Category Archives: ECB

European Central Bank Leveraged Like Lehman: Author

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Obviously neither the author nor CNBC understands the fundamental difference between the issuer of the euro and the users of euro.

In fact, the ECB as per the treaty has no capital requirement, nor does it have any particular use for capital.

However, a general belief has been expressed by various higher ups to the effect that negative ECB capital would somehow be inflationary, and therefore the current imperative for the ECB to have sufficient capital, whatever that means.

So the presumption is any losses the ECB realizes will be ‘matched’ by capital calls to the member nations. Hence the reluctance by the ECB to give Greece, for example, any discounts on the Greek bonds in the ECB’s porfolio.

European Central Bank Leveraged Like Lehman: Author

By Patrick Allen

May 10 (CNBC) — The European Central Bank is indebted to the hilt and is beginning to look like one of the banks it has done so much to save, according to author Satyajit Das.

Having subsidized the European banking industry with its 1 trillion euro ($1.29 trillion) long-term refinancing operation (LTRO), funds that were distributed at well below market prices, the central bank is leveraged to levels Bear Stearns and Lehman Brothers might have felt comfortable with in early 2007.

“If the European Financial Stability Fund was a collateralized debt obligation, the ECB increasingly resembles a highly leveraged bank. The ECB balance sheet is now around euro 3 trillion, an increase of about 30 percent just since Mario Draghi took office in November 2012,” said Das in notes sent to CNBC before an interview on “Squawk Box Europe” on Thursday.

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Something to note…

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Spotted by Sean Keane

It was also interesting to note an easily overlooked article in Greek online newspaper Kathimerini saying that the European Commission is pressuring the European Investment Bank to withdraw a clause that it recently inserted into its new loan contracts that were signed with a number of Greek companies. The new clauses allow for the repayment of debt in Greek Drachma instead of Euro, should the Greeks decide to leave the EU at some point in the future. Clearly the EC is displeased at one of the foremost European lending institutions legally embedding the possibility of something happening which the Commissioners all insist is impossible. Commissioner Olli Rehn reportedly called the clauses “unfortunate and incomprehensible2”. A cynic might note that the EIB has taken an appropriately commercial and realistic approach to the loans, free of the politics that surround the EC.

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Brussels to relax 3pc fiscal targets as revolt spreads

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Yes, larger deficits are needed to support aggregate demand at desired levels.

However, the problem is the national govts are currently like US states and as such are revenue constrained.

So relaxing the deficit limits without some kind of ECB funding guarantees can cause markets to abstain from funding the nat govts.

Said another way, without the ECB the euro members are currently deep into ‘ponzi’.

Brussels to relax 3pc fiscal targets as revolt spreads

By Ambrose Evans-Pritchard

The European Commission is preparing a major shift in economic strategy, fearing that excessive fiscal tightening will inflict unnecessary damage on a string of eurozone countries.

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Bad headline day for eurozone

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Euro-Area Construction Declines for Third Month Led by Germany
Bundesbank Says Euro Nations Must Set Aside Growth Concerns
Merkel Gives Spain No Respite, Says Debt Cuts Key to Yields
Germany wants IMF funding raised to $1 trillion
IMF Lowers Additional Funds Target To $400bn-Plus: Lagarde
Spain weighs financing options
Spain Reduces Flexibility of Labor Reform, Expansion Reports
Bank of Spain Questions Budget Forecasts, Calls for Prudence
Spain Is Back in Recession, Central Banker Warns
Spanish Banks to Set Aside $71 Billion for Real Estate Cleanup
IMF’s Lagarde Sees Scope for ECB Monetary Easing, FAZ Reports
IMF sees Italy missing budget deficit targets
Italy Probably Shrank 0.7% in First Quarter, Bank of Italy Says

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Spanish Banks Face Bond Losses in LTRO Aftermath: David Powell

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Looks like it was at least the Spanish banks that got the nod to buy their govt’s bonds when the LTRO was announced.

Problem is they can only buy them to the extent their capital allows, and as raising more capital isn’t happening, it was probably a one time buying binge.

That’s why subsequent LTRO’s won’t do much for banks whose capital is already fully extended.

And losses serve to weaken their capital positions.

Spanish Banks Face Bond Losses in LTRO Aftermath: David Powell

By David Powell

April 11 (Bloomberg) — The European Central Bank may have pushed the Spanish banking system closer to collapse through its three-year longer-term refinancing operations.

Banks in Spain have been saddled with losses of about 1.6 billion euros as a result of the liquidity operation conducted in December, according to Bloomberg Brief estimates. Spanish lenders purchased 45.7 billion euros of government bonds during the months of December, January and February, according to monthly data from the ECB, and the average of the current prices of two-, six- and 10-year government bonds of Spain is 3.5 percent below the average of the average of those prices from Dec. 22 to March 1. [Note: The prices for six-year bonds are used instead of those for five-year bonds because the price history for the current five-year generic government bond of Italy starts only in January.]

International assistance will probably be needed to break the cycle. Spanish sovereign yields surged last year as investors worried about the solvency of the state given unrecognized losses in the banking system linked to the real estate bubble. Interest rates later declined after Spanish lenders purchased government debt during those three months, probably with the proceeds of the first three-year longer-term refinancing operation. Those purchases are now creating additional losses for the banking system.

The losses stemming from those bonds were essentially transferred to the domestic banking system from private bondholders with the assistance of the central bank.

The damage may be mitigated by low levels of margin calls from the ECB. Deposits related to margin calls at the central bank totaled only 0.3 billion in the week ended April 4, according to the Eurosystem’s weekly financial statement.

That suggests commercial lenders posted assets as collateral that have maintained their values. Those probably consisted primarily of the “residential mortgages and loans to small and medium-sized enterprises (SMEs)”, which the central bank said were eligible for use in its Dec. 8 statement. Those illiquid assets may be unaffected by the mark-to-market process because there are no developed markets for them. The deposits related to margin calls probably would have risen if banks had posted government bonds as collateral.

The situation for financial institutions in Italy is less dire than for those in Spain. Italian government bond prices on average are 2.1 percent above the distressed levels at which they traded from Dec. 22 to March 1. That suggests Italian banks may be sitting on profits of about 425 million euros after they purchased 20.3 billion euros of government bonds during that period.

Losses for both banking systems would probably have been created if they purchased government bonds with the proceeds of the second three-year longerterm refinancing operation. The funds from the second auction are excluded from this analysis because it settled on March 1 and the latest data from the ECB on government bond purchases of euro-area banks runs through the end of February. The data for March will be released on April 30.

As Ronald Reagan quipped, “The nine most terrifying words in the English language are: ‘I’m from the government and I’m here to help.'”

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EU Daily | Monti under fire as crisis deepens

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It’s now not over until the ECB writes the check, the whole check, and nothing but the check.

Monti under fire as crisis deepens

(FT) — “We are not standing down,” said Susanna Camusso, leader of the leftwing CGIL. Workers are to down tools next Friday over pension reforms passed in December and will strike again when parliament debates Mario Monti’s controversial labour reform legislation. Rather than feeling mollified by concessions made by Mr Monti over changes to rules on the firing of workers for economic reasons, Ms Camusso made it clear the union felt emboldened by its mobilisation. “The text is very bad,” Emma Marcegaglia, head of Confindustria, told the Financial Times, saying it would be better to scrap the entire labour reform legislation if it were not amended in parliament. A senate committee will start examining the bill on Wednesday.

Shaken Spain seeks to restore confidence

(FT) — Luis de Guindos, the economy minister, has said in interviews with local and foreign media that Spain does not need a bailout of the kind provided to Greece, Ireland and Portugal by the European Union and the International Monetary Fund. Mr de Guindos told Germany’s Frankfurter Allgemeine Zeitung that the government’s next step would be a reform of the health and education systems “that is, a rationalisation of spending in the autonomous regions”. Spain needs to cut more than 3 percentage points of gross domestic product from its public sector deficit, reducing it from 8.5 per cent of GDP in 2011 to 5.3 per cent this year in line with EU targets. In 2013, the deficit is supposed to fall further to 3 per cent of GDP.

Spain Economy to Start Growing From 2013, de Guindos Tells Ser

(Bloomberg) — Spain’s economy will start growing next year, Economy Minister Luis de Guindos says in interview with Cadena Ser radio station today.

Labor situation to stabilize from final quarter of this year, de Guindos says.

Italy Fights Spain for Investors as ECB Boost Fades: Euro Credit

(Bloomberg) — Competition between Italy and Spain for international investors’ funds will heat up this quarter as domestic buying stoked by the European Central Bank fades.

Italian and Spanish bonds slumped last week after demand dropped at a Spanish bond sale and Prime Minister Mariano Rajoy said his country is in “extreme difficulty.” The decline reversed a first-quarter rally sparked by more than 1 trillion euros ($1.3 trillion) of ECB loans to the region’s banks via its longer-term refinancing operation. Spain’s 10-year yield spread to German bunds widened to the most in four months, while Italy’s reached a six-week high.

“Spain and Italy are coming back down to earth after an incredible first quarter,” said Luca Jellinek, head of European interest-rate strategy at Credit Agricole SA in London. “The LTRO bought some time, but not a massive amount of time. Now the second quarter will be harder than the first unless policy moves convince foreign investors to come back in.”

Italian 10-year bonds fell for a fourth week, with the yield advancing 40 basis points to 5.51 percent. The yield difference over bunds widened to 378 basis points, compared with an average of 381 basis points in the first quarter. Spain’s 10- year yield spread to Germany reached 410 basis points last week after averaging 333 basis points in the first three months.

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Euro zone update

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The joke used to be: ‘what’s the difference between bonds and bond traders?
Bonds eventually mature.

Except in the euro zone, post the Greek PSI ‘bond tax’, markets are starting to trade like maybe the don’t.

Yes, the ECB can come in and buy again, and probably will with more deterioration, but now it’s known that merely increases the risk of holding the remaining outstanding bonds, as the ECB’s bonds become ‘senior’and don’t get taxed.

So with deficits looking higher due to economic weakness due to mandatory austerity, the sustainability maths pointing to the bond tax route, and the ECB buying further adding to risk of loss, something has to give.

And it all remains potentially catastrophic for the global financial infrastructure, with aggregate demand remaining on the weak side globally and fiscal consolidation pending in most places.

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Global themes

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  • Austerity everywhere keeps domestic demand in check and export channels muted
  • Non govt credit expansion pretty much stone cold dead in the US and Europe
  • Rising oil energy prices subduing global aggregate demand
  • US federal deficit just about enough to muddle through with modest GDP growth
  • Rest of world public deficits also insufficient to close output gaps, including China which has calmed down considerably
  • Zero rate policies/QE/etc. in the US, Japan, and Europe doing their thing to keep aggregate demand down and inflation low as monetary authorities continue to get that causation backwards
  • All good for stocks and shareholders, not good for most people trying to work for a living
  • Europe still in slow motion train wreck mode, with psi bond tax risk keeping investors at bay and ECB waiting for things to get bad enough before intervening

So still looking to me like a case of

‘Because we fear becoming the next Greece, we continue to turn ourselves into the next Japan’

The only way out at this point is a private sector credit expansion, which, in the US, traditionally comes from housing, but doesn’t seem to be happening this time. Past cycles have seen it come from the sub prime expansion phase, the .com/y2k boom, the S&L expansion phase, and the emerging market lending boom.

But this time we’re being more careful of ‘bubbles’ (just like Japan has done for the last two decades). So I don’t see much hope there.

Still watching for the euro bond tax idea to surface, which I see as the immediate possibility of systemic risk, but no real sign yet.

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