Category Archives: ECB

ECB, Fed, Rail traffic

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Looks like they are again making hawkish noises, taking the lead of the Fed:

ECB wary of further action despite uncertain future

By: Balazs Koranyi and John O’Donnell

Jan 14 (Reuters)

* Many governors sceptical of need for further action in near term
* Governors urge countries to act instead with reform
* Oil price and inflation expectations:
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Many European Central Bank policy makers are sceptical about the need for further policy action in the near term, conversations with five of them indicate, even as inflation expectations sink and some investors bank on more easing.

Next week’s rate meeting is expected to be relatively uneventful with the big test coming when the ECB releases its initial 2018 growth and inflation forecasts on March 10.

But apparently recent market action has got the Fed thinking twice about it’s hiking intentions:

China may slow Fed’s interest rate rises: Fed officials

Jan 13 (Reuters) — The rout in China’s stock market, weak oil prices and other factors are “furthering the concern that global growth has slowed significantly,” Boston Fed President Eric Rosengren said. Rosengren also said a second hike will face a strict test as the Fed looks for tangible evidence that U.S. growth will be “at or above potential” and inflation is moving back up toward the Fed’s 2 percent target. “It’s something that’s got to make you nervous,” Chicago Fed chief Charles Evans said of the drag slower growth in China could have on economies like the United States that don’t do much direct trade. Evans also said he was nervous about inflation expectations not being as firmly anchored as a year ago, and added it could be midyear before the Fed has a good picture of the inflation outlook.

Confirming the rail traffic indicators:

CSX fourth quarter profit falls on lower freight volumes

Jan 13 (Bloomberg) — CSX said freight volumes fell 6 percent in the fourth quarter, with a huge 32 percent decline in the amount of coal hauled. Fourth-quarter net income was $466 million or 48 cents per share, down 5 percent from $491 million or 49 cents per share a year earlier. Revenue in the quarter was $2.78 billion, down nearly 13 percent from $3.19 billion a year earlier. “We have not seen these kind of pressures in so many different markets because you have multiple aspects working against you: Low gas prices, low commodity prices, strength of the dollar,” CEO Michael Ward said on the call. Except auto, housing, “you are seeing pressure on most of the markets.”

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ECB comment, Retail Sales, Fed Atlanta, Oil comment

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Seems there’s no wisdom on the topic of ‘money’ anywhere of consequence:

No ‘plan B’ for ECB despite still low inflation: Praet

Jan 6 (Reuters) — Executive Board member Peter Praet said various factors, notably low oil prices and less buoyant emerging economies, meant it was taking longer to reach the goal of inflation of close to but below 2 percent. “We need to be attentive that this shifting horizon does not damage the credibility of the ECB,” he added. “There is no plan B, there is just one plan. The ECB is ready to take all measures necessary to bring inflation up to 2 percent. If you print enough money, you get inflation. Always. If, as is happening now, the prices of oil and commodities are tumbling, then it’s more difficult to drive up inflation,” he said.

From Morgan Stanley:

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Up to 1% for Q4 on the trade number, which is subject to revision.

And DB is forecasting +.5%.
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The still don’t seem to understand it’s only about pricing, not quantity:

Brent Crude Oil Drops Below $35

World’s benchmark oil fell by more than 4.8% to below $35 a barrel around 9:30 AM NY time, extending a third consecutive day of losses. It is the lowest price since 2004 as oversupply worries increased as tensions between Saudi Arabia and Iran diminish chances of major producers cooperating to cut production.

Not to forget their models use the oil futures prices, which express storage charges, as indications of future spot prices, and that this ‘rookie error’ tends to inflate their inflation forecasts:

A number of members commented that it was appropriate to begin policy normalization in response to the substantial progress in the labor market toward achieving the Committee’s objective of maximum employment and their reasonable confidence that inflation would move to 2 percent over the medium term.

However, some members said that their decision to raise the target range was a close call, particularly given the uncertainty about inflation dynamics, and emphasized the need to monitor the progress of inflation closely.

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Comments on Draghi NY Speech

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Excerpts from the Speech by Mario Draghi, President of the ECB, Economic Club of New York, 4 December 2015:

There is no particular limit to how we can deploy any of our tools.

True- limits are political

And in this context it is important to recall that we operate under a clear framework of monetary dominance – we are ultimately driven by our mandate of maintaining price stability.

True

Indeed, it is inevitable that unconventional policy settings, ranging from negative interest rates to purchases of a broad range of assets, can have unintended consequences on allocation and distribution.

Yes, and as they function like taxes to remove euro net financial assets from the private sector, they can have the (presumably) unintended consequences of reducing aggregate demand, reducing ‘inflation’, and, likewise, fundamentally causing the euro to appreciate and further exacerbate the other unintended consequences.

In the selection of our policy tools, we aim to minimise the extent of such distortions, which is why, for instance, we have so far focused our asset purchases as much as possible in the most liquid and generic asset classes.

But there is no doubt that if we had to intensify the use of our instruments to ensure that we achieve our price stability mandate, we would.

Yes, however removing more euro removes more aggregate demand, is deflationary, and further supports the euro.

As the carpenter said about his piece of wood, ‘no matter how much i cut off it’s still too short’

There cannot be any limit to how far we are willing to deploy our instruments, within our mandate, and to achieve our mandate. And indeed the European Court of Justice has stated that the ECB must be allowed “broad discretion” when it “prepares and implements an open market operations programme”.

True, potentially they can perform the miracle of making the blind man lame, so to speak…

I can say therefore with confidence – and without any complacency – that we will secure the return of inflation to 2% without undue delay, because we are currently deploying tools that we believe will achieve this, and because we can, in any case, deploy our tools further if that proves necessary.

As the Bank of Japan, after 20 years of similar policy, and the Fed after 7 years of similar policy have continued to say with regard to meeting their inflation targets, after 6 years Draghi also repeats:

We just need a little more time to allow our monetary policy to kick in…

:(

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Factory orders, ISM non mfg, ECB news

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Yes, they were up, but there is a ‘seasonal’ aspect to it, including an air show, so the year over year chart is a bit more indicative of what’s going on and it’s still in negative territory. Also, vehicle orders declined, and inventories remained at levels that beg continuing production cuts.

Factory Orders
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Highlights
Factory orders bounced sharply higher in October and, together with the bounce higher for manufacturing in the industrial production report, confirm what was a very solid month for the sector. Factory orders rose 1.5 percent in the month led by a 2.9 percent surge in durable goods orders (revised 1 tenth lower from last week’s advance release). This gain offsets a no change result for non-durable goods orders.

Excluding transportation, and orders tied to the biennial Dubai airshow, new orders rose a less exciting 0.2 percent. But indications from core capital goods are very strong with new orders surging 1.3 percent on top of a 0.5 percent orders gain in September. Turning to capital goods industries, new orders for machinery jumped 1.2 percent with computer orders up 5.9 percent.

A negative in the report is a surprising 2.0 percent decline for vehicle orders, a disappointment that may very well be reversed in coming months based on the sustained and unusual strength of vehicle sales.

Looking at other readings, total shipments fell 0.5 percent in October which is not a good start to the fourth quarter with core capital goods shipments also down 0.5 percent. But future shipments are certain to benefit from October’s orders gain. Inventories, which are widely seen as too high, did dip 0.1 percent but relative to shipments could do no more than hold steady at a ratio of 1.35. Unfilled orders are positive, ending two months of decline with a 0.3 percent gain.

Given that the factory sector has been in decline all year, the order data in this report are encouraging and should help offset concern from this week’s sub-50 reading in the ISM manufacturing report.
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After a ‘normal’ lag non manufacturing is now clearly softening form the decline in aggregate demand that began with the oil capex collapse about a year ago, with nothing that I can see stepping up to replace it. And note that exports went into contraction as it’s been the non manufacturing exports that have held up as other exports declined:

ISM Non-Mfg Index
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Highlights
Strength in ISM’s non-manufacturing sample is cooling but remains very solid, at 55.9 in November which is, however, the lowest rate of monthly growth since May. Readings across the report have also edged down to growth levels last seen in the second quarter including new orders (57.5), backlog orders (51.5), and employment (55.5). New export orders, at 49.5, show their first contraction since April. The breadth of strength across industries, with 12 showing growth and six in contraction, is positive but, like most of this report, less positive than prior months. Still, this report surged through the third quarter and into October making a step down to a lower rate no major surprise.
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So Draghi increased the tax on deposits, and this time the euro went up. Maybe portfolios don’t have any more left to sell as the high and growing trade surplus drains them from global markets?

Euro Rises After ECB

The Euro gained around 0.58% to 1.0667 USD right after the ECB cut deposit facility rate by 10 bps to -0.3% and said further stimulus measures would be announced during the press conference.
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And taking euro away from depositors hasn’t seem to help consumer spending:

Euro Area Retail Sales Unexpectedly Fall

Retail sales in the Eurozone edged down 0.1 percent in October of 2015, following a 0.1 percent drop in September and no growth in August. Figures came below market expectations of a 0.2 percent gain, marking the longest period of no growth since mid-2013. Sales of food, drinks and tobacco shrank 0.5 percent, those of auto fuel fell 0.4 percent while sales of non-food products edged up 0.1 percent.

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Draghi Comments, Global Comments

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ECB will do what is needed to keep inflation target on track: Draghi

By Stephen Jewkes

Oct 31 (Reuters) — “If we are convinced that our medium-term inflation target is at risk, we will take the necessary actions,” ECB president Draghi told Il Sole 24 Ore. “We will see whether a further stimulus is necessary. This is an open question,” he said, adding it would take longer than was foreseen in March to return to price stability. Draghi said inflation in the euro zone was expected to remain close to zero, if not negative, at least until the beginning of next year. “From mid-2016 to the end of 2017, also due to the delayed effect of the depreciation in the exchange rate, we expect inflation to increase gradually,” he said.

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Operating conditions deteriorate at a slower pace in October

Nov 2 (Markit) — The China PMI posted 48.3 in October, up from 47.2 in September. Total new business placed at Chinese goods producers declined for the fourth month in a row in October. That said, the rate contraction eased since September’s recent record and was only modest. Softer domestic demand appeared to be a key factor weighing on overall new work as new export business increased for the first time since June, albeit marginally. Nonetheless, a further decline in overall new orders led firms to cut their production schedules again in October.

Weakest deterioration in business conditions since May

Nov 2 (Markit) — The headline Taiwan Manufacturing PMI rose from 46.9 in September to 47.8 in October. Production at manufacturing companies in Taiwan continued to decline in October, as has been the case in each month since April. However, the rate of contraction eased further from August’s 35- month record to the slowest since May. Companies that cut output generally attributed this to poor economic conditions and fewer new orders. The latter was highlighted by a further fall in total new work in October. As was the case with output, however, the rate of reduction was the weakest seen in five months.

Manufacturing conditions deteriorate at weak pace

Nov 2 (Markit) — The South Korean manufacturing PMI posted at 49.1, down slightly from 49.2 in September. Production at South Korean manufacturers declined for the eighth successive month in October. According to anecdotal evidence, global economic uncertainty and poor demand conditions contributed to the latest fall in output. Supporting the fall in output was a decline in total new orders during the month. A number of panellists mentioned unstable economic conditions and a decline in sales from both domestic and international clients as factors behind the latest contraction.

S.Korea Oct exports post worst drop in over 6 yrs as global demand sags

Oct 31 (Reuters) — The trade ministry attributed the declines mainly to a sharp fall in ship contracts and low oil prices. Exports fell 15.8 percent on-year to $43.5 billion in October, their 10th straight month of declines and the sharpest fall since August 2009. Imports slumped 16.6 percent to $36.8 billion. The trade surplus fell to $6.7 billion in October from a revised $8.9 billion in September. The slump in exports was partially expected by economists as South Korea posted a record high in shipments last year.

Growth of manufacturing production wanes further

Nov 2 (Markit) — Posting a 22-month low of 50.7 in October (September: 51.2), the seasonally adjusted Nikkei India Manufacturing PMI waned. Output growth eased in October on the back of a slower increase in new orders. Rates of expansion in both production and order books were the weakest in their current 24-month sequences of growth, with panellists reporting challenging economic conditions and a reluctance among clients to commit to new projects. New business from abroad placed with Indian manufacturers rose for the twenty-fifth straight month in October.

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Cartoon, US International Trade, India, Redbook Retail Sales, China Comments, Consumer Confidence

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As previously discussed, trade deficit increasing:

United States : International trade in goods

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Definition
The Census Bureau is now publishing an advance report on U.S. international trade in goods. The BEA will incorporate these data into its estimates of exports and imports for the advance GDP estimates. This is expected to reduce the size of revisions to GDP growth in the second estimates.

Just maybe the higher rates have been supporting the higher inflation? And supporting growth?

India cuts policy rate by bigger-than-expected 50 bps

Sept 29 (Reuters) — The Reserve Bank of India cut its policy interest rate to a 4-1/2 year low of 6.75 percent on Tuesday, in a bigger-than-expected move that, with inflation running at record lows, could help an economy in danger of slowing down.

A Reuters poll last week showed only one out of 51 economists had expected a 50 basis points cut in the repo rate , while 45 had expected a 25 bps cut.

The RBI had previously cut interest rates three times this year, lowering it by 25 basis points each time.

The RBI justified the bigger reduction, saying consumer inflation was likely be running at 5.8 percent, below the 6 percent target for January, thanks partly to the government’s efforts to contain food prices.

Redbook retail sales dismal and dragging along the lows:
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Barclays analysts visited China and came back saying it was one of the most bearish trips they’ve ever taken

Good number here but not confirmed by sales reports, at least not yet:

Consumer Confidence
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China, Germany, Productivity, NFIB Index, Redbook, Wholesale Trade

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A few thoughts:

China’s US Tsy holding had been falling perhaps because they were selling $ to buy Yuan to keep it within in the prior band.

Pretty much all exporting nation’s currencies have already weakened vs the $, including the Yen and Euro, so this is a bit of a ‘catch up.’

In a weakening global economy from a lack of demand (sales) and ‘western educated, monetarist, export led growth’ kids now in charge globally, the path of least resistance is a global race to the bottom to be ‘competitive’. And the alternative to currency depreciation, domestic wage cuts, tends to be less politically attractive, as the EU continues to demonstrate.

The tool for currency depreciation is intervention in the FX markets, as China just did, after they tried ‘monetary easing’ which failed, of course. Japan did it via giving the nod to their pension funds and insurance companies to buy unswapped FX denominated securities, after they tried ‘monetary easing’ as well.

The Euro zone did it by frightening China and other CB’s and global and domestic portfolio managers into selling their Euro reserves, by playing on their inflationary fears of ‘monetary easing’-negative rates and QE- they learned in school.

The US used only ‘monetary easing’ and not any form of direct intervention, and so the $ remains strong vs all the rest.

I expect the Euro to now move ever higher until its trade surplus goes away, as global fears of an inflationary currency collapse are reversed and Euro buying resumes as part of global export strategies to export to the Euro zone. And, like the US, the EU won’t use direct intervention, just more ‘monetary easing’.

Ironically, ‘monetary easing’ is in fact ‘fiscal tightening’ as, with govts net payers of interest, it works to remove interest income from the global economy. So the more they do the worse it gets.

‘No matter how much I cut off it’s still too short’ said the hairdresser to the client…

The devaluations shift income from workers who see their purchasing power go down, to exporters who see their margins increase.
To the extent exporters then reduce prices and those price reductions increase their volume of exports, output increases, as does domestic employment. But if wages then go up, the ‘competitiveness’ gained by the devaluation is lost, etc., so that’s not meant to happen.

Also, the additional export volumes are likewise reductions in exports of other nations, who, having been educated at the same elite schools, respond with devaluations of their own, etc. etc. in a global ‘race to the bottom’ for real wages. Hence China letting their currency depreciate rather than spend their $ reserves supporting it.

The elite schools they all went to contrive models that show you can leave national deficit spending at 0, and use ‘monetary policy’ to drive investment and net exports that ‘offset’ domestic savings. It doesn’t work, of course, but they all believe it and keep at it even as it all falls apart around them.

But as long as the US and EU don’t have use of the tools for currency depreciation, the rest of the world can increase it’s exports to these regions via currency depreciation to lower their $ and Euro export prices, all of which is a contractionary/deflationary bias for the US and EU.

Of further irony is that the ‘right’ policy response for the US and EU would be a fiscal adjustment -tax cut or spending increase- large enough to sustain high enough levels of domestic spending for full employment. Unfortunately, that’s not what they learned in school…

The drop in expectations is ominous, particularly as the euro firms:

Germany : ZEW Survey
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Highlights
ZEW’s August survey was mixed with a slightly more optimistic assessment of the current state of the economy contrasting with a fifth consecutive decline in expectations.

The current conditions gauge was up 1.8 points at 65.7, a 3-month high. However, expectations dipped a further 4.7 points to 25.0, their lowest mark since November 2014.


The drop in unit labor costs and downward revision of the prior increase gives the Fed cause to hold off on rate hike aspirations:

United States : Productivity and Costs
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Highlights
A bounce back for output gave first-quarter productivity a lift, up a quarter-to-quarter 1.3 percent vs a revised decline of 1.1 percent in the first quarter. The bounce in output also held down unit labor costs which rose 0.5 percent vs 2.3 percent in the first quarter.

Output in the second quarter rose 2.8 percent vs a depressed 0.5 percent in the first quarter. Compensation rose 1.8 percent, up from 1.1 percent in the first quarter, while hours worked were little changed, up 1.5 percent vs 1.6 in the first quarter.

Looking at year-on-year rates, growth in productivity is very slight at only plus 0.3 percent while costs do show some pressure, up 2.1 percent in a reading, along with the rise in compensation, that will be welcome by Federal Reserve officials who are hoping that gains in wages will help offset weakness in commodity costs and help give inflation a needed boost.


Up a touch but the trend remains negative:

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Redbook retail sales report still bumping along the bottom:

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A decline in sales growth and rise in inventories is yet another negative:

United States : Wholesale Trade
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Highlights
A build in auto inventories as well as for machinery drove wholesale inventories up a much higher-than-expected 0.9 percent in June. Sales at the wholesale level rose only 0.1 percent in the month, in turn driving the stock-to-sales ratio up 1 notch to a less-than-lean 1.30. This ratio was at 1.19 in June last year.

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LA Port Traffic, Greek Banks, Recession Without Financial Crisis

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Another weak export report. No mention of the drop in oil prices reduced foreign incomes.

LA area Port Traffic: Weakness in June

by Bill McBride on 7/20/2015 09:57:00 AM

Note: There were some large swings in LA area port traffic earlier this year due to labor issues that were settled on February 21st. Port traffic surged in March as the waiting ships were unloaded (the trade deficit increased in March too), and port traffic declined in April. Perhaps traffic in June is closer to normal.

Container traffic gives us an idea about the volume of goods being exported and imported – and usually some hints about the trade report since LA area ports handle about 40% of the nation’s container port traffic.

The following graphs are for inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container).

To remove the strong seasonal component for inbound traffic, the first graph shows the rolling 12 month average.

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On a rolling 12 month basis, inbound traffic was down 0.4% compared to the rolling 12 months ending in May. Outbound traffic was down 0.9% compared to 12 months ending in May.

The recent downturn in exports might be due to the strong dollar and weakness in China.

Read more at Calculated Risk Blog

Reads like they still don’t have a clue about how banking works:

The Greek government ordered banks to open on Monday, three weeks after they were shut down to prevent the system collapsing under a flood of withdrawals,

That doesn’t cause collapse. Depositors might have to wait for their Euro. That’s all. No reason for the govt. to close the banks. Reads to me like the govt. thinks that Euro needed to run the economy, pay taxes, etc. would leave the country, or something like that. Makes no sense.

As Prime Minister Alexis Tsipras looked to the start of new bailout talks next week.

The first action of the new cabinet was to sign off on a decree to reopen banks on Monday with slightly more flexible withdrawal limits that allow a maximum of 420 euros a week in place of the strict limit of 60 euros a day currently in place.

But restrictions on transfers abroad and other capital controls remain in place.

It’s up to the banks to set their limits based on how much liquidity they have available.

Also:

Three week shutdown of Greece banks cost the economy an estimated €3B, not counting lost tourism revenue – press – Athens Chamber of Commerce and Industry (EBEA) says some 4,500 containers with raw materials and finished products are blocked at customs.

Additionally, €6B in business transactions were frozen by the bank shutdown.- Retailers lost about €600M in business, with apparel taking the main blow. Exporters lost €240M.

Source: TradeTheNews.com

Yes, negative growth and recession sometimes happens without a domestic financial
crisis, and without any financial crisis globally as well.

Lots of things can cause deficit spending- both non government (private sector) and government together- from being insufficient to offset agents desiring to spend less than their incomes.

Sometimes it’s a sudden obstruction to lending and sometimes it’s not.

Sometimes the agents spending more than their incomes just fade away. For a government allowing the deficit to get too small is a political choice, sometimes well informed but most often misguided.

For the private sector it could be insufficient income, or any reason it simply doesn’t want to borrow to spend or spend from savings.

And the private sector tends to be pro cyclical. That is, should GDP growth decline, private sector borrowing to spend tends to taper as well, as credit worthiness deteriorates, causing the slowdown to get worse. This downward process continues until some agent starts spending more than its income, which historically is government, as tax revenues fall and transfer payments increase with rising unemployment from the downward spiral.

So looks to me like it was the oil capex that was keeping up with the demand leakages, and when that collapsed as prices fell the demand leakages got the upper hand. And so far no sign of anything else stepping up its spending enough to move the GDP needle.

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macro update

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At the beginning of 2013 the US let the FICA tax reduction and some of the Bush tax cuts expire and then in April the sequesters kicked totally some $250 billion of proactive deficit reduction. This cut 2013 growth from what might have been 4% to just over half that, peaking in Q3 and then declining to negative growth in Q1, due to the extremely cold winter. Forecasts were for higher growth in 2014 as the ‘fiscal headwinds’ subsided. GDP did resume after the weather improved, though not enough for 2014 to look much different from 2013. And with the fall in the price of oil in Q4 2014, forecasts for Q1 2015 were raised to about 4% based on the ‘boost to consumers’ from the lower oil prices. Instead, Q1 GDP was -.7%. The winter was on the cold side and the consumer had been saving instead of spending the savings from lower gas prices. And the forecasts for Q2 were for about 4% growth based on a bounce back and consumers now spending their gas savings. Most recently Q2 forecasts have been reduced with the release of Q2 data.

My narrative is that we learned the extent of capex chasing $90 in Q4 after the price fell in half. It seemed to me then that it had been that capex that kept 2013 growth as high as it was and was responsible for the bounce from Q1 2014 as well as the continued positive growth during 2014 up to the time the price of oil dropped and the high priced oil related capex came to a sudden end.

By identity if any agent spend less than his income another must have spent more than his income or the output would not have been sold. So for 2012 the output was sold with govt deficit spending where it had been, and when it was cut by some $250 billion in 2013 some other agent had to increase it’s ‘deficit spending’ (which can be via new debt or via depleting savings) or the output would have been reduced by that amount. Turns out the increase in oil capex was maybe $150 billion for 2013 and again in 2014, best I can tell, and this was sufficient to keep the modest growth going while it lasted. And when it ended in Q4 that spending (plus multipliers) ended as well, as evidenced by the sudden decline in GDP growth. And so far the Q2 numbers don’t look like they’ve increased much, if any, since Q1. And to do so will take an increase in ‘borrowing to spend’ that I can’t detect. Of course, I missed the surge in oil capex last year, so there could be something this year I’m missing as well.

When oil prices dropped I pointed out three things-

1. Income saved by buyers of oil equaled income lost by sellers, so the benefit to total spending was likely to be small and could be negative, depending on propensities to save and to spend on imports. And yes, some of the sellers of oil were ‘non residents’, but that was likely to reduce US exports, and cuts in global capex could reduce US exports as well.

2. Lost capex was a direct loss of GDP, plus multipliers, both domestically and globally.

3. Deflation in general is highly problematic for lenders, and tends to reduce private sector credit expansion in general.

To me this meant the drop in oil prices was an unambiguous negative. And in the face of universal expectations (including the Fed) that it was a positive, which can be further problematic.

Euro Zone

Forecasts are for modestly improving growth largely due to the weak euro driving exports. However, the euro is down from massive foreign CB selling, probably due to fears of ECB policy and the Greek saga. This technical selling drove the euro down and the euro area 19 member current account surplus up, absorbing the euro the portfolios were selling. Once the portfolio selling subsides- which it will as euro reserves are depleted and short positions reach maximums- the trade flows continue, which then drives the euro up until those trade flows reverse. In other words, the euro appreciates until net exports decline and the anticipated GDP growth fades. And there is nothing the ECB can do to stop it, as rate cuts and QE works only to the extent it frightens portfolio managers into selling, etc.

Also, ironically, a Greek default would fundamentally strengthen the euro as Greek bonds are nothing more than euro balances in the ECB system, and a default is a de facto ‘tax’ that reduces the holdings of euro net financial assets in the economy, making euro that much ‘harder to get’ etc.

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