Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.

Now I'm really pissed off!

by Starvid Wed Dec 21st, 2011 at 08:39:10 AM EST

It's late so I can't be bothered to dig up sources, but basically, the ECB is screwing us over even worse than we thought, and it's doing it for entirely ideological reasons. More below the fold.

front-paged by afew


If I get any facts wrong, please correct me, but as far as I've understood it, this is the deal.

The ECB does not want to be a lender of last resort. To governments. While it refuses to bring rates on sovereign bonds down for the periphery and unconstitutionally meddling in fiscal policy it doesn't understand, it is actually acting as a lender of last resort on a massive scale. To the banks.

Yes indeed. As we speak, the ECB is issuing massive loans to European banks at about 1% interest and with a duration of up to three years, while accepting basically anything as collateral, no matter how noxious or toxic, including periphery sovereign bonds. For troubled banks with major problems with lending from the markets, this is, as they say in Italy (or at least in the Godfather), "an offer you can't refuse".

And as you might know, all sovereign bonds have a capital coverage ratio of 0%. This means banks can lend as much money as they like for free from the ECB, put the money in periphery bonds, use the bonds as collateral, and receive a 6% "risk-free" arbitrage profit, without straining the equity side of their balance sheets! The ECB has basically created a free arbitrage machine for these banks! Quite an interesting way to manage the recapitalisation of these banks... and in the end counterproductive, as you pump the balance sheets of the banks even fuller with bonds the periphery nations might well still default on! It seems the ECB is trying its best to turn the entire European banking sector into Dexia or MF Global.

The only way this might work is if the banks double down and go all in, creating such a massive private demand for periphery bonds (entirely fueled with free and unlimited ECB credit), that the interest on those bonds is pushed down to 2-3%. That might at least save Italy and Spain.

The price of this ideological sleight of hand, channeling the lender of last resort money through private banks instead of doing it outright, is a massive transfer of wealth to bank shareholders and executives, from periphery tax-payers. But as Mr. Draghi might explain it: unlike the banks and their owners, periphery tax-payers are not members of the financial world, the financial cosa nostra... so who cares about them!

Display:
This diary was inspired by this article by Per Lindvall.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Dec 20th, 2011 at 05:06:02 PM EST
The article (or one extremely similar by the same author) has also been published in Svenska Dagbladet - second largest morning paper, conservative with links to Moderaterna. So it is SeriousTM.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Mon Dec 26th, 2011 at 06:21:22 PM EST
[ Parent ]
So who wants to start a bank-cum-hedge fund?

The only thing we need is to set up a limited liability corporation, get it a banking license and some crappy toxic collateral. We use it to borrow money from the ECB, buy Spanish/Italian/Greek sovereign bonds, constantly turn any interest accrued into dividends for the shareholders (that is, us) and keep milking the scam if and until the periphery countries defaults. Then we declare bankruptcy, default on the debts to the ECB and go buy some Ferraris with our accumulated dividends (which we have sent to some obscure island so as to avoid capital taxes, of course). All perfectly legal.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Tue Dec 20th, 2011 at 05:18:36 PM EST
Why don't governments do this? After all, article 123 does not allow the ECB to discriminate against publicly owned banks in their capacity as banks. Although Jens Weidmann appears to disagree:
Jens Weidmann ... also said eurosystem would not refinance EFSF/ESM even if they did have a banking licence


tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Tue Dec 20th, 2011 at 05:23:03 PM EST
[ Parent ]
So much for rule of law when the BuBa is involved...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Dec 20th, 2011 at 05:36:57 PM EST
[ Parent ]
The German establishment really are a remarkable bunch. From Eurointelligence on the same day:
Germany's president may have to resign over private credit scandal

Germany's president Christian Wulff may have to resign because he may not have been entirely truthful about a private credit of €500,000 he got to buy a house, Spiegel Online reports. When Wulff was still prime minister of Niedersachsen he denied business links to a business man from the region. Now it turns out that he got this private credit on unusually favourable terms via the business man's wife and according to Der Spiegel there are many indications that it was actually the business man himself who provided him with the credit. Since the president's sole role in the German political system is to be a moral authority and to provide moral guidance, commentators across the board agree that Wulff is no longer the person to fulfill that role and that he may have to resign. Der Spiegel this Monday has Wulff's photograph on its cover under the title ,,The wrong president". For Angela Merkel this would yet be another blow that would further undermine her political authority as well. Wulff was handpicked by the chancellor, she could only impose him with great difficulties in 2010 after three rounds in the body that elects the president. Since her majority has further eroded since then, she may not even be able to force through another candidate of her own choice, but she may have to accept a candidate championed by the opposition. "

This would be the same German President who happens to be a lawyer and recently declared that, in his considered opinion, ECB bond purchases are illegal
The German presidency is a largely ceremonial office, but he has two functions that can be important in the euro crisis. His words carry weight, and influence public opinion. And he constitutes an important link between the parliament, who legislation he has to approve, and the Constitutional Court. Yesterday, Christian Wulff said he considered the ECB's bond purchases as legally questionable. The direct purchase of bonds was explicitly ruled out. It is wrong to circumvent this rule through secondary market purchases, according to Frankfurter Allgemeine. He also criticised the EU governments' tendency to kowtow to financial markets. In free democracies, decisions have to be taken by parliaments, and said the rescue policies were too hectic. He warned of a domino effect of rescue packages, asking rhetorically, who was going to rescue the rescuers?


tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Tue Dec 20th, 2011 at 05:43:12 PM EST
[ Parent ]
Siemens can do this, they have a banking licence.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Tue Dec 20th, 2011 at 05:23:22 PM EST
[ Parent ]
Yes, but they don't wan't to have their entire corporate equity wiped out in case of periphery defaults. No, this just screams for the use of a Structured Investment Vehicle. That's right: the ECB has set up a scheme which creates massive incentives for the use of the very thing that blew up the US a couple of years ago. All for the sake of purity and virtue.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Dec 20th, 2011 at 05:29:35 PM EST
[ Parent ]
Stop knocking the European sovereign.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Tue Dec 20th, 2011 at 05:30:31 PM EST
[ Parent ]
Yep.

Of course, standard run-of-the-mill sovereign bonds are basically the same scam: Buy a thirty-year bond paying 4 %, fund at the interbank market at (on average) 3 %, and viola, the taxpayers are paying you to borrow the money they printed themselves and put in the interbank market.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Dec 20th, 2011 at 05:36:50 PM EST
[ Parent ]
The only thing we need is to set up a limited liability corporation, get it a banking license and some crappy toxic collateral.

Hey! I have just the thing. It is a 1988 32' Pace Arrow Fleetwood RV. I can easily show a book value of close to $20,000. (I might have trouble selling it for $5,000, especially without getting it running, but that should not matter by Generally Accepted Accounting Standards.) Just pay me $10,000 and I will hold the asset and give you a title for $20,000 which you can repo four or five times and soon we will have $100,000 in assets under management. Call the company RV Financial Assets International.

I can find two transactions like that for next month and four for the following month within 50 miles of home and we should be able to go public for over a million dollars! At that point I would probably want to transfer my asset management services to a junk yard for a one time payment while continuing to receive my monthly asset management fee.

Help the new public corporate owners continue the growth on a similar trajectory, (the equivalent of $40K, $80K and then $160K over the next three months, for a healthy consulting fee, of course, and we should be able to make even more by dumping our stocks and then shorting the company. But it probably would be better to stay on as consultants and make contributions to local, state and national politicians as we find and collateralize decrepit RVs over wider geographic areas. Hell, I could even throw in my house and land at a suitable cost preparatory to decamping to balmy climes. We can always do the 'pump and dump' later, just before getting on a plane to a Caribbean island nation, or, perhaps, Chaing Mai, Thailand.

It is not like this is rocket science or has never been done before. We would just need to be careful to employ intermediaries as the public face of the corporation. I can see plastic surgery, new documents with slightly different names, citizenship in Caribbean nations and a whole new life ahead.  :-)

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Dec 20th, 2011 at 06:27:58 PM EST
[ Parent ]
I'm in. I'm shopping for a trike, pedal or electric motorized, for my grocery shopping needs so that'll free up my CLASSIC 1980 VW Rabbit. The appropriate collector/appraiser should put its value over $1 Mil if I bribe him enough.

They tried to assimilate me. They failed.
by THE Twank (yatta blah blah @ blah.com) on Wed Dec 21st, 2011 at 04:59:33 PM EST
[ Parent ]
Ah, but you see, an auto is transport where as an RV is a home. With a fleet of RVs one could rent them out to FEMA for disasters or to vacationers, at least those that are roadworthy, and one can form a separate insurance company to insure them - another profit center.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Dec 21st, 2011 at 11:14:26 PM EST
[ Parent ]
Sounds about right. Migeru covered it in a Salon somewhere when it happened. I believe the words "toilet paper collateral" were used.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Dec 20th, 2011 at 05:33:58 PM EST
It's like his sinful filthy, filthy, filthy ECB credit becomes all pure and holy if you process it through a private bank. A miracle, Ave Maria!

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Dec 20th, 2011 at 05:39:07 PM EST
[ Parent ]
Hey, as early as 11 February 2010 our commentary on the crisis homed in on the fact that
What the ECB cannot do is fund a public debt issue, and that makes some sense from certain ideological perspectives.
Because by having passed through the bid-ask spread of a major investment bank, it is suddenly converted from a loan into a monetary instrument?
The last 22 months have been an exercise in teasing out the conequences of that ideological perspective.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Tue Dec 20th, 2011 at 05:46:57 PM EST
[ Parent ]
Yes, Art. 123 of the Treaty on the Functioning of the European Union states quite clearly that member state government bonds turn from debt instruments into monetary instruments by passing through the bid-ask spread of a commercial institution.

Trans-substantiation, if you will, although in reverse: The incredible state is transformed into something more credible by having a priest mumble a prayer over it while extracting a hefty tithe.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Dec 20th, 2011 at 05:51:29 PM EST
[ Parent ]
Economics really is religion. Or possibly ideology. But for some people, those two seems to be the same. No. I think the correct word is... faith.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Dec 20th, 2011 at 05:57:12 PM EST
[ Parent ]
I used to have an e-mail sig that read "macroeconomic planning should probably not be a faith-based initiative."

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Dec 20th, 2011 at 06:03:26 PM EST
[ Parent ]
This is how they work everywhere. All monopoly rights become holy when they are privatised and given away for nothing. All real estate land becomes holy when it's given to contruction business, all electricity and water utilities when they are given away.
No one asks how much wealth and jobs would have been created with these monopoly rents in real investements.

Neoliberalism is a deeply developed disease that will kill us all.

by kjr63 on Wed Dec 21st, 2011 at 07:44:52 PM EST
[ Parent ]
See this thread.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Thu Dec 22nd, 2011 at 04:42:03 AM EST
[ Parent ]
Eurointelligence Daily Briefing: Some good news from the eurozone at last: the ECB's liquidity policies are showing some effect
The ECB is expected to announce a much larger than expected take-up of the first 3-yr LTRO; national central banks have been putting pressure on banks to take the money; a Spanish 3-month auction saw a drop in interest rates from 5.11% to 1.74%; Germany's Ifo index rises against all expectations; Hans Werner Sinn says Germany was decoupling from the rest of Europe; Peter Spiegel writes that no crisis can be large enough to distract Europeans from their favourite sport of navel-gazing; Greek coalition faces a first real test as New Democracy is expected to challenge cuts in auxiliary pensions; there are conflicting reports about the state of the PSI+ negotiations in Greece, as a large hedge fund walks out of the steering committee; Jean-Pierre Jouyet said it would be a miracle if France was able to maintain its AAA-rating; a poll says that most French would blame Nicolas Sarkozy for a downgrade; Sarkozy met with Gerhard Schröder yesterday, a man whose policies he admires; Dominique Strauss-Kahn says the eurozone is a sinking ship; Nouriel Roubini, meanwhile, warns policymakers against another year of kicking the can down the road.


tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Wed Dec 21st, 2011 at 04:03:59 AM EST
Eurozone crisis: Banks scramble for ECB crisis loans | Business | guardian.co.uk

Martin van Vliet at ING Financial Markets says the perceived stigma attached to central bank borrowing has not prevented eurozone banks from making extensive use of the ECB's offer of unlimited three-year liquidity, with 523 banks taking up €489bn of loans. He highlights that the number of banks participating is relatively low:

The take-up of loans is massive, and even higher than in the ECB's first 12-month longer-term refinancing operation (LTRO) of June 2009, which attracted demand of €442bn. However, the lower number of participating banks (523 versus 1121 previously) suggests that the take-up is currently less widespread - and probably more concentrated in banking systems in peripheral eurozone countries. We will be keeping a close eye on national central bank data over the next few weeks for further clues on which countries' banking systems tapped the three-year facility.

Today's allotment of three-year loans is equivalent to almost one and a half times Spain and Italy's combined sovereign bond issuance in 2012. However, we doubt whether the money will be used extensively to fund purchases of peripheral debt, given concerns about mark-to-market risks and possible reputation risks. Only banks in peripheral countries with large exposures to local sovereign debt may decide to actually pursue the sovereign-debt carry trade. Most other banks, instead, may prefer to use the three-year ECB-loans to finance credit to the private sector or to repay maturing bank debt. Against this backdrop, we are sceptical as to whether the recent rally in (shorter-dated) Spanish and Italian sovereign bonds will sustain itself.

by Metatone (metatone [a|t] gmail (dot) com) on Wed Dec 21st, 2011 at 05:53:57 AM EST
Banks take huge 489 billion euros in 3-year ECB loans | Reuters

(Reuters) - Banks took a huge 489 billion euros (409 billion pounds) at the European Central Bank's first ever offering of 3-year funding on Wednesday, providing hope a credit crunch can be avoided and that the money may be used to buy Italian and Spanish debt.

A total of 523 banks borrowed money at the tender with the final demand well above the 310 billion euros expected by traders polled by Reuters in the run-up to the operation.

The euro rose to a one-week high versus the dollar while stocks gained after the ECB's three-year lending operation produced a greater takeup than market participants had been expecting, boosting risk appetite.

The three-year loans are the ECB's latest bold attempt to ease the euro zone's current troubles.

It hopes the limit-free, ultra-cheap and ultra-long funding will have a range of beneficial effects, including bolstering trust in banks, easing the threat of a credit crunch and tempting banks to buy Italian and Spanish debt.

Rather than a simple flat rate, the 3-year funds were offered at an interest rate which will be the average of ECB's main interest rate over the next three years. That benchmark rate is, after a rate cut earlier this month, currently at a record low of 1.0 percent.

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Dec 21st, 2011 at 05:55:20 AM EST
FT Alphaville yesterday quoted analysis from RBC:

FT Alphaville » The carry trade and the goldilocks LTRO

A not too small outcome should suggest that banks use the new facility and get longer dated funding on board. This should sooth some anxiety about their funding risks going into 2012. A not too large outcome should also suggest that no unreasonable risks have been taken.

Predictions were ranging from €200bn to €350bn roughly, so today's €400bn+ should probably be filed under "too large outcome". Carry trade risks have been taken?

That Alphaville post is worth reading, as is this one.

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Dec 21st, 2011 at 07:40:05 AM EST
[ Parent ]
From yesterday's Eurointelligence: Ecofin approves €150bn for IMF, but UK refuses to join in
Draghi warns about massive volumes of new issuance

In a testimony to the European Parliament, Mario Draghi pointed to the massive bond expiries in Q1 2012, with €250bn-€300bn in government bonds expiring, €230bn in bank bonds. In addition, €200bn in collateralised obligation will fall due during the course of 2012, Reuters reports. Draghi said the pressure was "unprecedented". Asked about eurobonds, he said: "(But) if you have separate countries that go on and spend on their own, separately and tax on their own, you cannot think about common issuance."

That's €480bn-€530bn in unsecured lending needing to be rolled over between now and the second 3-year LTRO. Sounds about right...

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Wed Dec 21st, 2011 at 08:35:24 AM EST
[ Parent ]
From the goldilocks article:
True, the ECB ties up collateral as equally as covered bonds do, but there is an extra attraction to the LTRO: the banks that take the 3-year funding will in fact have the option to repay any part of it after just a year, hence freeing up the collateral held against the borrowing at the ECB. Nice option... that isn't too consistent with the whole "carry trade" concept where the maturity of the asset is matched to the term of the funding for it, the rates team at SocGen points out.

Oh, and the collateral posted to the ECB can be relatively low quality. Not like the stuff required for private markets, or for covered bond pools.

One thing that actually joins the LTRO on the supply-side for liquidity, according to SocGen, is the lower reserve requirements that will kick in for the maintenance period starting on January 18th. Falling from two per cent to one per cent will free up some €100bn that was on deposit with the ECB -- something that will happen in advance of the second 3-year LTRO at the end of February. However, the SocGen analysts expect that this move will more likely lead to a decrease in weekly main-refinancing operations (MROs), than a decrease in LTRO demand. One to be aware of, anyhow.



tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Wed Dec 21st, 2011 at 08:44:49 AM EST
[ Parent ]
Perhaps the uptake of the LTRO funds best indicates the volume of toxic assets held by the banks taking the funds. For many of these institutions three years may represent >2 years beyond the time they expect to survive.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Dec 21st, 2011 at 11:08:13 AM EST
[ Parent ]
European Tribune - Now I'm really pissed off!
Mr. Draghi might explain it: unlike the banks and their owners, periphery tax-payers are not members of the financial world

He might also more plausibly explain it: Germany will not have it any other way.

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Dec 21st, 2011 at 06:00:06 AM EST
No bankers were harmed in the making of this film.
by tjbuff (timhess@adelphia.net) on Wed Dec 21st, 2011 at 01:08:06 PM EST
[ Parent ]
Some previous discussion here.
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Dec 21st, 2011 at 06:06:49 AM EST
The Guardian: Draghi warns of new year contagion
Mario Draghi, the ECB president, told MEPs in Brussels that pressure in bond markets in the first quarter would be "really very, very significant, if not unprecedented" as hundreds of billions in debt came up for renewal.

...

The ECB president said he had "no doubt whatever about the strength of the euro, its permanence, its irreversibility" but he reiterated his view that the central bank had no role to play in buying up sovereign bonds on a long-term and enhanced basis.

"We are trying to avoid a credit crunch, which might come from a lack of funding for banks," he said. "The ECB cares about financial stability, it cares a lot, but this has to be done without undermining the credibility of the institutions."He said the proposed "fiscal compact", to be discussed in Brussels on Tuesday by senior officials, including from the UK Treasury, was a breakthrough but was inadequate to solve the crisis.



tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Wed Dec 21st, 2011 at 06:09:50 AM EST
They do need the money, though. They have difficulties selling bonds, the inter-bank market isn't working, in some countries there is a run on deposits. So the ECB had to something and is acting as a lender as last resort. Quite rightly. And if he banks really buy peripheral debt instruments up to three years duration, interests rates should fall.
by IM on Wed Dec 21st, 2011 at 07:02:16 AM EST
Apparently rates are up again. If this holds, yields would have fallen in the lead-up to the 3-year auction as banks gather collateral.

@DuncanWeldon

Eurozone bond spreads moving up again, Euro itself down. Market reaction not quite what the ECB hoped for after shock and awe lending?



tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Wed Dec 21st, 2011 at 07:19:26 AM EST
[ Parent ]
Rates were down, and even quite strongly for the last Spanish sale. But it was supposed banks were stocking up on collateral for today's tender.

If rates rise again now, (and stay up), then this will just have been a probably necessary liquidity op, and not an attempt to ease bond market tensions by the (private) back door.

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Dec 21st, 2011 at 07:26:25 AM EST
[ Parent ]
But see my comment above.
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Dec 21st, 2011 at 07:41:29 AM EST
[ Parent ]
Why should yields continue to be low after the auction? It makes sense to buy bonds on the week before a liquidity auction, but now you have to wait until March for the second 3-yr LTRO.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Wed Dec 21st, 2011 at 08:31:17 AM EST
[ Parent ]
So the only effect is a short-lived (occasional) easing of sovereign bond interest.

I can see Sarko counting on this one and the Feb-March one to get him through the elections.

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Dec 21st, 2011 at 09:18:25 AM EST
[ Parent ]
That's what I'm thinking.

It wasn't a case of people pledging trash for cash in order to buy sovereign bonds, but a case of buying trash bonds in order to pledge them (among other assets) for cash.

Excess reserves continue to swell, massive rollovers in 2012Q1 beckon, and the banks are incresingly in an all cash position with the ECB acting as a clearinghouse for the broken-down interbank market.

This is the 5th year-end in a row that the ECB has had extraordinary liquidity measures to tide banks over the end of the year. You would think the serious people would realise the crisis is not going away. How long before we settle into this as the new normal?

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Wed Dec 21st, 2011 at 09:29:15 AM EST
[ Parent ]
From Eurointelligence today:

The best comment this morning on the impact of this operation came from Mark Schieritz, who gives a downbeat-realistic assessment. He says the liquidity shower will have a marginally positive impact on the banking sector, in the sense that it reduces the probability of a liquidity squeeze. It probably prevents a massive liquidity crunch, but it is unlikely to lead to more private sector credit. He also dismissed the backdoor theory - that banks would now use the money to buy government bonds. One reason for their caution is that future stress tests might require a corresponding increase of core-tier one capital to back such purchases. Schrieritz concludes that most of the money will end up with the ECB.

Further wonders of the ECB's liquidity policy.

by afew (afew(a in a circle)eurotrib_dot_com) on Thu Dec 22nd, 2011 at 03:21:57 AM EST
[ Parent ]
It's as if the ECBankers don't understand banking.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Thu Dec 22nd, 2011 at 04:37:07 AM EST
[ Parent ]
>Schrieritz concludes that most of the money will end up with the ECB.>

And how exactly is this supposed to work?

by IM on Thu Dec 22nd, 2011 at 06:29:07 AM EST
[ Parent ]
Excess reserves, which are already at record levels.

There is a chart in FT Alphaville's The carry trade and the goldilocks LTRO.

With the interbank market not working, when banks have excess cash they simply park it at the ECB. Banks have used the liquidity auction to turn illiquid assets into cash (effectively, every asset is illiquid if the interbank market is not working because the preferred form of liquidity is to pledge assets as collateral in the interbank market rather than sell them outright).

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Thu Dec 22nd, 2011 at 06:47:12 AM EST
[ Parent ]
See here.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Wed Dec 28th, 2011 at 04:18:42 AM EST
[ Parent ]
Die Zeit: So viel Geld und keine Inflation (Herdentrieb blog)

The original piece doesn't provide much more explanation of the mechanism beyond Münchau's summary.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Thu Dec 22nd, 2011 at 07:03:46 AM EST
[ Parent ]

Acoording to the ECB the situation regarding reserve interest rate and excess reserve is this:

http://www.ecb.int/mopo/implement/mr/html/index.en.html

Remuneration and penalty rates
Reserve maintenance period:    09/11/2011 to 13/12/2011
Average reserve requirements (EUR millions):    207,747
Remuneration rate:    1.25%
Penalty rate for deficiencies:    4.50%

Reserve Maintenance Statistics (EUR millions)
Reserve maintenance period ending in:    November 2011
Required reserves:    206,177
Excess reserves:    2,754
Deficiencies:    0
Current account holdings:    208,932

That doesn't really look like big excess reserves to me. Now it is indeed possible right now to borrow at 1% and invest as reserves 1.25%.
Strill thar is only 0.25% and they to use collateral for that. And of course the ECB could should change the interest rate on reserves.

by IM on Thu Dec 22nd, 2011 at 10:10:38 AM EST
[ Parent ]
An according to the Bundesbvank the so called renumeration rate is changed quite frequently and has indeed been lowered from 1.5% to 1.25% just this month:

http://www.bundesbank.de/gm/gm_mindestreserven.en.php

by IM on Thu Dec 22nd, 2011 at 10:13:56 AM EST
[ Parent ]
The ECB rates are here.

The refinancing rate is 1% (was 1.25% in November - "remuneration rate" in your quote). The ECB pays the refinancing rate on required reserves which means you can always fulfill the reserve requirement by repoing eligible assets.

Excess reserves are remunerated at the deposit rate, currently 0.25% or 0.75% less than the refinancing rate.

We went over most of this here.

Maybe what is being referred to as "excess reserves" in commentary is reported by the ECB under "deposit facility" while "excess reserves" in your quote refers to actual excess of reserves over requirements at the end of the maintenance period.

Aha, bingo - under data:

Use of the standing facilities (Figures as at 21 December 2011, EUR millions)

Use of the marginal lending facility:     7,546
Use of the deposit facility:     264,969



tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Thu Dec 22nd, 2011 at 11:39:51 AM EST
[ Parent ]
They do need the money, though. They have difficulties selling bonds, the inter-bank market isn't working, in some countries there is a run on deposits. So the ECB had to something and is acting as a lender as last resort. Quite rightly.

Absolutely. The problem is not that they lend to private banks. The problem is not even that they accept toilet paper collateral, because the ECB has no formal role in bank resolution, which remains a state-level function.

The problem is that they refuse to print money for the treasuries while lending to private banks at rock-bottom rates against toilet paper collateral.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Dec 21st, 2011 at 09:44:58 AM EST
[ Parent ]
The problem is not even that they refuse to print money for the treasuries, the problem is that they keep coming up with bogus legal arguments to avoid buying treasury bonds in the secondary market and with Rube Goldberg schemes to make up for the disastrous consequences of that.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Wed Dec 21st, 2011 at 10:04:20 AM EST
[ Parent ]
I can't wait to here what the Irish and Greeks think of this.
by tjbuff (timhess@adelphia.net) on Wed Dec 21st, 2011 at 09:36:42 AM EST
@yanisvaroufakis
The worst combination of financial repression combined with massive liquidity provision: The current ECB strategy. A disaster in the making



tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Wed Dec 21st, 2011 at 01:09:15 PM EST
Debatte über Europäische Zentralbank: Deutschlands heuchlerische Monetaristen - Wolfgang Münchau - SPIEGEL ONLINE Debate on ECB: Germany's hypocritical monetarists - Wolfgang Münchau - Spiegel Online
Deutschlands Währungshüter fühlen sich im Euro-Raum schon lange nicht mehr wohl: Jürgen Stark verlässt dieser Tage sein Büro in der Frankfurter Zentrale der Europäischen Zentralbank. Zurückgetreten ist er aus Protest gegen die Aufkäufe von Anleihen. Im Frühjahr trat Axel Weber als Bundesbankchef zurück. Sein Nachfolger, Jens Weidmann, stammt aus der gleichen ideologischen Ecke.Germany's central bankers have been feeling uncomfortable in the Euro zone for a long time. Jürgen Stark has resigned in protest against purchases of bonds. Axel Weber resigned as Bundesbank chief. His successor is from the same ideological breed.
Sie alle stehen mehr oder weniger in der Tradition des Monetarismus, eine wichtige Lehre des 20. Jahrhunderts, die der Geldmenge eine besondere Rolle zuwies.They are all more or less in the tradition of monetarism, an important lesson of the 20th Century, that assigned a special role to the money supply.
Es ist deren Heuchelei. Echte Monetaristen würden sich in dieser Krise völlig anders verhalten als ihre deutschen Jünger....It is their hypocrisy. True monetarists would act in this crisis completely differently than their German disciples.
Alle Indikatoren der Monetaristen zeigen auf Rot All indicators of the monetarists point towards Red
Deutsche Notenbanker wie Stark, Weidmann und Weber erinnern sich immer nur dann an den Monetarismus, wenn es darum geht, die Zinsen zu erhöhen - aber nicht, wenn es andersherum laufen soll. Sie sind asymmetrische Monetaristen. Ein echter Monetarist würde angesichts der Kreditklemme im Euro-Raum die Zinsen auf null senken. Er würde sogar für einen Aufkauf von Staatsanleihen plädieren. Echte Monetaristen würden den Zusammenbruch des Geldhandels zwischen den Banken nicht tolerieren.German central bankers like Stark, Weidmann and Weber only ever remember monetarism, when it comes to raising interest rates - but not if it is the other way around. They are asymmetric monetarists. A true monetarist would reduce the interest rates to zero in the face of the credit crunch in the euro zone. He would even plead for buying government bonds. True monetarists would not tolerate the collapse of the money market between banks.
Alle Indikatoren der Monetaristen zeigen auf Rot: die Geldmenge, die Kredite, die Liquiditätströme, die Zinsspannen. Die positiven Meldungen aus Deutschland spielen für die Einschätzung der Lage kaum eine Bedeutung. Der Referenzpunkt für die Geldpolitik ist der Euro-Raum als Ganzes. Da braut sich gerade etwas zusammen. Ein Milton Friedman würde jetzt auf das Gaspedal treten.All indicators of the monetarists point towards Red: the money supply, credit, liquidity flows, interest rate spreads. The positive reports from Germany to play for the assessment of the situation has hardly any meaning. The reference point for monetary policy is the euro area as a whole. Because something is brewing straight. A Milton Friedman would now step on the accelerator.
Darüber hinaus ist es zweitens gar nicht so leicht, eine Inflation mit Anleihenkäufen zu generieren - selbst wenn man es wollte. Nach Kalkulationen ehemaliger Notenbanker der Europäischen Zentralbank und der Bank of England muss man mindestens zwei oder drei Billionen Euro an Anleihen kaufen, bis überhaupt Inflation entsteht. Wenn man vor einem Ankauf zurückschreckt, dass in einer fast zehn Billionen Euro schweren Volkswirtschaft die makroökonomisch läppische Summe von 210 Milliarden Euro hat, dann hat das alle möglichen Gründe. Mit Angst vor Inflation hat das aber nichts zu tun, zumindest nicht mit rationaler Angst.Furthermore, it is not easy, secondly, to generate an inflation with bonds purchases - even if you wanted it. According to calculations of former central bankers of the European Central Bank and Bank of England have to buy at least two or three billion euros in bonds to any inflation occurs. If you shy away from buying one that has a nearly ten trillion economy, the severe macroeconomic € paltry sum of 210 billion €, then that has all sorts of reasons. With fear of inflation that has nothing to do, at least not with a rational fear.
Ein echter Monetarist ist weder Falke noch TaubeA real monetarist is neither hawk nor dove
Dabei waren die historischen Wurzeln des Monetarismus völlig andere. Friedmans Monetarismus basierte auf einer berühmten Studie, die er mit der Wirtschaftshistorikerin Anna Schwartz im Jahre 1963 veröffentlichte. Das wichtigste Ergebnis der "Monetary History of the United States, 1867-1960" war, dass eine durch die Notenbank verursachte Verknappung der Geldmenge die Große Depression verursachte. Das erste wichtigste Resultat des Monetarismus bestand also darin, dass Falken in den Zentralbanken für die Deflation verantwortlich waren.But the historical roots of monetarism were completely different. Friedman's monetarism was based on a famous study, which he published with the economic historian Anna Schwartz in 1963. The most important result of the "Monetary History of the United States, 1867-1960," was that a shortage caused by the central bank in the money supply caused the Great Depression. The first important result of monetarism was thus that hawks in the central banks were responsible for the deflation.
Ein echter Monetarist ist weder Falke noch Taube, sondern jemand, der eine unemotionale, gleichbleibende Distanz zwischen Deflation und Inflation bewahrt.A true monetarist is neither a true hawk nor dove monetarist, but someone who keeps a unemotional, consistent distance between deflation and inflation.
Friedman würde sich im Grabe umdrehen, wenn er hören würde, was heute im Namen seiner Lehre passiert.Friedman would turn over in his grave if he heard what happened today on behalf of his teaching.


Schengen is toast!
by epochepoque on Wed Dec 21st, 2011 at 01:46:57 PM EST
Thanks for posting this. Just my suggestion for correcting a mistranslation:

the European Central Bank and Bank of England have to buy at least two or three billion trillion euros in bonds to cause any inflation occurs

That would correspond to the calculations of Buiter et al.

by afew (afew(a in a circle)eurotrib_dot_com) on Thu Dec 22nd, 2011 at 03:18:08 AM EST
[ Parent ]
Ah yes, the first time I used TribExt.

Schengen is toast!
by epochepoque on Thu Dec 22nd, 2011 at 04:11:59 AM EST
[ Parent ]
TribExt uses Googles translate-function, that has become impressive for major languages but still needs to be checked.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Thu Dec 22nd, 2011 at 04:22:10 AM EST
[ Parent ]
That's because they are not Monetarists but Austrian. Friedman would roll in his grave because these people are actually following Hayek and von Mises.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Thu Dec 22nd, 2011 at 04:45:22 AM EST
[ Parent ]
Eurointelligence Daily Briefing: The end of yet another suckers' rally
ECB's three-year liquidity operation has a take-up of €489bn, much larger than forecast; the news triggered a massive rally, which reversed during the trading day, as investors reminded themselves that this would have no lasting impact on the crisis; one analyst compares the policy to a "sugar rush"; the Libor-Ois spread, a measure of stress in the money markets, registered no change despite the policies; Mark Schieritz says it will only have a marginal impact, and predicts that most of the money will end up with the ECB; the Italian economy shrank by 0.2% in Q3; Mario Monti faces a confidence vote in the Senate today; Lucas Papademos starts bilateral talks with party leaders to overcome the  latest political crisis; opinion polls show the FDP at 2%; Germany continues to increase its export surplus against the rest of the eurozone (adjustment would require the very opposite to happen); economists believe that France will not reach its 2013 deficit goal; Kenneth Rogoff says eurozone crisis casts a long shadow over the global economy in 2012; Olivier Blanchard, meanwhile, says that IMF calculations show that the eurozone rush to fiscal retrenchment will fail even in its narrow goal of debt reduction.


tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Thu Dec 22nd, 2011 at 04:25:03 AM EST
This is exactly what took place in the US, with the slight exception that banks are forced to buy T-bills.

Instead of bashing the ECB we should ask ourselves why is everything laying on the shoulders of this non-elected institution.

You might find me At The Edge Of Time.

by Luis de Sousa (luis[dot]a[dot]de[dot]sousa[at]gmail[dot]com) on Fri Dec 23rd, 2011 at 03:00:36 AM EST
From today's Eurointelligence Daily Briefing: Moody's downgrades Slovenia for second time in three months
Southern European Banks are main users of the ECB's 3 year LTRO

Banks from Italy and Spain are the main users of the ECB's unprecedented 3 years LTRO, Frankfurter Allgemeine Zeitung writes. Referring to figures published by Reuters based on banking sources Italian banks borrowed €116bn. One of the reasons for their run on the ECB offer was that Italian banks had been short on collateral they could offer the ECB up until recently. FAZ says that altogether 523 banks used the ECB offer, among them many Spanish, but also German and French banks. The net liquidity injected into the system by the ECB is not €489bn but rather €210bn, the paper states. The reason for the lower figure is the end of an open market operation of €234bn and that €45bn where shifted from a previous 1 year tender to the new 3 years tender.



tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Fri Dec 23rd, 2011 at 04:24:57 AM EST
Bloomberg: ECB Says Banks' Overnight Deposits Climbed to Record High of $591 Billion
Euro-area banks parked 452 billion euros ($591 billion) with the Frankfurt-based ECB yesterday, the most since the euro's introduction in 1999 and up from the previous record of 412 billion euros a day earlier.

The ECB last week lent 523 banks a record 489 billion euros for three years to keep credit flowing to the 17-nation euro economy during the sovereign debt crisis. It lent the money at its benchmark rate of 1 percent. Banks are depositing excess cash back with the ECB at the overnight rate of 0.25 percent, incurring a loss rather than lending it at a better rate.

Barclays Capital estimates the three-year loans injected 193 billion euros of new money into the system, with 296 billion euros accounted for by maturing loans. Since the three-year loans started on Dec. 22, overnight deposits have jumped by 187 billion euros, suggesting banks are parking almost all the additional liquidity back with the ECB.



tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Wed Dec 28th, 2011 at 04:17:58 AM EST
to keep credit flowing to the 17-nation euro economy during the sovereign debt crisis

Bwahahahahah

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Wed Dec 28th, 2011 at 04:19:22 AM EST
[ Parent ]


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