Category Archives: ECB

ECB’s Weber Says Emergency Support Must Be Tied to Conditions

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Confirming suspicions of what’s been happening somewhat behind the scenes.

They may even understand that as long as ECB support does not add to spending there is no inflationary effect.

ECB’s Weber Says Emergency Support Must Be Tied to Conditions

By Simone Meier and Rainer Buergin

October 15 (Bloomberg) — “A temporary financial support for member states should remain an option at best used only if there’s a clear, considerable contagion risk for the rest of the currency union and if, secondly, the use is tied to strict and painful conditions,” ECB Governing Council member Axel Weber said. Funds should be raised by individual member nations rather than through a joint measure such as Eurobonds, he said. “Measures for crisis management need to be tailored in a way that entails as little as possible distortion of incentives” for member states, Weber said. “That’s why it’s indispensable to credibly anchor the no-bailout principle.” Weber, who is also head of Germany’s Bundesbank, called for a system of “automatic sanctions” for countries breaching the region’s budget rules. It’s important not only to monitor countries’ shortfalls but also their debt, he said.

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Weber Says ECB Should Start to Phase Out Bond Purchases ‘Now’

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>   
>   (email exchange)
>   
>   On Tue, Oct 12, 2010 at 1:17 PM, Kevin wrote:
>   
>   Warren
>   
>   I am interested in your views on this development
>   
>   It would strike me as either blather or a dramatic reversal of fortune for
>   the continent
>   
>   Any thoughts?
>   

Weber has been against it from day one, which tells me he doesn’t get it at all. For now he’ll keep getting over ruled, but that can change down the road when ECB management turns over.

Yes, if this were to happen in this kind of economy it could all head catastrophically south very quickly again, and, as before, not end until the ECB resumes writing the check.

The problem is he doesn’t understand that inflation and currency weakness would follow from excess spending by the national govts, which is both not the case and under control of the ECB while they are funding. Instead he thinks the bond purchases per se somehow matter, though with no discernible transmission channel.

Weber Says ECB Should Phase Out Bond Purchases ‘Now

By Gabi Thesing and Christian Vits

October 12 (Bloomberg) — European Central Bank Governing
Council member Axel Weber said the ECB should stop its bond-
purchase program and signaled that it’s time for officials to
show how they will withdraw other emergency measures.

“As the risks associated with the Securities Markets
Program outweigh its benefits, these securities purchases should
now be phased out permanently,” Weber said, according to the
text of a speech delivered in New York today.

“As regards the two dimensions of exit consisting of
phasing-out non-standard liquidity measures and normalizing our
clearly expansionary monetary policy, there are risks both in
exiting too early and in exiting too late,” Weber said. “I
believe the latter are greater than the former.”

Weber’s comments are the strongest so far from any official
on how the ECB will withdraw its emergency stimulus measures.
They come as governments and banks in some euro nations such as
Ireland and Portugal struggle to convince investors about their
financial health and as other major central banks signal their
willingness to add more stimulus to their economies.

The remarks also come less than a week after ECB President
Jean-Claude Trichet’s last policy statement, when he declined to
comment on the timing of the ECB’s exit strategy.

The bond purchases were opposed by Weber when they were
started in May as part of a strategy to keep the euro region
together after the Greek crisis threatened to undermine the
currency. The ECB stepped up its bond purchases at the end of
September, buying 1.38 billion euros ($1.9 billion) in the week
to Oct. 1, as tensions reemerged in Portugal and Ireland.

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Trichet ‘Trapped’ by Banks’ Addiction to ECB Cash: Euro Credit

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Yes, as previously discussed, the ECB is now dictating terms and conditions to both the banking system and the national govts with regard to fiscal policy.

The fundamental structure of the eurozone includes no credible bank deposit insurance that now keeps the bank dependent on direct ECB funding. It also includes national govts that are in the position of being credit sensitive entities, much like the US states, only now with debt ratios far too high for their market status who are now directly or indirectly dependent on ECB support via bond purchases in the open market.

And there is no way out of this control for the banks or the national govts. There will be large deficits one way or another- through proactive fiscal expansion or through automatic stabilizers as attempts to reduce deficits only work to a point before they again weaken the economy to the point where the automatic stabilizers raise the deficits as the market forces ‘work’ to obtain needed accumulations of net euro financial assets.

This inescapable dependency has resulted in a not yet fully recognized shift of fiscal authority to the ECB, as they dictate terms and conditions that go with their support.

Yes, the ECB may complain about their new status, claim they are working to end it, etc. but somehow I suspect that deep down they relish it and announcements to the contrary are meant as disguise.

In the mean time, deficits did get large enough the ‘ugly way ‘in the last recession to now be supportive of modest growth. And even the 3% deficit target might be enough for muddling through with some support from private sector credit expansion which could be helpful for several years if conditions are right.

Also, dreams of net export expansion are likely to be largely frustrated as the conditions friendly to exports also drive the euro higher to the point where the desired increases don’t materialize. And the euro buying by the world’s export powers, though welcomed as helping finance the national govts., further supports the euro and dampens net exports.

Trichet `Trapped’ by Banks’ Addiction to ECB Cash: Euro Credit

By Gabi Thesing and Matthew Brown

October 7 (Bloomberg) — European Central Bank President Jean- Claude Trichet staked his reputation on propping up banks with cheap cash during the financial crisis. Now credit markets won’t let him take away that support.

Near-record borrowing costs for nations across the euro region’s periphery are making it harder for the ECB to wean commercial banks off the lifeline it introduced two years ago.

The extra yield that investors demand to hold Irish and Portuguese debt over Germany’s rose last week to 454 basis points and 441 basis points respectively. Spain’s spread hit a two-month high.

The risk for the ECB is that it gets pulled deeper into helping the banking systems of the most indebted nations in the 16-member euro bloc. Governing Council member Ewald Nowotny said Sept. 6 that addiction to ECB liquidity is “a problem” that “needs to be tackled.” Complicating the ECB’s task is that interbank lending rates have risen, tightening credit conditions and making access to market funding more expensive for banks.

“The ECB is trapped and the exit door is blocked,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London. “The state of credit markets is going to force them to stay in crisis mode for longer than some of them would like.”

The ECB’s 22-member Governing Council convenes today in Frankfurt. Policy makers will set the benchmark lending rate at a record low of 1 percent for an 18th month, according to all 52 economists in a Bloomberg News survey. That announcement is due at 1:45 p.m. and Trichet holds a press conference 45 minutes later.

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Austerity Will Push Euro to $1.50 by Year End: Economist

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This story was abstracted from a long phone interview a couple of days ago and is reasonably well reported.
It was a follow up to my last interview with them when the euro was 119.
At the time all forecasts there were seeing were for it to keep going down.

Unreported was the part of the discussion reviewing that the traditional export model keeps fiscal tight enough to keep domestic demand relatively low, and at the same time buys fx to prevent currency appreciation and keep real costs down to help the exporters. And that the ECB has an ideological constraint against buying US dollars, in that building dollar reserves would give the appearance of the dollar backing the euro, when they want the euro to be a reserve currency.
(And interesting that they kept my name out of the title.)

Austerity Will Push Euro to $1.50 by Year End: Economist

By Antonia Oprita

October 7 (CNBC) — The euro will keep rising and will likely end the year at up to $1.50, as the European Central Bank pursues a highly deflationary policy, despite buying euro-denominated bonds, economist Warren Mosler, founder and principal of broker/dealer AVM, told CNBC.com.

Mosler, who predicted that the euro would bounce back towards $1.60 in June, when the single European currency was trading at around $1.19, said there was nothing to stop the euro’s [EUR=X 1.3965 0.0036 (+0.26%) ]appreciation versus the dollar, short of a policy response from the European Central Bank.

“If it (the euro) keeps going at the rate it’s going, it could go to $1.45-$1.50 by the end of the year,” he said.

The ECB started buying government bonds belonging to distressed euro zone members such as Greece, Ireland, Portugal and Spain to ease market concern regarding these countries’ ability to fund themselves and some analysts have said the measure may be inflationary.

But the policy is, if anything, deflationary because it is accompanied by tough austerity conditions, Mosler said.

“They’re causing a shortage of euros by requiring governments to rein in spending. It’s a highly deflationary move and that’s what is driving the euro higher,” he said.

“Right now the ECB and the euro zone are tightening up their supply of euros.”

Billionaire investor George Soros accused Germany earlier this week ofdragging the euro zone in a deflationary spiral by promoting austerity measures.

Many analysts have said that the ECB is promoting policies that go hand in hand with the euro zone’s biggest member’s fears of inflation.

One element of uncertainty is the ECB’s willingness to continue to buy government bonds, Mosler warned.

“No-one knows how long the ECB are going to do it… they could change their mind tomorrow,” he said.

But market speculators, while being able to attack the euro zone’s weakest members, will not be able to speculate against the central bank, which can print money and distribute it among its members at any time, Mosler said.

“The markets cannot punish the ECB. They can’t punish the issuer of the currency,” he said. “When you’re the issuer of a modern currency, you can credit an account and there’s nothing the market can do about it.”

He reiterated his view that the ECB has now de facto shifted to deciding fiscal policy for the countries in the single currency area, since their help by buying bonds comes with conditions regarding cutting debt and budget deficits.

Another factor behind the euro’s appreciation will be China’s announcement that it will buy Greek debt, which was hailed in Europe as proof of confidence in Greece’s ability to pay its debt.

“China would like nothing more than to buy euros – they’re doing it through buying Greek debt. That’s just one more force for a stronger euro,” Mosler said.

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China to the Rescue! Wen Offers to Buy Greek Bonds

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Subtitle:

“Ticker Tape Parade for Trojan Horse”

Ordinarily China’s policy of driving exports to a nation with purchases of their currency is met with resistance. The US, for example,
has been chastising nations buying $US, like Japan and China, calling them currency manipulators, outlaws, etc. But China is getting very clever about it, here coming into the euro zone and buying Greek debt as the savior, and possibly even negotiating informal guarantees of repayment or other forms of support from the ECB, to keep the Greek debt off of the ECB’s balance sheet.

In any case, with Chinese buying, the euro zone is finding support for their funding issues, even as this ‘solution’ further drives up the euro and threatens to put a damper on their exports.

As previously discussed, the euro zone’s export driven model lacks the critical ingredient of being able to buy the currencies of the regions to which they wish to export.

All not to forget that imports are real benefits and exports real costs. So what we are seeing is a battle for export markets between nations who haven’t mastered the elementary art of supporting domestic demand and optimizing real terms of trade.

China to the Rescue! Wen Offers to Buy Greek Bonds

October 3 (Reuters) — China offered on Saturday to buy Greek government bonds in a show of support for the country whose debt burden triggered a crisis for the euro zone and required an international bailout.

Premier Wen Jiabao made the offer at the start of a two-day visit to the crisis-hit country where he says he expects to expand ties in all areas.

“With its foreign exchange reserve, China has already bought and is holding Greek bonds and will keep a positive stance in participating and buying bonds that Greece will issue,” Wen said, speaking through an interpreter.

“China will undertake a great effort to support euro zone countries and Greece to overcome the crisis.”

Greece needs foreign investment to help it fulfill the terms of a 110 billion euro (US$150 billion) bailout. This rescued it from bankruptcy in May but also imposed strict austerity measures, deepening its recession.

Greece, which has been raising only short-term loans in the debt market, has said it wants to return to markets some time next year to sell longer-term debt, although the EU/IMF package llows it to wait until 2012.

“I am convinced that with my visit to Greece our bilateral relations and cooperation in all spheres will be further developed,” Wen told Greek Prime Minister George Papandreou earlier in the day.

Greece and China pledged to stimulate investment in a memorandum of understanding and private companies signed a dozen deals in areas like shipping, construction and tourism.

“Our two countries, both historical and modern, have to strengthen our relations in all sectors, to move on and overcome present difficulties,” said Wen, speaking through an interpreter in televised comments.

The investment memorandum does not target specific investment volumes, an official close to Investment Minister Harris Pamboukis said ahead of Wen’s visit.

“We want to build this strategic partnership with China,” the investment ministry official said. “The purpose is not a signature on something big.”

China has said it needs to diversify its foreign currency holdings and has bought Spanish government bonds. In January, Greece denied media reports it planned to sell up to 25 billion euros of bonds to China.

Wen will address the Greek parliament on Sunday and leave early on Monday for Brussels, where he will attend an EU-China summit before going on to Germany, Italy and Turkey.

Clinching business deals with countries such as China and Qatar would help boost confidence among Greek consumers and businesses, economic analysts said.

With the global economic crisis and competition with other Balkan countries increasing, foreign direct investment in Greece fell from 6.9 billion euros in 2006 to 4.5 billion in 2009, according to Investment Ministry figures.

Chinese investment represents a very small proportion of this, excluding a 35-year concession deal China’s Cosco signed in 2008 to turn the port of Piraeus into a regional hub for a guaranteed amount of 3.4 billion euros, according to port authority figures.

Wen is also likely to deal with international pressure on China over its currency exchange policies during his tour.

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Ireland Banking System Recapitalization

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On Fri, Oct 1, 2010 at 9:14 AM, wrote:
Note the Anglo (not Allied) Irish Bank has been split up into a bad bank, the Asset Recovery Bank, and a good bank, the Funding Bank. The Asset Recovery Bank requires 29 bb and the Funding Bank 250 mm Euro. Allied Irish Bank is also to be split eventually into a good bank/bad bank structure.


Where is the Irish government getting 29.3 bb of Euro to recapitalize Anglo Irish Bank?

It doesn’t ‘get’ the money, as you next state.

The government will issue promissory notes to recapitalize Anglo Irish Bank (this is unrelated to the NAMA program activity), which the bank can count towards their capital base.

Right, capital isn’t ‘spent’ until there are losses and depositors want out. It is just ‘counted’

The promissory notes will be amortized over a 10 yr period. Currently the government is estimating that a total of 29.3 bb in capital will need to be provided to Anglo Irish Bank. Of this 29.3 bb, 23 bb has already been given to the bank in the form of promissory notes. The Irish MOF has stated that no additional borrowing will be required this year due to the additional capital support needed.

Right, and going fwd the bank can buy irish debt that will ‘count’ as capital which is the same as the notes it now holds. So in that sense it’s ‘self funding’ and all nothing more than a guarantee of the govt. that we call deposit insurance. But as previously discussed it’s like having a US State provide the deposit insurance over here.

Given the bank related issuance plan, it is my understanding that Ireland’s debt to GDP program will show a significant jump at year end as the European Commission has required Ireland to include this issuance in their reported debt figure. This should not be new information but the headline debt/gdp number, which may break 100% when it is released, may get the markets attention.

Functionally ‘debt’ should include all the deposit guarantees, not just this one. But that’s another story

In addition, the government will fast-track the transfer of Anglo Irish Bank’s remaining bad loans to NAMA in order to be finished by early 2011. The haircut for the remaining 19 bb euro loans to be transferred will be 67% in the base case scenario well above the average of 56% for the first two tranches transferred totaling 16 bb euros. The total transfer of bad loans from Anglo Irish Bank is projected to total €35bn.

Actual losses on that portfolio will be actual losses to Ireland

Current Status of NAMA Program


Program is not completed yet.
81 bb euro face value of loans from 5 different banks, including Anglo Irish Bank, are expected to be transferred to the government (NAMA)
Two tranches of transfers have been completed for a total of 3,518 loans with a face value of 27.2 bb euro
The loans were given a haircut of 52.3% on average. NAMA bond issuance to the banks in exchange for these loans has totaled 13 bb euros
A third tranche is expected to be completed this month (Sept) involving 12 bb euro face value of loans (not including the haircut)


While the ECB does not disclose the collateral it receives in return for loans via its main refinancing operation (MRO) or its long term repo operation (LTRO) it is presumed that the NAMA issued bonds have been given to the ECB as collateral for funding at the policy rate.

Makes sense. Underneath it all the ECB is supporting the funding by buying irish bonds.

Miscellaneous


By December Allied Irish Bank (not to be confused with Anglo Irish Bank) is scheduled to raise 5.4 bb in capital. A rights issue for approximately 3 bb euro is expected to be fully underwritten by the National Pension Reserve Fund Committee (NPRFC) and offered to existing shareholders. The NPRFC currently holds 15 bb euros in liquid assets according to UBS which would be available for this transaction.


Based on the haircuts used for NAMA transfers, the central bank has requested an additional capital injection for the Irish National Building Society of 2.7 bb euro. The MoF plans to inject this extra capital via promissory notes as well.

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ECB Steps Up Its Bond Buys Amid Worries

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Bottom line- The ECB continues to ‘do what it takes.’ They are in no case ‘resource constrained.’ It’s entirely a political decision. And with the troubled nations complying with the terms and conditions dictated by the ECB I see no reason they won’t continue.

ECB Steps Up Its Bond Buys Amid Worries

(WSJ) The ECB has spent more than €61 billion ($79.58 billion) since May on government bonds. The ECB said it spent €323 million on government bonds last week, up from €237 million the previous week and its highest level since mid-August. On Monday, yields spreads between Irish and German 10-year bonds exceeded four percentage points, a record, and more than double the spread that existed on May 10 when the ECB started buying government debt. Portuguese yield spreads also hit a record Monday, at more than four percentage points above safer German equivalents. That spread was just 1.89 percentage points on May 10. Greek spreads are near highs at more than nine percentage points above German government bonds. Ireland plans to auction €1 billion to €1.5 billion in bonds Tuesday. Portugal is due to tap the debt markets Wednesday with a €750 million to €1 billion offering.

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Bank capital is about price, not quantity

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As previously discussed, there is no numerical limit to the amount of available bank capital.

It’s about price, not quantity.

Borrowing by Europe’s banks soars

September 12 (FT) — European banks are borrowing at their fastest rate in almost six months and are set to continue exploiting a positive market mood in spite of longer-term funding concerns and worries about the economic health of weaker eurozone governments.

Financial institutions in the region last week raised $20.5bn, their busiest week since March, according to Dealogic. Bankers expect similar data this week.
Institutions tapping the market included Santander unit Abbey National, BNP Paribas, UniCredit, Banesto, Banco Popolare and Lloyds Banking Group.

The renewed investor appetite will come as a relief to many banks. The bank debt markets virtually froze in May and June as the eurozone sovereign debt crisis erupted, putting some banks behind with their funding plans. September is typically a busy month as investors and bankers return from summer breaks with only three full months left before activity subsides again in December.

The borrowing comes as the Basel Committee on Banking Supervision met at the weekend to hammer out final capital rules that will force banks to raise their capital cushions further in the coming years.

Last week was also notable because it included a handful of deals from second-tier banks in weaker eurozone countries.

“Now it’s not just the national champions,” said Vinod Vasan, European head of financial institutions for debt capital markets at Deutsche Bank, who noted that some smaller Spanish banks had issued covered bonds, a form of ultra-safe securitisation that gives investors recourse to the bank if the underlying assets decline.

Bankers had feared that this month’s bond market would be disrupted by concerns about banks’ ability to refinance debt.

Ireland’s banks have been hit by these worries because they are due to repay about €25bn of debt this month as a 2008 government guarantee wears off. A new guarantee was put in place last week and analysts expect Bank of Ireland to test market interest in the next few weeks.

But some bankers caution against believing that the bond markets are fully open for all financial institutions. “National cham pions still have funding needs,” said Chris Tuffey, co-head of Credit Suisse’s European credit capital markets group. “So if there is investor appetite, they’ll be the ones to nail it.”

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Fears Grow over the Fate of Irish Economy, Banks

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The two external shocks of the summer were China, which historically has had second half slowdowns due to State lending front loaded to the first half, and the euro zone which became a ward of the ECB. China’s growth has slowed some, but not collapsed, and the ECB has continued its support of euro member solvency and funding capability in the short term markets.

There was no credible deposit insurance for the euro zone banks until the ECB ‘wrote the check’ by buying national govt debt in the secondary markets. It’s not the most efficient way to do things, but it does work to facilitate national govts being able to fund themselves, though mainly in the very short term markets (I still see my per capita distribution proposal as the better policy response). And that ability of the member nations to fund themselves means they can write the check for deposit insurance as needed.

The ECB also imposed ‘terms and conditions’ along with funding assistance, and as long as Ireland is in compliance, the ECB is for the most part responsible for the outcomes, so it seems logical the ECB will continue its support, perhaps changing its terms and conditions if not pleased with the outcomes. Additionally, the ECB will continue to supply liquidity directly to the banks, again, as with Ireland complying with the terms and conditions the ECB is now responsible for the outcomes.

But there is no question it is all a precarious brew, and there is no telling what might result in the ECB withdrawing support, so at this time steep yield curves for euro member nations due to credit risk make perfect sense.

Also, Europe and the rest of the world would like nothing more than to increase net exports to the US.

It’s all a golden opportunity for a decade or more of unparalleled US prosperity if we knew enough to again become the ‘engine of growth’ and implement the likes of a full payroll tax (FICA) holiday to provide Americans working for a living enough spending power to buy both everything we could produce at full employment and all the rest of the world wants to net sell us.

Unfortunately the deficit myths continue to cast a wet blanket over domestic demand as our leaders continue to let us down.

And with maybe 100 new Congressmen on the way, with most supporting a balanced budget and a balanced budget amendment which already has maybe 125 votes, there’s more than enough fiscal responsibility looming to create a true depression.

Hopefully their tax cutting agenda outweighs their balanced budget agenda.

And hopefully we get some kind of energy policy to decouple GDP growth from a spike in energy consumption.

Fears Grow over the Fate of Irish Economy, Banks

By Patrick Allen

September 8(CNBC) — The fate of the Irish economy is back in focus for investors across the world, after the former Celtic Tiger extended guarantees to its banking industry and depositors and with the spread on Irish bonds hitting record highs.

The country is also waiting for a decision from the European Commission on the fate of Anglo Irish, the troubled bank that was nationalized two years ago; uncertainty on whether Anglo Irish will be wound down or allowed to survive has weighed on sentiment towards the country.

Ireland is an example of a Western economy adjusting to both the banking crisis and, crucially, the emergence of Asia, Amit Kara, an economist at Morgan Stanley, said.

“Ireland has taken steps to overcome the hangover from the credit boom, but a successful outcome requires the economy to become more competitive and also, and more crucially, a global economic recovery,” Kara said.

He is confident the Irish economy will be able to roll over debt in the coming weeks and sees the chance for Irish debt to outperform the likes of Spain.

“Though Ireland faces serious long-term challenges, its liquidity position is healthy and its banks should have sufficient ECB-eligible collateral to significantly offset the funding impact of upcoming debt redemptions,” Kara explained.

“Given the underperformance of recent weeks, we see scope for Irish bonds to regain some ground against Portugal and Spain in particular, once the initial round of government-guaranteed bond redemptions has taken place over the first two weeks of September,” he added.

What is on Ireland’s Books?

The Irish banking system remains hooked on European Central Bank funding and investors are also worried about the risks posed by the scale of liabilities following Ireland’s decision to guarantee the country’s lenders.

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