Category Archives: ECB

placebo’s doing their thing

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As previously discussed, financial placebos like QE do cause market participants to alter behavior out of either a misunderstanding of the actual fundamentals, or in anticipation of reactions by others presumed to be misinformed. And while the effects of these activities get reversed, however sometimes the effects are more lasting.

And there are also first order and second order effects. For example, a QE announcement could unleash misinformed fears about ‘money printing’ and ‘currency debasement’ and subsequent portfolio shifting that drives down the currency in the fx markets and drives up the price of gold. And the same misguided fears could cause bond yields to go higher in anticipation of a stronger/inflationary economy, even with the Fed buying bonds in an attempt to take yields lower.

So right now the QE/’monetary policy works if large enough’ placebo is at least partially driving things in both Japan and the US, and today’s announcement of the possibility of the ECB buying asset backed securities is now also at work.

And along the same lines but with a different ‘sign’ is the ideologically driven idea that cutting govt spending in the face of a large output gap- the sequester- is a plus for output and employment. Same for the year end tax hikes.

The underlying fundamental I don’t see discussed is whether private sector credit expansion can continue to sufficiently ‘overcome’ the declining govt deficit spending and satisfy the ‘savings desires’/demand leakages.

The main sources of private sector credit expansion are housing, student loans ($9 billion increase in March), and cars. Since 2009, the private sector credit expansion has managed to stay far enough ahead of the declining govt deficit, which has fallen from about 9% of GDP to about a rate of 6% of GDP by year end (mainly via the ‘automatic fiscal stabilizers’ of higher tax receipts and moderating transfer payments) resulting in about 2% real growth.

The question now is whether the private sector credit expansion can survive the 1.25% of GDP shock of the FICA tax hike and sequesters- which reduce support from the govt deficit to only maybe 4.5% of GDP- and still continue to sufficiently feed the (ever growing) demand leakages enough to generate positive GDP growth.

The stock market is often the best leading indicator of the macro economy, but it has ‘paused’ for two double dips that didn’t happen over the last few years, and it is subject to influence from placebos. Additionally, valuations change as implied discount rates change, and so in this case P/E’s shifting upwards may be discounting interest rates staying low for longer, due to an economy too weak to trigger Fed rate hikes, but strong enough to keep sales and earnings at least flat.

Placebo Surgery Shows Surprising Results

By Kate Melville

Research by Doctor Cynthia McRae of the University of Denver’s College of Education provides strong evidence for a significant mind-body connection among patients who participated in a Parkinson’s surgical trial.

Forty persons from the United States and Canada participated to determine the effectiveness of transplantation of human embryonic dopamine neurons into the brains of persons with advanced Parkinson’s disease. Twenty patients received the transplant while 20 more were randomly assigned to a sham surgery condition. Dr. McRae reports that the “placebo effect” was strong among the 30 patients who participated in the quality of life portion of the study.

“Those who thought they received the transplant at 12 months reported better quality of life than those who thought they received the sham surgery, regardless of which surgery they actually received,” says Dr. McRae. More importantly, objective ratings of neurological functioning by medical personnel showed a similar effect. In the report, appearing in the Archives of General Psychiatry, Dr. McRae writes “medical staff, who did not know which treatment each patient received, also reported more differences and changes at 12 months based on patients’ perceived treatment than on actual treatment.”

One patient reported that she had not been physically active for several years before surgery, but in the year following surgery she resumed hiking and ice skating. When the double blind was lifted, she was surprised to find that she had received the sham surgery.

Although patient perceptions influenced their test scores, when the total sample of patients was grouped by the actual operation they received, patients who had the actual transplant surgery showed improvement in movement while, on average, patients who had sham surgery did not.

Professor Dan Russell at Iowa State, the study’s co-author, says the findings have both scientific and practical implications. “This study is extremely important in regard to the placebo effect because we know of no placebo studies that have effectively maintained the double-blind for at least 12 months. The average length of placebo studies is eight weeks,” according to Russell. Dr. McRae notes that similar results related to the placebo effect have been found in other studies with patients with Parkinson’s disease. She says that there is a need for placebo controls in studies evaluating treatment for Parkinson’s as the placebo effect seems to be very strong in this disease. Dr. McRae also reports that although the sham surgery research design is somewhat controversial and has raised some ethical concerns, the results of this study show “the importance of a double-blind design to distinguish the actual and perceived values of a treatment intervention.”

Knee Surgery Proves No Better Than Placebo

By Katrina Woznicki

July 10, 2002 (UPI) — For individuals suffering from osteoarthritis in their knees, a common type of knee surgery has been found to be no more beneficial than a placebo, a new study revealed Wednesday.

Researchers at the Houston VA Medical Center and at Baylor College of Medicine came to this surprising conclusion after comparing various knee treatments to placebo surgery on 180 patients with knee pain.

The patients were randomly divided into three groups. One group underwent debridement, in which the damaged or loose cartilage is the knee is surgically removed by an arthroscope, a pencil-thin tube that allows doctors to see inside the knee. The second group received arthoscopic lavage, which flushes out the bad cartilage from the healthier tissue. A third group underwent a placebo surgery. They were sedated by medication while surgeons simulated arthroscopic surgery on their knees by making small incisions on the leg, but not removing any tissue.

During a two-year follow-up, researchers found no differences among the three groups. All patients reported improvement in their symptoms of pain and ability to use their knees. Throughout the two years, patients were unaware whether they had received the “real” or placebo surgery.

However, patients who received actual surgical treatments did not report less pain or better functioning of their knees compared to the placebo group. In fact, periodically during the follow-up, the placebo group reported a better outcome compared to the patients who underwent debridement.

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Market Watch

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Radical fixes needed to make the euro work

Commentary: Warren Mosler has a plan but no takers

By Darrell Delamaide

May 8 (MarketWatch) — If youre ever tempted to think the euro zone has turned the corner and is on the right track, go have a chat with Warren Mosler and hell set you straight.

The former hedge-fund manager and an original proponent of what has come to be known as modern monetary theory gave a talk recently at a wealth management conference in Zurich that took a pessimistic view of the euro righting itself on its current path.

The European slow-motion train wreck will continue until theres recognition that deficits need to be larger, Mosler said at the conclusion of his analysis. The continuing efforts at deficit reduction will continue to make things worse.

Mosler suggested several measures that could turn around the situation in the euro zone, though he acknowledged there is little chance they will be adopted.

The euro authorities need to accept that deficits should be allowed to go up to 8% of gross domestic product, instead of the current 3%, as the only way to create the monetary conditions for full employment and economic growth.

The European Central Bank should make a policy rate of 0% permanent. The ECB, as the source of the euro zones fiat money, should guarantee the debt of all euro countries and guarantee deposit insurance for all euro-zone banks, which would entail taking over bank supervision.

Individual countries in the euro zone, like individual states in the U.S., are trapped in a procyclical monetary and fiscal environment. Because they have no sovereign currency, they must reduce spending in a downturn.

In the U.S., the federal government can operate countercyclically, by running a sufficiently large deficit to provide net savings to the private sector. The ECB is the only institution in the euro zone that does not have revenue constraints and could play a countercyclical role.

Because money is a public monopoly, when the monopolist restricts supply by not running a sufficient deficit, it creates excess capacity in the economy, as evidenced by high unemployment.

Mosler says the deficit can result from lower taxes or increased government spending, whatever your politics prefers. But policies aimed at reducing the deficit are doomed to keep an economy depressed.

And theres more. All successful currency unions include fiscal transfers, Mosler said. In Canada, this is written into the constitution and in the U.S. it is achieved through the federal budget.

In Europe, this would mean that some authority like an empowered European Parliament would direct government spending to the areas with the highest unemployment.

Clearly all of this is well beyond what Europe is currently capable of doing, and the leaders in power have implicitly or explicitly rejected all of these potential fixes.

The reality is, Mosler noted, that there is no political support for higher deficits, no political support for leaving the euro, and beyond reducing deficits the only remaining fixes are taxes on depositors and bondholders like those seen in Cyprus and Greece.

Mosler, who currently manages offshore funds and produces sports cars on the side, says his views, which have been taken up and elaborated by a post-Keynesian school of economics, are based on his experience as a money manager.

And, he adds, he has a substantial following of asset managers for his ideas because these are people who are paid to get it right.

The current stopgap measures proposed by the ECB notably the putative outright monetary transactions to bail out a country under certain conditions, which has yet to be used have a dubious legal basis and are so much smoke and mirrors, Mosler said.

In this Zurich talk, Mosler did not draw any further conclusions regarding his pessimistic view of the euros current course, but a website devoted to Mosler Economics in Italy, where MMT has a considerable following, spells out what it could mean in a post called 10 reasons to return to the lira.

These reasons include the ability to lower taxes, allow the government to pay off debts to the private sector and implement a works program to provide employment and improve the public infrastructure. Read the post (in Italian).

Lest this all seem like so much pie in the sky, keep in mind that the forces that gave the protest movement of Beppe Grillo a quarter of the vote in Italys recent election will only grow as continued austerity deepens Europes recession.

So remain optimistic if you like, but youve been warned.

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DRAGHI SAYS ECB TECHNICALLY READY FOR NEGATIVE DEPOSIT RATES

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If anyone can get a message to him, please tell him that, functionally, negative rates are just a tax on deposits that ultimately reduces spending/output/employment, much like the PSI did in Greece and whatever you want to call the ‘deposit confiscation tax’ in Cypress.

>   
>   (email exchange)
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>   This is a bit unexpected
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*DRAGHI SAYS ECB TECHNICALLY READY FOR NEGATIVE DEPOSIT RATES

*DRAGHI SAYS ECB TECHNICALLY READY FOR NEGATIVE DEPOSIT RATES

“on the deposit facility rate… we are technically ready. There are several unintended consequences that may stem from this measure. we will address and cope with these consequences if we decided to act. We will look at this with an open mind and stand ready to act if needed”

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Germany’s Ifo Drops in April, Raising Odds of ECB Cut

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And a rate cut only makes it worse, as per the interest income channels:

Germany’s Ifo Drops in April, Raising Odds of ECB Cut

April 24 (Bloomberg) — Germany’s Ifo index dropped in April, in a further sign that Europe’s largest economy is slowing.

The business climate reading came in at 104.4 down from 106.7 in March and expectations of 106.2.

The weak data follows Tuesday’s weaker-than-expected purchasing managers index (PMI) data.

That sparked speculation that the European Central Bank will cut interest rates at its meeting next week on Thursday.

European shares shrugged off the weak Ifo reading, in a sign the market is cheering a possible ECB rate cut.

The euro fell against the dollar after the Ifo data was released.

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Thaler’s Corner 04-22-2013 2013: And now?

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Again, very well stated!

Thaler’s Corner

I must admit that I am at a loss for words these days. The analytical items at our disposal describe a situation so complex, given a myriad of contradictory influences, that I find it impossible to develop any sort of reasonable scenario.


I have spent a lot of time in recent weeks exchanging ideas and perceptions with academics, political officials and others in an effort to develop a coherent explanation of the events unfolding before us (Cyprus, wealth tax, etc.), but the conclusions are anything but conclusive!

Changes in financial securities will no longer be determined by purely economic factors but more and more by political decisions, such as whether or not to establish a real European banking union with all that implies in terms of cross-border budget transfer risks.

Whatever, lets take a look at the state of the real economy in the United Sates and Europe, given that it is still a bit early to draw any sort of conclusions about a third economic motor, Japan.

By the way, I strongly recommend that people check out the links in todays Macro Geeks Corner toward the end of the newsletter. It is interesting to see how two fairly divergent schools of thinking (the two first texts) end up with rather similar conclusions.

United States

In the United States, the economy is (logically) slowing as the effects of the Sequester slowly make themselves felt. Only the (increasingly discredited) partisans of Reinhold & Rogoffs constructive austerity thought it would not affect household consumption.

We had to wait for the hike in payroll taxes for the effect to be seen in retail sales figures, down 0.4% in March. Similarly, all the latest leading economic (PMI) and confidence indicators came in below expectations, which augurs for a soft patch in the US.

Moreover, the yens decline can only have a negative impact on America trade balance with Japan as it puts US exporters at a disadvantage, in particular, as they compete with their Japanese rivals on Asian markets. And the pitiful state of the European economy is not going to help this sector of the US economy either.

But there remains one bright spot, namely the residential real estate market, which should remain a powerful support in the quarters ahead. Check out one of my favorite graphs real animal rates.

Real animal rates in the US:


Full size image

These rates are calculated using a proprietary equation I developed, which includes, in addition to terms like mortgage interest rates, recent home price trends, the difference between the reported unemployment rate and that during periods of full employment, and the difference between the average length of unemployment and that existing in times of full employment.

With the Animal Spirits so dear to Keynes and behavioral science in mind, the goal was to factor in items more subjective than simple economic criteria (nominal borrowing rates) in the home purchase decision-making process of a household.

If experience has taught us anything, it is that the factors which most influence a potential homebuyers decision is his degree of job security and the feeling that prices can only rise.

The first point is that the only time these real animal rates dipped into negative territory (in the upper part of graph, transcribed in inverted scale) corresponds perfectly with the great real estate bubble of 1998 to 2006.

This big trend reversal occurred in 2006 when rates resurfaced above zero and thus below the graphs red line.

The only other time real animal rates became negative was in 1989, but that was abruptly reversed by the sharp hike in nominal interest rates.

In the current context, nominal interest rates are unlikely to undergo any such sharp hike in the quarters ahead, and this dip of real animal rates into negative territory should enable the real estate market to continue to recover. This all the more true, given that the yens decline will only strengthen disinflationary trends in North America, which ensure accommodative monetary policies for some time to come!

All you need to do is look at the steep decline in inflationary expectations, as expressed by the TIPS market in the US, to understand that investors seem to have finally realized that QE policies have nothing to do with the so-called dollar printing press. Notwithstanding the ZeroHedge paranoids!

That said, existing home sales in the US, out just a few minutes ago, came in weak, at -0.6% m-o-m (vs expected +0.4%, i.e. 4.92M vs 5M), which explains this afternoon shiver on stockmarket indices.

Now, as the IMF has said in recent days, the main brake on a worldwide recovery is the Eurozone, which remains paralyzed by the obsession of its northern member states on austerity and by the ECBs total and unforgivable incapacity to comply with its own mandate! In todays Macro Geeks Corner, you will find two instructive links on this matter.

Eurozone

Instead of harping on the endless stream of errors made by our beloved European monetary and governmental leaders, I prefer to comment on some far more instructive graphs.

Lets start with our graph on aggregate 2-year Eurozone government bond rates, which have proven to be so useful in recent years for evaluating the ECBs reaction function.

This rate, currently at a record low 0.55%, is now well below the 0.75% set for the refi. This stems from two factors.

First, in view of the state of the economy and the latest comments by certain ECB board members, investors expect that the refi rate will very soon (May or June) be cut to 0.50%.

Second, certainty that short-term interest rates, like the Eonia, which have been stuck between 5 bps and 12 bps for the past 9 months, are not going to rise anytime soon is pushing investors to seek yields wherever they can still find them, like in Spain and Italy where 2-year bonds still fetch between 1.95% and 1.25%, now that they are assured that, henceforth, in case of insolvency, bank depositors will be forced to pay the bill without pushing sovereign issuers into default, as happened in Greece!

Aggregated Eurozone government 2-year rate:

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However, we have reason to be concerned that the ECB, if it does lower the refi to 0.50%, will be satisfied with what it already deems a low rate and highly accommodative monetary policy. Such is far from being the case, even if we go by the ECBs own obsolete aggregates, like M3, as money velocity continues to skid to a halt, following Cyprus.

And all this has an impact on the real economy, as you can see in the following graphs.

Eurozone Industrial Production

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The least we can say is that this graph is particularly distressing. Of course, it does not account for the economys industrial aspect, which some call the old economy. But it provides a whole lot of jobs and no economic area can afford to neglect it.

And the impact of Mr Sarkozys renowned Walk of Canossa, following his summons by Ms Merkel in July 2011 to Berlin where the unfortunate decision to create the first sovereign default of a developed country was endorsed (Greek PSI), is very clear on this graph. Together with a hardening of austerity policies and the nefarious consequences of the ECBs hikes of benchmark interest rates in the spring of 2011, this decision torpedoed already distressed economies, with the consequences we all know today.


But if there is one depressing economic indicator, which reflects even more cruelly how austerity affected the Eurozone, it is surely the unemployment curve.

Eurozone Unemployment

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Here again, no comment is needed. I included earlier in this newsletter the graph comparing the US and Eurozone curves, but even that is no longer all that relevant. If people are happy to underperform the United States, who cares? If the Eurozone wants to try liquidationist economic policies to help drive home the morality message, it has every right to do so, just as its citizens merit the leadership they elect.

But to go from there to creating a situation of hysteria, leading to an increasingly large segment of the active population being ejected from the labor market, is a big step that must never be taken.

In some countries, the figures are just horrifying, with nearly 30% general unemployment and over 50% for those under 25 years of age. It is incredible that some continue to boast the merits of such policies for countries like Ireland while ignoring the daily siphoning of the population due to massive immigration to seek jobs elsewhere!!

I wonder if those responsible for such policies have forgotten the consequences of such an approach in Europe and the breakdown in the social fabric during the Great Depression, especially now, with so many leaders spicing their speeches with anti-German references?

This pathetic situation, reflecting month after month of economic policies based on no worthwhile or credible foundations, be it on a theoretical or empirical basis, explains why I am having a hard time re-establishing a decent pace of publication.

This is especially so in that the conflict between this depressive macro situation and the strong efforts undertaken by the Fed and the BoJ (among others) to reignite economic activity leave no space for laying out clear asset allocation biases.

We continue to enable our clients to take advantage of opportunities on option markets which make it possible during these troubled times to make bets on the cheap but without any real conviction.

Has our asset allocation strategy, dating from 2007 (a bit early, I know), of favoring government debt came to maturity with German 10-year rates at 1.23%, i.e. more than 30 bps below those of the United States?

Will European stock markets continue to suffer from our big fear, the Japanese syndrome? Or will popular pressure push the ECB and the Austrian School proponents to realize that they have a modern currency at their disposal and that reversing their entire intellectual edifice is possible?


Despite all my efforts, studies, reading and discussion, I am totally incapable of responding to these questions, which a great lesson in humility. Sorry for the consequences in terms of this newsletters clarity and frequency of publication, but if anyone has any ideas, I am all ears!

The Macro Geeks Corner:

Dear Northern Europeans Monetary easing is not a bailout

A factual rebuttal of remarks of ECB chief Jrg Asmussen, made at the Bank of America/Merrill Lynch Investor conference

Breaking bad inflation expectations

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Draghi Considers Plan B

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Yet more proposals that won’t work.

The problem remains:
Deficits are too small while they all think they are too large.

Draghi Considers Plan B as Sentiment Dims After Cyprus Fumble

By Jeff Black and Jana Randow and Stefan Riecher

April 4 (Bloomberg) — European Central Bank President Mario Draghi is under pressure to reveal Plan B.

A botched attempt to rescue Cyprus last month sent bank shares tumbling across the euro area and rattled confidence in policy makers’ ability to tame the sovereign debt crisis. With doubts growing about Draghi’s forecast for a second-half economic recovery, he’s considering his options.

They range from an interest-rate cut to a new round of long-term loans to banks, to a plan to encourage lending to companies, three officials with knowledge of the deliberations said. They stressed that such action may not be announced today.

“They have to start thinking about a plan for unconventional measures if the recovery does not materialize,” said Martin van Vliet, senior euro-area economist at ING Bank NV in Amsterdam. “It may be too early for them to do that this month, but I’d expect Draghi to acknowledge that the economy is not improving and the chances of a surprise are bigger than they were.”

With Europe entering a second year of recession and fragmented financial markets preventing the ECB’s record-low borrowing costs from reaching the countries that need them most, Draghi may prefer to use so-called non-standard measures. He is particularly concerned about a lack of credit being extended to small and medium-sized companies in countries such as Italy and Spain, two of the officials said on condition of anonymity.

Rates on Hold

The Frankfurt-based ECB will leave its benchmark rate at a record low of 0.75 percent today, according to 54 of 56 economists in a Bloomberg News survey. Two predict a cut. The decision is due at 1:45 p.m. and Draghi holds a press conference 45 minutes later.

The Bank of England will hold its key rate at a record low of 0.5 percent and maintain bond purchases at 375 billion pounds ($568 billion), separate surveys of economists show. That decision is due at noon in London.

The Bank of Japan (8301) decided today to increase monthly bond purchases to 7 trillion yen ($74 billion) in a bid to reach 2 percent inflation in two years. At the first meeting led by Governor Haruhiko Kuroda, it also temporarily suspended a cap on some bond holdings and dropped a limit on the maturities of debt it buys.

Economists from ABN Amro Bank NV to Nordea Bank AB say Draghi needs to give reassurance he still has policy options at his disposal as evidence mounts that the recovery is faltering.

The ECB’s measure of bank lending to the private sector fell for a 10th month in February, dropping 0.9 percent from a year earlier, and manufacturing activity, measured by a survey of purchasing managers, contracted more than economists forecast in March.

Case for Action

“If you look at the world around you, with the economy weak, inflation falling to low levels, the disparities between countries and the credit mechanism not getting any better, you can’t conclude that no further action from the ECB is necessary,” said Nick Kounis, head of macro research at ABN Amro in Amsterdam. “The case for further action from the ECB remains very strong.”

Still, ECB officials haven’t provided clear guidance on what that further action might be. A rate reduction has been discussed since December, with Draghi saying last month that the “prevailing consensus” was against such a move.

That may be because lower ECB interest rates aren’t being fully passed on to the parts of the euro economy that really need them. A cut would also raise the issue of whether to take the deposit rate — the rate the ECB pays banks to park cash with it overnight — below zero.
Rates ‘Disconnect’

The ECB may be more concerned with what Executive Board member Benoit Coeure on March 12 called the “disconnect” between official lending rates and those that businesses are actually charged.

More than four times as many small businesses in Spain were rejected for loans in the second half of last year than in Germany, or walked away from an offer because it was too expensive, research published by Barclays Plc shows.

While the ECB is studying ways to ease that fragmentation, such as the Bank of England’s Funding for Lending Scheme, Draghi said at last month’s press conference on March 7 that it isn’t “planning anything special.”

‘Expectations’

An asset-purchase plan targeted at small- and medium-sized business lending is far from straightforward, said Jan von Gerich, chief fixed-income analyst at Nordea Bank in Helsinki.

“There are a lot of expectations but they’re quite limited in what they can do,” he said. “It’s most likely for them to ease collateral requirements and make it easier to package SME loans. But it gets messy quickly and hawkish members are probably not comfortable with it.”

With excess liquidity in the banking sector halving in the past six months, lenders in some parts of the region might be in need of more central-bank funds. Longer-term refinancing operations, or LTROs, have been the ECB’s signature tool to ease tensions in financial markets and encourage lending, and policy makers may resort to this option again if they can’t find consensus on more complex measures, economists said.

Draghi is also likely to be questioned today on the ECB’s role in Cyprus’s bailout. The ECB was party to and welcomed an initial plan to tax all deposits in Cypriot banks, which the nation’s parliament rejected.

While a revised agreement ditching a tax on deposits under 100,000 euros ($128,580) was negotiated over a week later under threat of the ECB cutting emergency funding to Cypriot banks, capital controls have been introduced for the first time in the euro region to prevent capital flight.

Confidence Damaged

The episode damaged investor confidence across the currency bloc. The Stoxx Europe 600 Banks Index (SX7P) dropped 6.8 percent between March 15 and 27, the day before banks reopened in Cyprus.

The cost of insuring against default on European bank bonds surged 41 percent in that period, with the Markit iTraxx Europe Senior Financial Index of credit-default swaps on 25 lenders jumping 58 points to 201.

Allowing a flawed plan to go to the Cypriot parliament exacerbated the financial reaction to the bailout and harmed trust in Europe’s crisis-fighting abilities, said Ken Wattret, chief euro-area economist at BNP Paribas in London, who predicts a rate cut today.

“The error originated in Cyprus, but the error from finance ministers and the ECB was to support it,” he said. “We saw an increase in stress in financial markets and a drop in economic sentiment. What we’re missing is a policy response.”

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Cyprus proposal detail

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Proposals from earlier today:

ECB guarantees deposits for .25% annual fee
ECB takes over regulation, supervision, enforcement of banking regs etc.

This becomes the model for regulating all EU banks

I finally got a quick minute to add some color to the above proposals from earlier today.

With about 70 billion in assets, the banking system has negative capital of about only 2 billion, or about 3% of assets. And that no doubt includes markdowns on EU member nation debt that ‘goes away’ with the ECB ‘doing what it takes’ to sustain solvency.

With ECB deposit insurance the liquidity issue goes away, so the approx 10 billion in loans won’t be applicable, and ‘regulatory forebearance’ can then obviate the need for the rest of the proposed and highly controversal and problematic ‘rescue package.’

Additionally, the cost of funds goes down, so net interest margins widen to promote internal capital rebuilding.

ECB regulation will include ‘regulatory forebearance’ where the banks are allowed to operate with current levels of negative capital under strict ‘tarp like’ terms and conditions- no dividends, salary and bonus controls, credit quality criteria, etc. etc. and not to neglect thorough investigations into criminal activity and prosecution.

When capital ratios are brought into compliance with BASIL levels either through earnings and/or raising new equity the ECB can remove the ‘special requirements and restrictions’ imposed due to insufficient capital.

The ECB, like all central banks, will ultimately insure all bank deposits and also do the regulation. It’s already pretty much doing this indirectly. Cyprus is an opening to do it directly, and get the process down there first before expanding to the rest of the ECB’s member banks.

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French and Italian debt chiefs warn on EU Tobin Tax

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So how about just letting the ECB fund them all at 0%???

Transactions taxes reduce transactions by making them costly,
which is exactly what this one will do.

So if that’s the outcome they want they should go ahead and do it.

And if they want deficit reduction, well, if they were working for me I’d replace them.

But they’re not, so expect more of same.

French and Italian debt chiefs warn on EU Tobin Tax

By Ambrose Evans-Pritchard

March 6 (Telegraph) — Both France and Italy have been keen advocates of the new Financial Transaction Tax (FTT) proposed by Brussels last month, claiming that it will raise money and curb speculation. But they may have overlooked the unintended effect on their own borrowing costs.

Maya Atig, acting chief of French debt agency, said the European Commission’s internal documents acknowledge that the FTT could drain liquidity in the bond markets by 15pc, an effect that would push up yield spreads and raise debt costs.

Brussels estimates that the tax will raise €30bn to €35bn each year for the eleven EU states taking part, but Mrs Atig told a Euromoney conference in London that any revenue would offset “the extra costs that we might have to pay”.

She said the French government is searching for ways to ensure that the tax does not “perturb” the bond market. “This something still to be discussed.”

Maria Cannata, director of Italy’s debt agency, said her country already has a version of the Tobin Tax but has been careful to exempt sovereign debt, adding that policy-makers must bear in mindful the “importance of not damaging the government bond markets”.

The proposal – now in the hands of working groups – is to come into force in early 2014. It will raise a fee of 0.1pc for shares and bonds, and 0.01pc for derivatives.

These rates are far higher than the Swedish tax in 1989 that led to an 85pc crash in bond sales, a 98pc fall in bond futures, and shut-down of options trading, before the experiment was abandoned.

Gabriele Frediani, head of the electronic fixed income market MTS, said the tax would cause repurchase or Repo trades to plunge by 99pc. “The Repo market would disappear overnight,” he said.

The Repo market serves as a vast pawn shop allowing banks to raise funds on money markets by pledging assets. It is a key source of short-term finance for firms, but by its nature it involves fast turn-over.

Brussels said it had changed the text after listening to concerns. Repo trades will be treated as a single transaction instead of two, halving the tax. Short-term loans with collateral will be exempted.

It said the FTT will cover the secondary market for bonds only, insisting that good yield on long-term debt will “still leave enough room for profit after the tax is applied”.

Markus Beyrer, head of the pan-EU industry lobby BusinessEurope, said he was “very disappointed” by the draft text, calling it a threat to growth and jobs.

The text includes an “issuance principle”, meaning that the tax will cover bonds and other assets issued in the eleven countries taking part, even if they are traded in London. This may breach “extra-territoriality” codes.

The Chancellor, George Osborne, said the FTT scheme would amount to a tax on pensioners and cost up to 1m jobs across the EU “without costing bankers a penny”. The traders would migrate to the US or Asia, taking the financial industry with them.

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