Tag Archives: ECB

Fed to lend to CBs in unlimited quantities unsecured (Update2)

Posted on by


[Skip to the end]

Functionally, the Fed seems to have agreed to lend USD to the ECB in unlimited quantities unsecured and non-recourse.

This defies comprehension.

It’s potentially functionally a fiscal transfer.

Interesting they have the authority to do that.

They wouldn’t even do it for the US banks where the Fed demands collateral for loans.

It opens the door to widespread fraud and corruption as the ECB can now lend USD without supervision or regulation and in any quantity.

Somehow this got under Congress’ radar screen.

Watch for the size of the first USD auction.

The ECB and other CBs are going to set a rate and fill all requests at that rate.

Could be over $1 trillion?

Should bring USD LIBOR down to near the Fed Funds rate.

Helps the euro vs the USD at first.

However, the primary way they pay the Fed back is for someone down the line to sell euros and buy USD.

USD debt is external debt for foreign CB’s, so they are in much the same position the emerging market nations used to be in when they were choked with USD debt.

Still trying to comprehend all the ramifications, but they are very large.

This also means no government should default in the eurozone due to bank funding issues.

As long as the Fed lends unsecured and in unlimited quantities to the ECB and they do the same with their banks, the banks will be able to continue operating regardless of how technically insolvent they may be. It’s only when the funding is cut off or regulators step in that the problems surface.

It’s like the Fed is at risk of backing an international ponzi scheme again, watch for the size of the auctions.

They could snowball into the trillions, and be very difficult to shut down.

Which would also mean accelerating inflation.

Fed Releases Flood of Dollars, Market Rates Fall (Update2)

by John Fraher and Simon Kennedy

Oct. 13 (Bloomberg) The Federal Reserve led an unprecedented push by central banks to flood the financial system with dollars, backing up government efforts to restore confidence and helping to drive down money-market rates.

The ECB, the Bank of England and the Swiss central bank will auction unlimited dollar funds with maturities of seven days, 28 days and 84 days at a fixed interest rate, the Washington-based Fed said today. All of the previous dollar swap arrangements between the Fed and other central banks were capped.


[top]

Share

End game for the euro

Posted on by


[Skip to the end]

Europe is even worse off than I thought.

And it looks to me like the Fed’s loan (via swap lines) to the ECB is noncollectable:

  1. Seems Eurozone got caught short USD much like AIG got caught short credit. Now the squeeze is on as the euro falls vs the USD rises. It’s an old fashioned external currency debt problem.
  1. The ECB has borrowed perhaps over $400 billion from the Fed via swap lines, secured by euros, to lend to its banks. Functionally, this is unsecured borrowing. And the amount approved by the Fed grows with each FOMC meeting. To pay it back the ECB has to sell euro and buy $400b, which might be problematic, at best.
  1. National budget deficits are now rising rapidly due to falling revenues and rising transfer payments. They will soon have their hands full funding themselves and will be incapable of funding the needs of the banking system.
  1. Should a run on the banks force the euro payments system to close; the question is how it re-opens.
  1. Reopening the ECB in euros will mean the national governments will have to repay the Fed $400 billion.
  1. If the national governments abandon the ECB and euro, the ECB’s debt to the Fed debt is noncollectable. The Fed’s debt is only with the ECB and not the national governments.
  1. This gives the national governments a powerful incentive, and perhaps no other choice, but to abandon the euro should the payment system fail.
  1. It will also likely mean the national governments will technically default on their euro debt, as they convert the debt to a new currency (or currencies).

 
Their only hope is a large enough US fiscal package that restores demand for world output.

Like my proposed payroll tax holiday that immediately adds maybe 5% to US GDP.

But the odds of that are not promising.

And the US economy continues to weaken rapidly.

(I own some German credit default insurance and wish I had bought a lot more.)


[top]

Share

ECB

Posted on by


[Skip to the end]

(email exchange)

Yes, but the inflation risks of the weak Euro may scare them.

>   
>   On Tue, Oct 7, 2008 at 7:11 AM, Karim wrote:
>   
>   Bini Smaghi is quite influential. Here he has a clear easing bias
>   and is saying they may cut intermeeting.
>   
>   Yesterday, the Austrian CB Governor said the ECB needed to do
>   ’everything necessary’ to promote growth, similar to the
>   Bernanke comment earlier this week on using ‘all the tools we
>   have’. Even Fisher was dovish yesterday.
>   

ECB’s Bini Smaghi Says Price Pressures Waning, Reuters Reports

Oct. 7 (Bloomberg) — European Central Bank Executive Board member Lorenzo Bini Smaghi said inflation pressures have become “less important” and the bank will make monetary-policy decisions when needed, Reuters reported, citing Italian radio.

“The economic situation has got worse, the inflationary pressures are always there but they are less important than in the past and we will take decisions at the appropriate time,” Bini Smaghi was quoted as saying.

While European countries have responded with different strategies to the financial crisis, the important thing is to restore confidence and Europe is “ready to do anything” to maintain stability, Bini Smaghi said, according to Reuters.


[top]

Share

The Daily Telegraph: Bank borrowing from ECB

Posted on by


[Skip to the end]

[written on Sunday]

While not a problem in the US for the Fed to do this and more (in fact it should be standard operating procedure), the eurozone has self imposed treaty issues that make it very problematic.

If there are defaults its the national governments that will probably be called on to repay the ECB for any losses, but given the national governments didn’t approve the transactions the result will be chaotic at best.

Without bank defaults it will probably all muddle through indefinitely.

As before, the systemic risk is in the eurozone.

Valve repair tomorrow, going to try to smuggle in a knife under my gown to even the odds…

Bank borrowing from ECB is out of control

by Ambrose Evans-Pritchard

The European Central Bank has issued the clearest warning to date that it cannot serve as a perpetual crutch for lenders caught off-guard by the severity of the credit crunch.

Not Wellink, the Dutch central bank chief and a major figure on the ECB council, said that banks were becoming addicted to the liquidity window in Frankfurt and were putting the authorities in an invidious position.

“There is a limit how long you can do this. There is a point where you take over the market,” he told Het Finacieele Dagblad, the Dutch financial daily.

“If we see banks becoming very dependent on central banks, then we must push them to tap other sources of funding,” he said.

While he did not name the chief culprits, there are growing concerns about the scale of ECB borrowing by small Spanish lenders and ‘cajas’ with heavy exposed to the country’s property crash. Dutch banks have also been hungry clients at the ECB window.

One ECB source told The Daily Telegraph that over-reliance on the ECB funds has become an increasingly bitter issue at the bank because the policy amounts to a covert bail-out of lenders in southern Europe.

“Nobody dares pinpoint the country involved because as soon as we do it will cause a market reaction and lead to a meltdown for the banks,” said the source.

This “soft bail-out” is largely underwritten by German and North European taxpayers, though it is occurring in a surreptitious way. It has become a neuralgic issue for the increasingly tense politics of EMU.

The latest data from the Bank of Spain shows that the country’s banks have increased their ECB borrowing to a record €49.6bn (£39bn). A number have been issuing mortgage securities for the sole purpose of drawing funds from Frankfurt.

These banks are heavily reliant on short-term and medium funding from the capital markets. This spigot of credit is now almost entirely closed, making it very hard to roll over loans as they expire.

The ECB has accepted a very wide range of mortgage collateral from the start of the credit crunch. This is a key reason why the eurozone has so far avoided a major crisis along the lines of Bear Stearns or Northern Rock.

While this policy buys time, it leaves the ECB holding large amounts of questionable debt and may be storing up problems for later.

The practice is also skirts legality and risks setting off a political storm. The Maastricht treaty prohibits long-term taxpayer support of this kind for the EMU banking system.

Few officials thought this problem would arise. It was widely presumed that the capital markets would recover quickly, allowing distressed lenders to return to normal sources of funding. Instead, the credit crunch has worsened in Europe.

Not to miss out, Nationwide recently announced that it was setting up operations in Ireland, partly in order to be able to take advantage of ECB liquidity if necessary. Any bank can tap ECB funds if they have a registered branch in the eurozone, although collateral must be denominated in euros.

Jean-Pierre Roth, head of the Swiss National Bank, complained this week that lenders were getting into the habit of shopping for funds from those authorities that offer the best terms. The practice is playing havoc monetary policy.

“What we should avoid is some kind of arbitrage by banks, which say they are going to go to central bank X, instead of central bank Y, because conditions are more attractive,” he said.


[top]

Share

Bloomberg: Fed can’t reduce LIBOR

Posted on by

I could fix this in twenty minutes…

Money Market `Plagued’ by Libor That Fed Can’t Reduce

by Gavin Finch

(Bloomberg) A year after central banks started to pump trillions of dollars into the financial system to end a seizure in credit markets caused by subprime mortgages, cash is about as tight as it’s ever been.

The U.S. market for commercial paper, or short-term IOUs, backed by assets such as mortgages has shrunk 40 percent from its peak in July 2007. The amount borrowed in pounds between banks in the U.K. fell by 70 percent in June from a record in February 2007. The European Central Bank received $100 billion of bids for the $25 billion it offered to financial institutions on July 29, the most since the sales began in December.

Efforts by the Federal Reserve, ECB and Swiss National Bank to shore up the world’s biggest banks and promote lending have had limited success.

Share

AMEX/CAT

Posted on by


[Skip to the end]

Karim writes:

AMEX notes consumer spending slowed in latter part of quarter, suggesting effect of fiscal impulse waning. CAT driven by emerging market strength, states U.S. and Europe are two weakest regions, and expects rate cuts by Fed and ECB by year-end.

AMEX

  • Consumer spending slowed during the latter part of the quarter and credit indicators deteriorated beyond our expectations,” Mr Chenault said. The economic fallout was evident even among American Express’s prime customers.

CAT

  • CATERPILLAR SEES ECB CUTTING RATES AT LEAST 25BP BEFORE YR END
  • CATERPILLAR SEES NO SIGN OF RECOVERY IN NORTH AMERICAN HOUSING
  • CATERPILLAR ASSUMES AT LEAST ONE MORE RATE CUT LATER THIS YR
  • CATERPILLAR SEES ‘DIFFICULT’ FOR ECONOMY TO AVOID A RECESSION
  • CATERPILLAR SEES OIL PRICE AVG ABOUT 16% HIGHER IN LAST HALF
  • CATERPILLAR SAYS 2Q SALES/REVENUE UP 30% OUTSIDE NORTH AMERICA
  • Caterpillar Net Rises 34% as Asia, Mideast Building Lift Sales
  • Caterpillar Reports All-Time Record Quarter Driven by Strong Growth Outside North America

    • Right, weak domestic demand for sure. But note the last few lines that represent the booming exports even though domestic economies around the world are slowing.

    That’s what happens when they spend their accumulated hoard of USD here and spend less at home as they try to get rid of their USD hoards. This doesn’t stop until their holdings of USD fall to desired levels.

    I still see continued domestic weakness with GDP muddling through due to exports and government spending.

    And ever higher prices pouring in through the import/export channel.


    [top]

    Share

Bloomberg: Europe inflation accelerates to 3.5%, sentiment drops

Posted on by

Europe Inflation Accelerates to 3.5%, Sentiment Drops

By Fergal O’Brien

(Bloomberg) European inflation accelerated to the fastest pace in almost 16 years, making it harder for the European Central Bank to cut interest rates as a global credit squeeze saps confidence among executives and consumers.

Consumer-price inflation in the euro area accelerated to 3.5 percent this month, the highest rate since June 1992, the European Union’s statistics office in Luxembourg said today. The euro rose after the publication of the figure, which was higher than economists had forecast. A separate report showed consumer and business confidence declined in March.

And that’s with a strong euro keeping import prices lower than otherwise.

“This will surely dash any residual hopes of a near-term rate cut,” said Dario Perkins, an economist at ABN Amro in London. “With inflation this high, it would take a major deterioration in the real economy to prompt the ECB to lower interest rates this year.”

Yes.

March inflation was faster than the 3.3 percent median forecast of 36 economists in a Bloomberg News survey and the acceleration pushed the rate further above the ECB’s 2 percent ceiling, a target it hasn’t achieved in the last eight years.

The euro rose as high as $1.5834 after the inflation report and was up 0.1 percent to $1.5807 as of 12:15 p.m. in London.

High inflation = Strong currency???

That’s the current paradigm as markets trade as if interest rates are more important for currency pricing rather than purchasing power parity.

Still, there are signs the euro-area economy is so far weathering the U.S.-led slowdown. German and French business confidence climbed in March and unemployment in the euro region was a record low 7.1 percent in January.

Low unemployment scares the ECB a lot.

Share

Bloomberg: European banks may write down $81 billion more

Posted on by

While problems in the US financial sector pose risks for the real economy, systemic risk to the payments system is not an issue. The US banking system has credible deposit insurance, so it is unlikely there would be any kind of run on the banks by depositors, and operationally the Fed can easily deal with it if it did happen.

In the UK, Northern Rock did have a run, but in the UK the BOE is there to provide funding as needed.

Not so in the eurozone where the ECB is prohibited from this type of action, and it’s up to the national governments to write the checks, and a major run on their banks has the potential to bring down the national governments.

European Banks May Write Down $81 Billion More, Merrill Says

by Poppy Trowbridge

(Bloomberg) Europe’s 11 largest banks may make additional writedowns of as much as $81 billion linked to U.S. subprime mortgages and have to cut dividends and raise money by issuing new equity, Merrill Lynch & Co. said.

“Banks are still playing catch-up on writedowns” following declines in the Markit ABX, CMBX and other indexes tied to subprime mortgages, Stuart Graham, a London-based analyst at Merrill, wrote in a note to clients today. “No bank has so far admitted to selling these assets off.”

In addition to writedowns from underperforming assets, lower profit means Europe’s banks will have to ease a cash shortage in the industry of as much as $104 billion, Graham wrote.

“We have assumed the European banks take significant further writedowns on” subprime mortgages, asset-backed securities, collateralized debt obligations and other derivatives, Graham said.

HSBC Holdings Plc, Europe’s biggest bank, HBOS Plc, Britain’s largest mortgage lender, Barclays Plc and Edinburgh-based Royal Bank of Scotland Group Plc are among banks that may make writedowns, Graham said. As many as eight banks may need to reduce their dividends by 20 percent and raise $84 billion in new equity.

The companies may also sell assets to raise money, he added.

–Editor: Ben Vickers, Adrian Cox

Share

Re: ECB funding Spanish mortgage banking system

Posted on by

(an interoffice email)

Deep,

Interesting!

In the case of a bank failure, Spain still is the entity that would
repay depositors. To get the funds Spain would somehow liquidate the
failed bank. If the loss was large enough so that Spain couldn’t
raise the funds to pay off the depositors (via both liquidating the
bank and attempting to borrow in the credit markets) payment to the
depositors would be delayed until Spain did raise the funds.

The ECB would either return the mtg collateral to Spain for payment,
or, if Spain would not or could not receive the collateral vs payment,
the ECB would liquidate the collateral and hold Spain responsible for
any deficiency balance.

This makes the ECB much like any other depositor, but with collateral
as security.

It does not reduce the risk of loss to bank shareholders should the
mtgs not perform.

It does not remove ultimate liability from Spain.

It does not involve risk to the ECB beyond that of Spain paying for
any deficiency, and presumably the ECB isn’t loaning at 100% of market
value.

It does not create a ‘moral hazard’ issue as bank shareholders and
Spain are still in first loss position for any loan losses.

It does prevent a disruptive ‘fire sale’ from ‘technical volatility’
of forced liquidations.

It does provide bank funding at the ECB’s target rate for interbank
lending, which is what the target is all about, so that seems ok?

I have no problem with institutional structure that doesn’t use the
liability side as a source of ‘market discipline’ and instead uses
capital requirements/ratios/gap rules, etc. and regulates the asset
side as well?

And with the right haircuts and regs funding non bank mtg production
can likewise suit public purpose.

>Spanish banks funding mtgs at the ECB
>
> Shortcut to:
> http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/01/28/bcnspa
> in128.xml
>
>
>

Share

Valance Weekly Economic Reports: Global News Highlights

Posted on by

Same twin themes taking hold – weakness and inflation.

Highlights:
US Mixed data
EU Softening data could change ECB’s inflation rhetoric
JN CPI Higher on food, energy prices; Mixed data continues
UK Housing Market Continued To Show Weakness
AU Businesses Less Confident About Q1 economic outlook

♥

Share