Re: ECB ending Fed swap lines!


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(email exchange)

>   
>   On Fri, Dec 19, 2008 at 9:25 AM, Scott wrote:
>   
>   ECB says to discontinue US dollar swap OPS from end Jan.
>   
>   I guess they don’t want euro to strengthen!
>   

Exactly!

This is the new century version of ‘competitive devaluations.’

Paulson moved first by talking foreign CB’s out of buying USD reserves.

Bernanke thought he was helping with rate cuts.

China said ‘no mas’ a while back started ‘letting’ the yuan depreciate, probably via USD purchases.

Japan recently announced ‘no mas’ and that they were prepared to resume USD buying to abort yen appreciation.

If the ECB in fact cuts off its banks ‘cold turkey’ from the Fed’s $ the shock can be enormous.

Ramifications:

Upward pressure on USD LIBOR.

Downward pressure on the euro.

Upward pressure on eurozone credit default premiums.

Falling US equities.

Etc.

ECB to Discontinue Dollar Swap Tenders From the End of January

By Jana Randow

Dec. 19 (Bloomberg) — The European Central Bank said it will discontinue its euro-dollar foreign exchange swap tenders at the end of January due to “limited demand.”

Right! Only $300 billion outstanding.

The ECB will continue to loan banks in Europe as many dollars as they need for terms of 7, 28 and 84 days in exchange for eligible collateral, the Frankfurt-based central bank said in a statement today. Dollar swaps “could be started again in the future, if needed in view of prevailing market circumstances,” the ECB added.

Those circumstances being the strong euro?


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ECB funding national government securities


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ECB cuts to 2.5pc and mulls “printing money”

By Ambrose Evans-Pritchard

The Maastricht Treaty prohibits the ECB from injecting stimulus by purchasing the government debt of the eurozone’s fifteen states debt — a method known as “monetizing the deficit” or, more crudely, as “printing money.”

But it can achieve the same effect

not quite

by mopping up sovereign debt, mortgage securities, or even company debt on the open market, as the Fed has already begun to do. At the moment the ECB accepts some of these assets as collateral in exchange for loans, but it has not yet hit the atomic button by buying them outright with its own freshly-minted fiat money.

When the ECB accepts collateral for loans, it doesn’t offer non recourse funding. The owner of the securities remains liable in the case of default.


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Re: Commentary


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>   
>   The banks using the ECB’s liquidity program deposited a record 160
>   billion Euros with the ECB overnight, rather than lend them to other
>   banks or market participants.
>   

Jeff, ‘lending them out’ wouldn’t have changed that number. At most it would have moved the funds from one bank’s reserve account to another. So maybe, they did ‘lend them out’. Best indication is the interbank rates, but even that’s not definitive.

>   
>   Russia is going to base missiles on EU border. That should go well. In
>   unrelated news, they are also planning to build a deep-water port in
>   Venezuela that will allow Russian warships to dock there. Hamas
>   militants pounded southern Israel today with a massive barrage of 35
>   rockets, after Israeli forces killed six gunmen. So much for the
>   five-month truce. China has so far sentenced 55 people for riots
>   against Beijing’s rule that broke out in Tibet in March. No word yet on
>   the other 147 people who stood trial. Iran has warned the US again
>   not to violate its airspace.
>   

Good luck to us!


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ECB tenders


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The ECB raised its day tender rate to 2.75% today and got far fewer tenders, as USD market rates had gone below that in anticipation of lower rates.

But that should just mean the USD ‘market rates’ will rise to over that level and the USD borrowers will come back to the ECB in big size as it’s just a game of musical chairs


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ECB council member foresees ‘tri-polar’ currency system


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(email exchange)

>   
>   On Sun, Oct 19, 2008 at 11:06 PM, wrote:
>   
>   Sure he can say that now so long as the Fed is there to
>   backstop everything. These Europeans have no shame.
>   

Right, the Eurozone is surviving on the unlimited Fed USD swap lines.

That’s a complete ideological failure for the Euro members.

It’s their worst nightmare- the ECB borrowing USD reserves to support the Euro Banking System.

ECB council member foresees ‘tri-polar’ currency system

By Jonathan Tirone

VIENNA, Austria — European Central Bank council member Ewald Nowotny said a “tri-polar” global currency system is developing between Asia, Europe, and the United States and that he’s skeptical the U.S. dollar’s centrality can be revived.


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Re: The first weak link to be probed?


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(email exchange)

Good read, thanks, passing it along.

>   
>   On Thu, Oct 16, 2008 at 8:22 PM, wrote:
>   
>   Even though Hungary is not a member of the euro zone, this analysis
>   suggests that this could be the weak link which shatters the whole euro
>   project. Is the ECB now going to be able to secure swap lines from the
>   Fed to deal with the problems in eastern Europe? Interested to hear
>   your thoughts.
>   

ECB Agrees to Lend Hungary as Much as 5 Billion Euros

The European Central Bank has announced that it will lend up to 5 billion euros to Hungary’s Central Bank. The move aims to stop Hungary’s financial crisis from spreading, a goal that overrides its drawbacks.

Analysis

The European Central Bank (ECB) announced Oct. 16 it will lend as much as 5 billion euros ($6.75 billion) to the Hungarian Central Bank to help head off a local liquidity crisis. The ECB is attempting to nip Hungary’s potentially destabilizing problems in the bud, for if the Hungarian economy tanks, far more than one small Central European country will be affected.

International Economic Crisis

Hungary’s mortgage system is locked up in the carry trade with the Swiss franc; many mortgage loans are denominated in Swiss francs rather in the local currency, the forint. Since 2006 in fact, nearly 80 percent=2 0of all Hungarian mortgages have been granted in Swiss francs. As the forint falls versus the Swiss franc (it fell 7.1 percent Oct. 15 alone) the cost of servicing those mortgages for the average Hungarian homeowner will increase proportionally (even before things like teaser rates are taken into account). All told, approximately 40 percent of Hungary’s mortgages are directly affected, along with approximately 40 percent of all consumer debt. The ECB move today to inject 5 billion euros into the country is designed to head off a plunge in the forint. At about 4.8 percent of gross domestic product, this represents proportionally the same amount of money as the entire U.S. bailout package.

At present, how critical the Hungarian situation is to the Europeans remains somewhat murky, but we do know that most of the Swiss franc-denominated loans were granted by Austrian banks. So as the forint falls and Hungarians begin defaulting on their mortgages en masse, we could see broad and deep failures in the Austrian banking sector, which is already in trouble due to the global liquidity crisis. Should that happen, the next step in the chain is the Swiss banks that lent the Austrian banks the francs needed to fund the Hungarian mortgages in the first place. Switzerland remains one of the world’s most critical financial nodes. Problems there would have global implications, with the epicenter at the heart of Europe. Switzerland is completely surrounded — culturally, economically, figuratively, financially and literally — by EU states, but is not a member.
Budapest has seen this problem coming, and has worked aggressively to get its budget deficit — which stood at 9.2 percent of GDP in 2006 — under control. Last year it was brought down to 5.5 percent, and now the government is redoubling its efforts and hopes to get that number down to 3.4 percent this year and 2.9 percent in 2009.

Highly contractionary move but necessary to keep the currency up and comply with ECB entrance requirements.

But it may be too late for that. The government has discovered that there is no appetite at home or abroad for additional government debt issues,

I haven’t been watching this, but that reads like the problem is a fixed FX policy, as they try to fit it to the Euro.

raising the prospect that government financing could simply freeze up. The government already has taken the precautionary step of seeking a standby agreement with the International Monetary Fund (IMF) for emergency financing. Preferring to avoid the embarrassment of having one of their own going hat in hand to an international institution that normally helps manage economic basket cases, the European Union jumped in Oct. 16 with that 5 billion euro loan both to (hopefully) nip the problem in the bud, and in the longer term avoid the embarrassment of having the IMF taking one of their own into receivership. Hungary now stands as the only European country to receive direct emergency aid in the history of the European Union, and Hungary is not even a member of the eurozone.

The only reason for that kind of financial assistance is to support the local currency at a pegged rate. Also sounds like a ‘managed peg’ of some kind as per the mortgage problems above stemming from currency depreciation.

As for the other end of this daisy chain of potential chaos, the normally stolid Swiss are filled with fear more appropriate for a former Soviet republic=2 0that has just fallen under the shadow of a resurgent Moscow. On Oct. 16, the two largest Swiss banks, UBS and Credit Suisse, received government capital injections worth $6 billion as Bern assembled a fund to buy up $60 billion (both of the packages are denominated in U.S. dollars) in questionable assets held by the banks. And this is on top of the 6.5 billion euros ($8.7 billion) gleaned from the banks’ own recapitalization efforts. The ECB is also working with the Swiss National Bank in a very big way to bolster liquidity in each others’ markets. The Swiss see a storm coming, and when the Swiss get nervous about financials, everyone should take note.

As of the time of this writing, Hungary is holding. The forint has risen 3.8 percent versus the euro since the ECB’s announcement, mitigating yesterday’s 5.4 percent fall. To prevent the collapse from going regional and perhaps even global, the ECB needs to keep the forint as locked into its current value as possible. That means the ECB probably will de facto draw Hungary into the eurozone. This is because if the forint/euro exchange rate can be frozen, homeowners will be able to keep up with their payments, the mortgages will not go into foreclosure and there will not be a domino effect. It would be better yet to freeze the forint versus the Swiss franc, the currency the problem loans are denominated in. But the ECB controls the euro, not the Swiss franc, and must work with the tools at its disposal.

This is a highly inflationary policy as it will take more and more euros to support the local currency that seems to have its own inflation issues.

Again, I haven’t followed this one.

Thanks for the heads up!

Warren

In the long run, essentially extending euro membership to Hungary on crisis terms is a horrible decision. Normally, states spend years working themselves to the bone to qualify for the sort of perks and stability that euro membership grants, so the political and economic fallout of what began Oct. 16 will damage the euro’s credibility for years. But these are exceptional circumstances. The ECB, and the European Union as a whole, realizes full well that without dramatic action far more than Hungary is at stake.


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ECB extending collateral (to almost anything)


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And this includes the ‘appropriate collateral’ for the unlimited USD loans as well.

ECB extending collateral (to almost anything)

ECB extending collateral (to almost anything) and introducing more longer dated repos with full allotment. Significant points: acceptable ratings down from A- to BBB- (except for ABS) syndicated loans included, also wider range of currency. Quid pro quo is higher haircuts but fair enough. So virtually no excuse for any bank to run out of money. Also pretty positive for corp spreads.

As you predicted. The US taxpayer, via the Fed, is basically the dumpster receiving all of this toxic crap from Europe. That’s got to be dollar bearish longer term.

Until the the ECB is driven to sell euros to pay back the USD it borrowed from the Fed.

And no doubt there will be continuous politically driven responses that could tilt the outcome in any direction.

Our leaders are in this way over their heads.

All they needed to do was declare a payroll tax holiday- none of this had to happen.


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Total euro CB offerings (update1)


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The total is now up to $354 billion including $100 billion in overnight funds added by the ECB.

Haven’t seen overnight funds by the Bank of England or Swiss National Bank.

Haven’t seen any Bank of Japan numbers.

ECB Leads Push to Flood Banks With Unlimited Dollars (update1)

Oct. 15 (Bloomberg) — The European Central Bank, Bank of England and Swiss National Bank loaned financial institutions a combined $254 billion in their first tenders of unlimited dollar funds, stepping up efforts to ease strains in markets.

The Frankfurt-based ECB lent banks $170.9 billion for seven days at a fixed rate of 2.277 percent. The Bank of England allotted $76.3 billion and the Swiss central bank $7.1 billion at the same rate, also for a week.


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(BN) ECB USD offerings total $270.9 billion


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The total of $279 billion is very high.

Note the seven day was higher than the one day, which could mean the longer term offerings will attract even more borrowers.

This is a lot of lending for the Fed to be doing to the ECB.

It also moves the USD debt in the Eurozone from the private sector to the public sector.

The private sector can default, declare insolvency, get ‘reorganized’, where the USD debt can be ‘converted’ to equity and functionally vanish, all to be written off by the creditors.

Public sector external debt doesn’t have that option, and thereby introduces systemic risk.

If the Eurobanks can’t/don’t repay the ECB, the Fed is left with the option of selling euros for USD for repayment.

And only if the ECB survives as a political entity.

It is not guaranteed by the national governments.

The ECB today offered banks unlimited dollar funds for seven days in the first tender of its kind, lending $170.9 billion. It also loaned an additional $100 billion for one day.


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Re: Fed to lend to CBs in unlimited quantities


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(email exchange)

>   
>   On Mon, Oct 13, 2008 at 3:00 PM, Craig wrote:
>   
>   Since nobody understand the local currency / foreign currency distinction and
>   since these obligations are part of the normal financial commerce of these
>   countries, is it possible that these loans will allow the markets to normalize,
>   

Yes.

>   
>   Allow the various governmental bodies to remove the guarantees/lending and
>   never realize this risk existed?
>   

Probably not.

>   
>   Everybody was perfectly happy with these private sector risks before the
>   credit markets seized up. Other than the sudden realization of everything
>   you’ve pointed out, what factors will put this over the edge?
>   
>   All this boils down to this question: Does this necessarily have to end badly?
>   

Looks that way to me.

>   
>   Or can the participants use this as a life rope to deleverage successfully,
>   ending the need for the life rope?
>   

I think the incentives are now in place for massive fraud.

Eurozone banks will find it hard to resist the demand for USD loans to their ‘friends’ in finance and industry, that will be based on inflated appraisals, inflated income statements, etc.

Just like the subprime issue was here.

It’s open season and my guess is the Fed is about to be in shock at the size of the first auction.


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