Does this indicate euro institutions are now selling euro for dollars to pay down their net dollar borrowings?
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Tag Archives: Euro
Help Ireland or it will exit euro, economist warns
He touches on the domestic demand issue, highlighted below.
And while sterling is going down versus the euro, more important is the fiscal response in the UK vs the eurozone.
Also, Germany and France are probably not in any position to help, even if they wanted to.
Help Ireland or it will exit euro, economist warns
by Ambrose Evans-Pritchard
Jan 19 (Telegraph) — “This is war: countries have to defend themselves,” said David McWilliams, a former official at the Irish central bank.
“It is essential that we go to Europe and say we have a serious problem. We say, either we default or we pull out of Europe,” he told RTE radio.
“If Ireland continues hurtling down this road, which is close to default, the whole of Europe will be badly affected. The credibility of the euro will be badly affected. Then Spain might default, Italy and Greece,” he said.
Mr McWilliams, a former UBS director and now prominent broadcaster, has broken the ultimate taboo by evoking threats to precipitate an EMU crisis, which would risk a chain reaction across the eurozone’s southern belt, where yield spreads on state bonds are already flashing warning signals. The comments reflect growing bitterness in Dublin over the way the country has been treated after voting against the EU’s Lisbon Treaty.
“If we have a single currency there are obligations and responsibilities on both sides. The idea that Germany and France can just hang us out to dry, as has been the talk in the last couple of days should not be taken lying down,” he said.
Mr McWilliams cited the example of New York’s threat to default in 1975. President Gerald Ford “blinked” at the 11th hour and backed a bail-out to prevent broader damage.
As yet, there is no public support for withdrawal from the euro. A Quantum poll published by the Irish Independent yesterday found that 97pc reject such a radical move. Three-quarters are in favour of a national government, an idea floated by Unilever’s ex-chief Niall Fitzgerald.
“The economic disaster we are facing is unlike anything which has happened in my lifetime. It is a national crisis and needs a government of national unity,” Mr Fitzgerald said.
Mr McWilliams said EMU was preventing Irish recovery. “The only way we can win this war is by becoming, once again, an export country. We can do what we are doing now, which is to reduce our wages, throw more people on the dole and suffer a long contraction. The other model is what the British are doing. Britain is letting sterling fall so that the problem becomes someone else’s. But we, of course, have ruled this out by our euro membership.
“We are paying twice for the euro: once on the exchange rate and once more on the interest rate,” he said.
“By keeping with the current policy, the state is ensuring that Ireland turns itself into a large debt-repayment machine. Is this the sort of strategy to win wars? ” he said.
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ECB’s Stark bravado
No mention of the $300 billion they’ve borrowed from the Fed to stay afloat…
ECB’s Stark Says Euro Prevented Worse Crisis Fall-Out, RBB Says
Jan. 5 (Bloomberg) — The euro has shielded the nations using the single currency from greater fall-out from the financial crisis, European Central Bank Executive Board member Juergen Stark said in an interview with German radio station RBB.
“The euro has saved us in the euro area from worse economic consequences,” Stark said in the interview broadcast on Jan. 3 and posted on RBB’s Web site.
Before the introduction of the euro 10 years ago, turbulence similar to that experienced last year also led to “considerable tensions” between the European currencies and governments, Stark told the broadcaster. The euro prevented that, he said.
Stark said in the interview that the single currency has been a “large success” and that the ECB has handled its challenges well.
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The Euro is reacting!
Re: Emergency Liquidity Assistance in the euro area
Very interesting.
Seems the ECB can use this facility to ‘replace’ lost deposits of any bank, which would seem to remove the ‘bank run’ risk.
However, it is supposed to be only for very short term liquidity needs.
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> On Wed, Dec 3, 2008 at 2:54 AM, Dave wrote:
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> Not sure if any of the following is new info but was an interesting read
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> DV
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Emergency Liquidity Assistance in the euro area
A Belgian newspaper (La Libre Belgique) is currently running a fascinating series of articles on the collapse of Fortis and Dexia.
In one article (lalibre.be/economie/actualite/article/464148/chapitre-7-la-trahison-des-hollandais.html) it mentions that Fortis benefited from an Emergency Liquidity Assistance from the NBB at the end of September for an amount of about €50bn. This confirms our own findings that showed such a loan on the balance sheet of the NBB (most of it was in $, see NBB loans to Fortis: About €50bn at the end of September 2008, 16 October 2008).
What is interesting is that it sheds a bit more light on a mechanism that is available on a euro area basis, and that up until now had been referenced only infrequently by the ECB. For example, the December 2006 edition of the Financial Stability Review (p.171) has the following description:
“One of the specific tools available to central banks in a crisis situation is the provision of emergency liquidity assistance (ELA) to individual banks. Generally, this tool consists of the support given by central banks in exceptional circumstances and on a case-by-case basis to temporarily illiquid institutions and markets. This support may be warranted to ease an institution’s liquidity strains, as well as to prevent any potential systemic effects, or specific implications such as disruption of the smooth functioning of payment and settlement systems. However, the importance of ELA should not be over-emphasised. Central bank support should not be seen as a primary means of ensuring financial stability, since it bears the risk of moral hazard. Furthermore, ELA rarely needs to be provided, and is thus less significant than other elements of the financial safety net, which have increased in importance in the management of crises.”
Apparently, these credit lines can be given by the various national banks, against collateral (including all the buildings of the retail banks network, in the case of Fortis!) and a ‘high’ rate of interest. But these credit lines need to be approved first by the ECB Governing Council and all 15 governors of the individual central banks. According to press reports, in a few days at the end of September, there were no less than 15 ECB teleconference calls to approve such ELAs to Belgian banks (Fortis and Dexia) but also German and Irish banks (probably Hypo Re since the bailout was at about the same time).
Looking at the balance sheets of the individual central banks it is quite difficult to have a complete picture of how much of these ELAs have been extended: while it was relatively clearly identified on the NBB balance sheet, it does not look like it was the case on the Bundesbank balance sheet, and to our knowledge the ECB as such has not given any figure on such credit lines. It is interesting, though, that such a mechanism existed. It is still available if needed in case of emergency, even if to a certain extent the existence of the guarantee schemes (introduced after this) may make its use slightly less necessary.
In addition it seems that Trichet was quite involved in the discussions, warning that Fortis did not have enough liquidity even after the capital injection that occurred over the weekend of 27-28 September (the ELA was probably extended from the Monday onwards, and it was after the next weekend that the Fortis share price really took a dive to below 1).
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Rush to join the euro
As the Belgian bank giant Fortis collapses, citizens of that country appreciate the bonheur of belonging to the eurozone. Had it not been for the euro, Belgium would have devalued and sharply increased interest rates  just as Iceland was forced to do. The banking and financial crisis is quickly changing perceptions. Across Europe, there is a bit of a scramble to join the euro. Politicians from Scandinavia to Eastern Europe, fearful of the abyss, are re-evaluating the wisdom of going it alone (Denmark, Sweden, Norway) or postponing structural reform (Hungary, Poland). Brazil and Mexico have secured a swap line from the Federal Reserve Bank. When it comes to liquidity conditions, size seems to matter after all.
‘Had it not been for the euro, Belgium would have devalued and sharply increased interest rates  just as Iceland was forced to do.’
Yes, but only because they don’t understand what other options are, like sustaining output and growth via fiscal measures, setting interest rates where they want them for further public purpose (including the option of a zero rate policy), and letting private corps with external currency debt problems default on them and convert them to equity in bankruptcy while sustaining the ongoing business as desired for further public purpose (keeping the banks open while they are legally getting reorganized) etc etc.
It’s the blind leading the blind.
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End game for the euro
Europe is even worse off than I thought.
And it looks to me like the Fed’s loan (via swap lines) to the ECB is noncollectable:
- Seems Eurozone got caught short USD much like AIG got caught short credit. Now the squeeze is on as the euro falls vs the USD rises. It’s an old fashioned external currency debt problem.
- The ECB has borrowed perhaps over $400 billion from the Fed via swap lines, secured by euros, to lend to its banks. Functionally, this is unsecured borrowing. And the amount approved by the Fed grows with each FOMC meeting. To pay it back the ECB has to sell euro and buy $400b, which might be problematic, at best.
- National budget deficits are now rising rapidly due to falling revenues and rising transfer payments. They will soon have their hands full funding themselves and will be incapable of funding the needs of the banking system.
- Should a run on the banks force the euro payments system to close; the question is how it re-opens.
- Reopening the ECB in euros will mean the national governments will have to repay the Fed $400 billion.
- If the national governments abandon the ECB and euro, the ECB’s debt to the Fed debt is noncollectable. The Fed’s debt is only with the ECB and not the national governments.
- This gives the national governments a powerful incentive, and perhaps no other choice, but to abandon the euro should the payment system fail.
- It will also likely mean the national governments will technically default on their euro debt, as they convert the debt to a new currency (or currencies).
Their only hope is a large enough US fiscal package that restores demand for world output.
Like my proposed payroll tax holiday that immediately adds maybe 5% to US GDP.
But the odds of that are not promising.
And the US economy continues to weaken rapidly.
(I own some German credit default insurance and wish I had bought a lot more.)
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Europe’s financial rescue plans
What has been announced by ECOFIN (European Council of Finance Ministers) today:
- Deposit insurance to be raised from a minimum of EUR20k to EUR50k.
- There will be support/interventions for systemically important institutions; intervention shall be timely, and in principle temporary; shareholder shall bear the consequences of intervention; governments will have the ability to change bank management when intervening.
Bad for shares.
- Recapitalizations may be necessary.
- Interventions to be decided at a national level, but to be coordinated; senior financial officials to be in daily contact.
They are limited by relying on the national government’s ability to fund.
- Commission to provide rapid reviews of interventions; Commission to issue guidance on state-aid compliant deposit insurance and interventions/recapitalizations.
- Systemic liquidity to be ensured.
Maybe in Euro, but maybe not in USD which they all seem to need.
- Executive pay guidelines have been agreed; undue benefits shall not be retained; governments can intervene on manager pay.
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Bloomberg: Europe Trade Deficit Widens to Record on Exports, Energy Costs
What’s happening is the world desire to net accumulate euro financial assets has increased and can only be achieved by the rest of the world net selling goods and services (or real assets) to the eurozone.
Europe Trade Deficit Widens to Record on Exports, Energy Costs
by Fergal O’Brien
Sept. 17 (Bloomberg) Europe’s trade gap widened to a record in July as a cooling global economy damped exports and crude oil’s advance to a record boosted the energy deficit.
The 15-nation euro region had a seasonally adjusted deficit of 6.4 billion euros ($9.1 billion), compared with a 3.5 billion-euro trade gap in June, the European Union’s statistics office in Luxembourg said today. The July deficit is the largest since the euro was introduced in 1999.
Euro-area exports to the U.S., the second-biggest buyer of the region’s goods, have fallen the most since 2003 this year as economic expansion there has eased. At the same time, record oil prices pushed up spending on imported fuels such as gasoline and heating oil by 41 percent, further widening the trade gap.
“On the one side, you’re getting weakness in exports and that then is feeding through to weaker industrial production,” said Marco Valli, an economist at Unicredit MIB in Milan. “On the other side, there is the oil prices and in July we will see the maximum impact of that, as oil peaked in early July.”
Crude oil reached a record $147.27 a barrel on July 11 and the euro region’s energy imports soared 41 percent to 151 billion euros in the first half, according to today’s report. The detailed data are published with a one-month lag.
The soaring energy costs boosted imports from Russia, which supplies 34 percent of Europe’s imported oil and 40 percent of its imported gas. Overall imports from Russia, home of OAO Gazprom, the world’s biggest gas producer, soared 22 percent in the first half and the euro area’s trade gap with the nation soared 25 percent to 20.4 billion euros, today’s report showed.
First-Half Decline
The detailed data for the January-June period also showed exports to the U.S., the world’s largest economy, fell 4 percent from a year earlier. That is the biggest first-half decline since a 9 percent drop in 2003. Shipments to the U.K., the euro area’s biggest trading partner, rose 1 percent.
The euro reached a record above $1.60 to the dollar in July, taking its gain over the previous 12 months to 15 percent. The euro’s strength undermines the competitiveness of European goods sold abroad. The currency was at $1.4224 today, down 11 percent from its record.
A slowdown in overseas sales has curbed production at Europe’s factories and dragged the region’s economy into its first contraction in almost a decade in the second quarter. Manufacturing activity has contracted for the last three months, according to a monthly survey of purchasing managers, while export orders have fallen for five months.
`Mightily Relieved’
“Euro-zone exporters will be mightily relieved by the recent marked retreat in the euro from its July peak,” said Howard Archer, chief European economist at Global Insight in London. “However, this is being countered by slowing global growth and a very uncertain outlook.”
Some companies have tried to offset falling U.S. orders by expanding in Asia and oil-exporting countries. Asian sales at French skin-creams maker Clarins SA rose 3 percent in the second quarter as North American sales fell by the same percentage.
Volkswagen AG, Europe’s biggest carmaker, on Sept. 8 said emerging markets will provide the fastest growth in worldwide sales over the next 10 years, led by economic expansion in Asia and Russia.
Europe’s trade deficit with China, which last year overtook the U.K. to become the euro area’s biggest supplier, narrowed by 1.2 percent to 49.9 billion euros in the six months through June. Exports to Asia’s second biggest economy rose 15 percent.
Economists had expected the euro region to show a trade deficit of 3.5 million euros in July, compared with an initially reported 3 billion-euro deficit in June, according to the median of nine estimates in a Bloomberg News survey.
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Re: Liquidity
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> European demand for $ funding has increased and surpassed the US demand
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Pat, this is most problematic as it indicates the eurozone is strung out on $US debt.
At least the US banking system doesn’t have a problem with euro debt.
This compounds the systemic risk over there.
Warren