump Calls for `Radical Action’

by Christian Vits

Nov. 6 (Bloomberg) — The European Central Bank will cut interest rates for the second time in less than a month today as the region’s economy suffers its worst slump in 15 years, economists said.

“It’s time for radical action,” said Ken Wattret, an economist at BNP Paribas SA in London. “This is a very severe economic downturn, interest rates should come down a long way.”

Obviously they still haven’t figured out lower rates will make matters worse, as lower rates cut government interest payments (it’s a spending cut) which removes income paid to the private sectors.

The only aspect that might help is the hope that the lower rates drive the currency lower. This is one of those ‘be careful what you wish for’ conditions.

First, with falling aggregate demand around the world, export growth will be problematic even with the lower real wages that come from a lower currency.

Second, a falling currency raises import prices and reduces real terms of trade, particularly for a large energy importer like the eurozone.

Third, anything that weakens the economy and lowers standards of living is socially dangerous.

Fourth, the problems of USD debt including USD losses growing as a % of euro based capital and income that have been driving the euro down remain and the risk of an acceleration of this process increases as the eurozone economies weaken.


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Re: Banks cutting foreign currency loans in Eastern Europe

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Thanks!

>   
>   On Fri, Oct 31, 2008 at 7:25 AM, Bob wrote:
>   

`Panic’ Strikes East Europe Borrowers as Banks Cut Franc Loans

By Ben Holland, Laura Cochrane and Balazs Penz

Oct. 31 (Bloomberg)- Imre Apostagi says the hospital upgrade he’s overseeing has stalled because his employer in Budapest can’t get a foreign-currency loan.

The company borrows in foreign currencies to avoid domestic interest rates as much as double those linked to dollars, euros and Swiss francs. Now banks are curtailing the loans as investors pull money out of eastern Europe’s developing markets and local currencies plunge.

Foreign-denominated loans helped fuel eastern European economies including Poland, Romania and Ukraine, funding home purchases and entrepreneurship after the region emerged from communism. The elimination of such lending is magnifying the global credit crunch and threatening to stall the expansion of some of Europe’s fastest-growing economies.

Plunging Currencies

Since the end of August, the forint has fallen 16 percent against the Swiss franc, the currency of choice for Hungarian homebuyers, and more than 8 percent versus the euro. Foreign- currency loans make up 62 percent of all household debt in the country, up from 33 percent three years ago.

That’s even after a boost this week from an International Monetary Fund emergency loan program for emerging markets and the U.S. Federal Reserve’s decision to pump as much as $120 billion into Brazil, Mexico, South Korea and Singapore. The Fed said yesterday that it aims to “mitigate the spread of difficulties in obtaining U.S. dollar funding.”

Plunging domestic currencies mean higher monthly payments for businesses and households repaying foreign-denominated loans, forcing them to scale back spending.

No More Dreaming

The bulk of eastern Europe’s credit boom was denominated in foreign currencies because they provided for cheaper financing.

Before the current financial turmoil, Romanian banks typically charged 7 percent interest on a euro loan, compared with about 9.5 percent for those in leu. Romanians had about $36 billion of foreign-currency loans at the end of September, almost triple the figure two years earlier.

In Hungary, rates on Swiss franc loans were about half the forint rates. Consumers borrowed five times as much in foreign currencies as in forint in the three months through June.

‘Serious Problems’

Now banks including Munich-based Bayerische Landesbank and Austria’s Raiffeisen International Bank Holding AG are curbing foreign-currency loans in Hungary. In Poland, where 80 percent of mortgages are denominated in Swiss francs, Bank Millennium SA, Getin Bank SA and PKO Bank Polski SA have either boosted fees or stopped lending in the currency.

The east has been the fastest-growing part of Europe, with Romania’s economy expanding 9.3 percent in the year through June, Ukraine 6.5 percent and Poland 5.8 percent. The combined economy of the countries sharing the euro grew 1.4 percent in the period.

IMF Help

Ukraine, facing financial meltdown as the hryvnia drops and prices for exports such as steel tumble, on Oct. 26 agreed to a $16.5 billion loan from the IMF.

Hungary on Oct. 28 secured $26 billion in loans from the IMF, the EU and the World Bank. The government forecast a 1 percent economic contraction next year, the first since 1993.

These come with ‘conditions’ which means contractionary fiscal adjustments.

Panicked Customers


Romanian central bank Governor Mugur Isarescu sounded the alarm in June, saying the growth of foreign-currency loans was “excessively high and risky,” especially because Romanians with their communist past aren’t used to the discipline of debt.


`Cheaper, Riskier’

Turkish savings in foreign currencies exceeded loans by about 30 percent as of the end of 2007, according to a January Fitch report. In Poland foreign exchange loans were double deposits, and in Hungary they were triple.

“We’ve been observing a return to a good old banking rule to lend in a currency in which people earn,” said Jan Krzysztof Bielecki, chief executive officer of Poland’s biggest lender, Bank Pekao SA. It stopped non-zloty lending in 2003. “Earlier, banks competed on the Swiss franc market watching only sales levels and not looking at keeping an acceptable risk level.”


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More USD swap lines

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The problem is the Fed doesn’t see the risks involved in this program.

They are only seeing ‘success’ as USD interest rates fall for lesser credits around the world.

The question is why they would want USD rates to come down for lower quality borrowers?

This policy does not reduce international USD borrowings.

Instead, it supports and encourages increased USD borrowings with attractive USD rates and terms.

And in unlimited quantities for the ECB, BOE, BOJ, and SNB.

Yes, unlimited USD lending to anyone who can breathe in and out lowers rates.

And as it’s going to several entities that will probably never pay it back, it’s the largest monetary handout/transfer of wealth of all time.

It’s also a policy that, once implemented, historically has become more than problematic to shut down.

US Fed launches four new currency swap lines

By David Lawder

WASHINGTON, Oct 29 (Reuters) – The Federal Reserve on Wednesday extended U.S. dollar liquidity aid beyond traditional markets, opening four new $30 billion currency swap lines with Brazil, Mexico, South Korea and Singapore.

The temporary arrangements, authorized through April 30, 2009, are aimed at easing global U.S. dollar funding shortages, the Fed said.

“These facilities, like those already established with other central banks, are designed to help improve liquidity conditions in global financial markets and to mitigate the spread of difficulties in obtaining U.S. dollar funding in fundamentally sound and well-managed economies,” the Fed said in a statement released in Washington.

The decision comes a day after the Fed established a $15 billion swap line with the Reserve Bank of New Zealand. The U.S. central bank now has 13 swap lines with foreign central banks.


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ECB USD tender

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Haven’t been able find the latest total on USD swap lines advances by the Fed.

But at the last ECB tender they set the rate above ‘market rates’ and didn’t get a lot of takers for that reason.

I suspected that would leave the market short USDs and USD LIBOR would trade up until the next tender when the size would again pick up as shorts scramble to cover.

Seems to be happening.

ECB USD tender

Time Euro (Euro change) Sterling (Sterling change) Dollar (Dollar change)
Overnight 3.55625 (-0.01125) 4.56250 (-0.01875) 1.20625 (+0.08750)
1 Week 3.92750 (+0.03000) 4.97500 (-0.04375) 2.19750 (+0.02875)
2 week 4.04250 (-0.00750) 5.42500 (-0.03750) 2.55375 (+0.03500)
1 month 4.58750 (-0.00875) 5.81125 (-0.03375) 3.25875 (-0.01625)
2 month 4.73125 (-0.01250) 5.93750 (-0.03500) 3.38625 (+0.00250)
3 month 4.91500 (-0.01000) 6.00500 (-0.03375) 3.53500 (-0.00625)
6 month 4.99313 (-0.01312) 6.12500 (-0.02250) 3.53000 (+0.04750)
1 year 5.05500 (-0.02625) 6.21875 (-0.03500) 3.50250 (+0.07875)
3 month LIBOR/OIS Spread (bps) 171.60000 (+8.500) 219.40000 (+0.100) 251.85000 (-0.275)


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EU/China

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ECB on inflation- while interest rate cuts are likely (and in my honest opinion, won’t help anything), what they consider low unemployment and wage gains still a factor and making headlines and have been causing some footdragging.

Trichet May Need to Prove ECB’s Inflation Credentials (Update1)

By Ben Sills

“Whether that means inflation is suddenly going to fall enough is highly doubtful,” said Broux. “Unemployment is the lowest in a generation.”

While oil prices have halved in the past three months and inflation slowed to 3.6 percent in September, workers are demanding compensation for higher costs.

Germany’s IG Metall labor union is seeking an 8 percent pay increase, the largest in 16 years, and workers at Ireland’s Electricity Supply Board last month demanded 11.3 percent.

Germany preparing some kind of fiscal package, but still no details. The government and bond issuance is already set to gap up, and this will add to the systemic risk:

Germany is preparing a package of economic measures to support consumption and help selected industries as growth in Europe’s largest economy rapidly loses steam, government officials said on Wednesday.

The fiscal package is considered more than just an economic response to the financial crisis; it is also a political move aimed at making Berlin’s €500bn ($644bn, £395bn) rescue package for its banks more palatable to voters, a year ahead of a general election at risk of becoming overshadowed by the abrupt slowdown.

The government reduced its 2009 gross domestic product growth forecast last week from 1.2 to 0.2 per cent and several economists fear the economy could even shrink next year.

Meaning higher deficits.

Although details of what will be included are yet to be announced, the move confirms that Berlin is no longer aiming to balance the federal budget by 2011, once a central goal of Angela Merkel, the chancellor.

Government officials said on Wednesday Ms Merkel had appointed Jörg Asmussen, deputy finance minister, and Walther Otremba, deputy economics minister, to prepare a list of measures to support consumers and business that could be adopted as early as next week.

The growth-supporting efforts are thought to be tax incentives to encourage consumption of German products, such as new cleaner cars or energy-efficient heating systems for homes.

“We need measures that have leverage,” said Joachim Poss, a Social Democratic MP and public finance expert, adding that these should be limited in the time they were available.

One option would be to increase the budget of a 2006 programme of tax incentives to encourage consumers to insulate their homes.

The economics ministry is also keen for KfW Group, the public sector development bank, to provide 100 per cent loans to small and mid-sized companies, as they struggle to secure credit in the financial turbulence.

More controversial is the issue of tax cuts, largely because of Ms Merkel’s concerns, shared by Peer Steinbrück, the finance minister, that these could fail to increase consumption at a time the downturn is beginning toaffect tax revenues.

However, an economics ministry official said Mr Asmussen and Mr Otremba had not abandoned the notion of income tax cuts.

Alternatively, the government could decide to bring forward by one year a decision to allow taxpayers to deduct the cost of their health insurance from their tax bills, the official said.

The decision, forced upon the government by a court ruling, was due to apply from 2010 and would cost the federal and regional governments €9bn a year in total.

In contrast, China, with its own fiscal authority and non-convertible currency, has no solvency issue and can get the job done if they aren’t shy about it:

China says domestic demand boost can help economy

BEIJING, Oct 23 (Reuters) – China can overcome the tightening in economic conditions by boosting domestic demand, Chinese Premier Wen Jiabao said on Thursday.

“We can overcome the current difficulties through stimulating domestic demand,” said Wen after meeting German Chancellor Angela Merkel.

Merkel added: “We want to use the chances (we have) through an intense cooperation.”


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In over their heads

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The Fed and Treasury decided ‘the problem’ was the LIBOR/Fed funds spread and threw everything they had at it.

What finally did the trick was the Fed’s unlimited swap lines with the MOF, BOJ, ECB, and SNB.

Unfortunately that turned a technical problem into a fundamental problem, as I’ve previously described.

Back tracking to why they wanted LIBOR rates lower- they wanted to assist the mortgage market and consumer debt in general.

There were other ways to do this, such as my plan for uncollateralized lending to their own member banks where government already regulates and supervises all bank assets and insures bank deposits.

That would have eliminated the interbank market for Fed member banks.

Euro banks would have still been paying up for USD borrowings and been distorting LIBOR.

The next step would be to get the BBA to adjust the USD LIBOR basket to not include banks who had to pay substantially higher for funds than the US member banks.

(This is supposed to happen automatically but the BBA is dragging its feet as it did with Japan years ago.)

And this would have immediately gotten LIBOR and Fed funds back in sync.

Also, they could have expanded treasury funding for the agencies to make mortgages to member banks in general for the same purpose and lowered mortgage rates that way.

Point- lots of other/better/more sensible ways that don’t increase systemic risk than the policy of unlimited (and functionally unsecured) USD lending lines for foreign commercial banks.

The ‘cure’ seems a lot worse than the new problems it creates.

Note the euro falling fast…


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