Category Archives: ECB

Euro Zone Strikes Deal on 2nd Greek Package, EFSF

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The markets like the announcement. Of course they also liked QE2…

Unfortunately, as previously discussed, without the ECB the EFSF isn’t sustainable. It’s like trying to lift up the bucket by the handle when you are standing in it.

Nor is it cast in stone yet, but all subject to details.

Also, the positive market response, if it continues, only encourages the continuing austerity measures that are weakening the euro economy and forcing already unsustainable deficits higher.

And, again, it’s a case of ‘the food was terrible and the portions were small.’

Starting with the 50% private sector loss on Greek bonds-

Presumably that ‘works’ if it indeed brings Greek debt down to 120% of GDP from 160% by 2020. But that implies the austerity measures won’t continue to reduce GDP and cause the Greek deficit to increase, as continues to be the case.

It presumes the 50% haircut will be considered sufficiently voluntary to not be a credit event that triggers a variety of global default clauses.

The rest of the ‘package’ presumes markets won’t reduce the presumed credit worthiness of member nations who fund the EFSF.

It presumes private sector funds will recapitalize the banks that lost capital on the write downs.

It presumes the EFSF won’t be needed to fully fund Portugal, Spain, and Italy.

It presumes banks and other investors required to be prudent and financially responsible to shareholders will continue to buy other euro member nation debt even after seeing the euro zone members allow Greece to default on half of their obligations.

That is, how could any bank now buy, for example, Italian debt, in full knowledge that euro zone policy options include a forced write down of that debt. And not in extreme, unforeseen circumstances, but under current conditions.

And how can prudent investors invest in the banks when they’ve just seen euro zone remove some 100 billion euro in equity by decree?

The problem is, it takes a presumption of general improvement to presume additional losses will not be incurred by investors.

And it takes a presumption of general improvement to presume the EFSF will be successful.

And that requires the presumption that continued austerity measures will result in a general improvement.

Even as all evidence (and most theory) is showing the opposite.

Euro deal leaves much to do on rescue fund, Greek debt

By Luke baker and Julien Toyer

October 27 (Reuters) — Euro zone leaders struck a last-minute deal to limit the damage from the currency bloc’s debt crisis early on Thursday but are still far from finalizing plans to slash Greece’s debt burden and strengthen their rescue fund.

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MERKEL: ECB INVOLVEMENT IN EFSF LEVERAGE RULED OUT

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Looks like Merkel is speaking purely for political effect, which may be all she’s capable of, unfortunately.

Fact is, from the beginning, without the ECB ultimately writing the check, it’s all been in ponzi.

And like all ponzi’s, it seems to work on the way up, and disintegrates on the way down.

With the ECB writing the check, deficits can be determined by further political/public purpose, without concern of ‘market forces’ undermining finance.

Without the ECB writing the check, it all probably keeps disintegrating, as none of the member nations can be inherently solvent without some form of ECB support.

MERKEL SAYS GOAL OF TONIGHTS DISCUSSIONS MUST BE TO HAVE A SOLUT ION WHICH PUTS GREECE AT A DEBT TO GDP RATIO OF 120 PCT BY 2020
MERKEL: ECB INVOLVEMENT IN EFSF LEVERAGE RULED OUT
MERKEL: GERMAN EFSF CONTRIBUTION WON’T EXCEED E211 BLN
MERKEL: BANK RECAP NECESSARY TO PREVENT CONTAGION
MERKEL: NEED PERMANENT SUPERVISION OF GREECE
MERKEL: TROIKA SUPERVISION DOESN’T SUFFICE
MERKEL: GREEK BOND HAIRCUT ALONE WON’T SOLVE PROBLEMS
MERKEL:PSI MUST BE MUCH HIGHER THAN AGREED ON JULY 21
MERKEL: NEED SIGNIFICANT PSI IN GREEK RESCUE

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Germany, the 10th plague

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Ok, it’s a stretch, but the biblical story of the 10 plagues does come to mind.

One by one various member nations have seen their funding taken away. The process begins with interest rates spiking to the point where, for all practical purposes, they can’t fund themselves without outside assistance.

There has been blood in the streets of Greece.

And the latest spread of the contagion to French interest rates, however politically incorrect, does bring to mind the plague of frogs, which was closely followed Sarkozy’s begging for the ECB, only to be turned down by Germany’s still hard hearted Merkel.

So might it be with the 10th plague, the killing of the first born, which, in the case of the euro is Germany, we will see the final liberation of the euro zone from it’s enslaving institutional structure?

Maybe next spring? When the chauffeur drives up in a Nissan to take them to the promised land?

Watching those German rates closely!

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Sarkozy Yields on ECB Crisis Role

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He’ll be back…The way things are going there is no alternative, a point market forces continue to make.

And no amount of tea from China, at any price, would be sufficient given current institutional structure and policy.

And more discussion on whether Greece should be allowed to default, even as haircut talk rises to 60%, and as the notion of ‘voluntary’ comes under further discussion. After all, if they don’t have to pay their debts, why should any other member nation have to pay its debts? etc.

Sarkozy yields on ECB crisis role, pressure on Italy

By Julien Toyer and Andreas Rinke

October 24 (Reuters) — European Union leaders made some progress towards a strategy to fight the euro zone’s sovereign debt crisis on Sunday, nearing agreement on bank recapitalization and on how to leverage their rescue fund to try to stop bond market contagion.

But final decisions were deferred until a second summit on Wednesday and sharp differences remain over the size of losses private holders of Greek government bonds will have to accept.

French President Nicolas Sarkozy backed down in the face of implacable German opposition to his desire to use unlimited European Central Bank funds to fight the crisis.

Instead, the euro zone may turn to emerging economies such as China and Brazil for help in underpinning its sickly bond market.

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GERMAN COALITION SOURCES: MERKEL SAYS LEVERAGING EFSF VIA ECB IS RULED OUT

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The news out of Europe has turned from mixed for the last week or so to troubling.

On the one hand they seem to realize that the answer is the ECB writing the check, and on the other they seem to be saying they don’t want to do that. And on the one hand they say Greece won’t default, and on the other is a serious discussion of the ramifications of default. And as the haircut talk on private holders of Greek debt has gone from 21% to 50% and maybe more, the ECB says they will keep their Greek bonds which will presumably mature at par, but at the same time additional ECB capital calls are under consideration due to what they call increased risk of loss.

The idea that the EFSF alone writing checks to support Portugal, Spain, and Italy would weaken the credit worthiness of the core has also been discussed, which is why talk of ECB support had materialized.

Meanwhile, even as the austerity continues to bite, perhaps to the point where the austerity is now causing deficits to be larger, additional austerity measures continue to be demanded and imposed.

And where the banks stand with regard to solvency is anyone’s guess as well.

In other words, it’s all moving further away from any sense of resolution, with uncertainty about as high now as it’s ever been, as is the potential for a catastrophic financial event.

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ECB Capital

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I’ve been reading up some on ECB capital.

Seems a minimum capital level for the ECB is not specified.

However, the ECB distributes profits ultimately to the national govts.

And that ECB losses are ultimately the responsibility of the national govts.

That’s why, faced with potential losses, the ECB has required the national central banks to advance additional capital to the ECB.

However, in the event of losses, the ECB is not required to call for capital from its members, but as a matter of policy the ECB has called for capital from its members when it deemed the risk of losses had risen.

So while the ECB, like the Fed, can, operationally, allow its capital to go negative without operational consequence. The ECB, unlike the Fed, looks to keep it’s capital positive by requiring contributions from its members.

This therefore means, for example, that should the ECB realize losses on its Greek bonds, it will demand additional capital from the national central banks/national govs. which will further erode their solvency.

The reason for this seems to be the notion that ECB losses left as negative capital would otherwise be inflationary.

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G20 Looks to IMF to Show How it Could Help in Debt Crisis

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What the IMF could do is contribute capital to the ECB as needed, and then let the ECB write the checks.

G20 Looks to IMF to Show How it Could Help in Debt Crisis

By AP

October 15 (CNBC) — The finance chiefs of the world’s leading economies opened the door Saturday for the International Monetary Fund to play a bigger role in fighting the eurozone’s escalating debt troubles.

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Posted in ECB

Retail Sales and euro dynamics

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Agreed.

Fundamentally, the 8%+ US federal budget deficit continues to support sufficient aggregate demand for modest GDP growth. Market participants don’t seem to understand this and were discounting a far higher probability of a recession than otherwise.

The strong euro/weak dollar strong stock dynamic continues, with the ECB continuing it’s strong euro policy of forced austerity in exchange for funding. However, this policy also slows growth in the euro zone, which tends to push deficits higher through softer tax revenues and higher transfer payments. At some point this means the ECB has to reconsider a policy designed to bring deficits down that is instead causing them to rise. The problem is they have no such alternative policy, and instead are looking for tight fiscal policy to drive exports. The problem with that is that without a policy of buying $US (the old German model), instead of exports rising, the euro rises to the point where trade stays relatively balanced, as has been the case since the inception of the euro.

Meanwhile, they seem to have responded adequately to the solvency issue with the ECB writing the check as needed. But with a slowing economy the checks the ECB must write get geometrically larger, which, while not an operational constraint, are a daunting political challenge that can quickly throw it all into even more disarray.


Karim writes:

  • Better than expected at 1.1% headline and 0.6% control group, and net +0.5% revisions to July and August control group.
  • Motor vehicles and parts clearly lifted in mid to late Q3 from end of supply chain disruptions
  • And lower gas prices also helping
  • These forces are looking to bring Q3 and Q4 growth near 2.5%, lower than the 3% plus that the Fed was looking for in Q2, but stronger than the post-debt ceiling debacle private sector consensus.
  • Also strong enough to delay need for ‘additional measures’ from Fed, though they will continue to be discussed in light of risks from Europe (via trade impact as well as financial conditions impact (fx, equities, bank lending,etc).

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ECB and Euro zone on Greek debt haircuts

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So how do you reconcile these two releases?

How about, they want the market to price in large haircuts so the ECB can buy the bonds that much cheaper?

Just guessing!

ECB Says Private-Sector Involvement in Rescues is Stability Risk

By Jeff Black

October 13 (Bloomberg) — The ECB said the involvement of the private sector in euro-area bailouts through enforced investor losses is a risk to financial stability and would have “direct negative effects” on the banking sector. While private-sector involvement “is certain to place significant stress on the solvency of banks and other private financial institutions in the country concerned, it will also have an impact on the balance sheets of banks in other euro-area countries,” the bank said in its monthly bulletin today. “The ECB has strongly advised against all concepts that are not purely voluntary or that have elements of compulsion, and has called for the avoidance of any credit events and selective default or default.”

Europe eyes bigger Greek losses for banks

By Jan Strupczewski

October 12 (Reuters) — Euro zone countries will ask banks to accept losses of up to 50 percent on their holdings of Greek debt. Ahead of a make-or-break summit of European leaders on October 23 at which a comprehensive new Franco-German crisis plan is expected to be discussed, four euro zone officials told Reuters that a “haircut” of between 30 and 50 percent for Greece’s private creditors was under consideration. That is far more than the 21 percent loss they had asked banks, pension funds and other financial institutions to accept in July as part of a second rescue package for Athens.

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