http://yanisvaroufakis.eu/2012/07/17/it-is-now-official-the-eurozones-monetary-transmission-system-is-broken/
Under normal conditions, the interest rates that you and I must pay on a home loan, a car loan, our credit card, a business loan are pegged onto two crucial rates. One is the rate that banks charge one another in order to borrow from each other. The other is the Central Bank’s overnight rate. Alas, neither of these interest rates matter during this Crisis. While such ‘official’ rates are tending to zero (as Central Banks try to squeeze the costs of borrowing to nothing), the interest rates people and firms pay are much, much higher and track indices of fear and subjective estimates of the Eurozone’s disintegration.
Following the Crash of 2008, banks stopped lending to each other, fearful that they will never get their money back (as most banks became, in effect, insolvent). Thus, the interest rate at which they lend to one another simply ceased being a meaningful price (just like the prices of CDOs, following Lehman’s collapse, lost their meaning as no one bought or sold those pieces of paper). The truly scandalous aspect of the Libor scandal of recent weeks is that banks continued to use (and ‘fix’) an estimate of the interest rate at which they lent to each other (for the purposes of fixing all other interest rates; e.g. mortgage and credit card rates) when they did not lend to each other any more…
The demise of Libor and other measures of inter-bank lending interest rates left us with the official interest rate of Central Banks, like the European Central Bank. Recently, in an acknowledgment of past errors and of the strength of the European austerity-induced recession, the ECB lowered its key interest rate to 0.75% – the lowest level since the euro’s inception. At the same time, the ECB did something else that is extraordinary by its own standards: it reduced to zero the interest rate it paid private banks for depositing money with the ECB.
Under normal conditions, such an aggressive interest rate reduction would drag downward all interest rates: with private banks being able to borrow at a pitiful 0.75% from the ECB to lend on to the private sector, and having no incentive whatsoever to park their idle capital with the ECB, one might have hoped (as the ECB’s President, Mr Mario Draghi, clearly did) that banks would be more willing to lend and at a lower interest rate. However, such hopes would have been baseless. Indeed, the interest rates p[aid by households and companies remained high, the banks’ funding costs even increased, and the normal ‘monetary transmission mechanism’ (i.e. the system that converts lower official Central Bank interest rates into an increase in the supply of money) proved to be broken and beyond repair. The question is: Why?
Here is the answer, as provided by Christian Noyer, a governor of the Central Bank of France (in an interview with Handelsblatt): “We are currently observing a failure of the transmission mechanism of monetary policy. From the markets’ perspective, the interest rate facing individual private banks depends on the funding costs of the state where they are domiciled and not on the ECB overnight interest rate… Hence the monetary policy transmission mechanism does not work.”
Now, this is an admission that should be on every headline in Europe, given that it comes from a governor of the Central Bank of the Eurozone’s second largest economy. It is equivalent to a pilot picking up the intercom and saying to the passengers: “The landing gear has failed.” And as if this were not enough, Mr Noyer added for good measure: “We did our best to face up to this phenomenon which is unacceptable for a Central Bank in a monetary union.” What did he mean by that? The clue comes from his follow up sentence: “In future we cannot rely endlessly on a system where the Central Bank is injecting massive liquidity to the banking system, boosting hugely its balance sheet.” Clearly, Mr Noyer was referring to the LTRO; the ECB’s attempt earlier in the year to ‘fix’ the ‘transmission mechanism’ by pumping 1 trillion euros of liquidity into the Eurozone’s banks. Reading between the lines, it is clear that, at least according to Noyer, this ploy failed (as some of us kept saying it would).
In summary, borrowing costs in the Eurozone have lost their two anchors: the inter-bank lending rate (courtesy of the sad reality that the banks no longer lend one another) and the overnight ECB interest rate (which banks ignore when lending). The key to understanding this breakdown is governor Noyer’s phrase “the interest rate facing individual private banks depends on the funding costs of the state where they are domiciled and not on the ECB overnight interest rate”. In short, the fear of a disintegration of the Eurozone (that is aided and abetted by silly talk of Greece’s and Portugal’s expulsion) has broken the umbilical cord that normally connects the ECB’s overnight rate with actual borrowing costs of the private sector. Now, the later reflect the fear that the member-state in which the firm or the household are will not be able to refinance itself. In a never-ending circle this fear ensures that the said member-state will not be able to refinance itself and, crucially, guarantees the ECB’s failure to lower interest rates even when it pushes its official rates to zero. This is what a monetary union on the verge of collapse looks like.
Under normal conditions, such an aggressive interest rate reduction would drag downward all interest rates: with private banks being able to borrow at a pitiful 0.75% from the ECB to lend on to the private sector, and having no incentive whatsoever to park their idle capital with the ECB, one might have hoped (as the ECB’s President, Mr Mario Draghi, clearly did) that banks would be more willing to lend and at a lower interest rate. However, such hopes would have been baseless. Indeed, the interest rates p[aid by households and companies remained high, the banks’ funding costs even increased, and the normal ‘monetary transmission mechanism’ (i.e. the system that converts lower official Central Bank interest rates into an increase in the supply of money) proved to be broken and beyond repair. The question is: Why?
Here is the answer, as provided by Christian Noyer, a governor of the Central Bank of France (in an interview with Handelsblatt): “We are currently observing a failure of the transmission mechanism of monetary policy. From the markets’ perspective, the interest rate facing individual private banks depends on the funding costs of the state where they are domiciled and not on the ECB overnight interest rate… Hence the monetary policy transmission mechanism does not work.”
Now, this is an admission that should be on every headline in Europe, given that it comes from a governor of the Central Bank of the Eurozone’s second largest economy. It is equivalent to a pilot picking up the intercom and saying to the passengers: “The landing gear has failed.” And as if this were not enough, Mr Noyer added for good measure: “We did our best to face up to this phenomenon which is unacceptable for a Central Bank in a monetary union.” What did he mean by that? The clue comes from his follow up sentence: “In future we cannot rely endlessly on a system where the Central Bank is injecting massive liquidity to the banking system, boosting hugely its balance sheet.” Clearly, Mr Noyer was referring to the LTRO; the ECB’s attempt earlier in the year to ‘fix’ the ‘transmission mechanism’ by pumping 1 trillion euros of liquidity into the Eurozone’s banks. Reading between the lines, it is clear that, at least according to Noyer, this ploy failed (as some of us kept saying it would).
In summary, borrowing costs in the Eurozone have lost their two anchors: the inter-bank lending rate (courtesy of the sad reality that the banks no longer lend one another) and the overnight ECB interest rate (which banks ignore when lending). The key to understanding this breakdown is governor Noyer’s phrase “the interest rate facing individual private banks depends on the funding costs of the state where they are domiciled and not on the ECB overnight interest rate”. In short, the fear of a disintegration of the Eurozone (that is aided and abetted by silly talk of Greece’s and Portugal’s expulsion) has broken the umbilical cord that normally connects the ECB’s overnight rate with actual borrowing costs of the private sector. Now, the later reflect the fear that the member-state in which the firm or the household are will not be able to refinance itself. In a never-ending circle this fear ensures that the said member-state will not be able to refinance itself and, crucially, guarantees the ECB’s failure to lower interest rates even when it pushes its official rates to zero. This is what a monetary union on the verge of collapse looks like.
and...
TUESDAY, JULY 17, 2012
More flight of capital out of the Eurozone
Here is a quick follow-up on the post discussing the ECB liabilities to non-Eurozone entities. Large euro deposits originating outside of the Eurozone can come from the Fed Liquidity Facility (the Fed took in euros as collateral for dollars it was lending out) or from other central banks trying to defend the euro peg.
The chart below is an attempt to subtract out the Fed Liquidity Facility from the non-Eurozone deposit balances. It's not a straight forward exercise because the euro collateral does not exactly correspond to the amount of dollars lent, which is what is available on the Fed's website. The timing of the weekly reporting is also different. But the chart does give an indication of central banks other than the Fed placing euros with the ECB. There is no question (see Kostas Kalevras most recent ECB update) that the increase is driven by either Switzerland or Denmark (or both) defending the currency peg, buying euros and depositing them at the ECB. And the sellers of those euros are Eurozone's citizens trying to convert their money into other currencies.
 |
| Liabilities to non-euro area residents denominated in euro adjusted for the Fed's liquidity facility (€ bn) - basically other european central banks depositing euros at the ECB |
The current balance is €172bn less €24bn from the Fed's facility gives €148bn from other central banks. Here is the latest liability side of the ECB's balance sheet.
and some eurozone news - not country specific .......
8:34PM BST 17 Jul 2012
5 Comments
The monthly survey of funds by Bank of America Merrill Lynch has picked up a sudden crumbling of confidence in the eurozone core, with France viewed as the country most likely to deliver a nasty surprise later this year. Europe’s debt crisis is by far the biggest worry worldwide, with the US “fiscal cliff” and China’s property slide well behind.
A net 32 of money managers expect trouble in Germany, a dramatic reversal since May. The worries may be linked to the Bundesbank’s rocketing claims on eurozone central banks under the ECB’s “Target2” payment system, now €729bn (£572m). These reflect the scale of capital flight from the Club Med bloc, and may prove hard to collect if the euro blows apart.
A net 55pc expect a bad surprise from France, which has $710bn (£456bn) of bank exposure to Club Med. President François Hollande is courting fate by raising the minimum wage, employing 60,000 new teachers and clinging to a largely unreformed state that takes 56pc of GDP.
While investors seem willing to overlook the leisurely pace of fiscal tightening, they may be less forgiving of Mr Hollande’s nonchalance over France’s relentless loss of global competitiveness.
The growing doubts about Germany and France have not yet surfaced in the debt markets. Short-term borrowing costs have turned negative in both countries. The immediate flight to safety has overwhelmed all other effects.
Germany has until now been able to head off any threat to its own credit rating, agreeing to loan packages at penal rates for Greece, Ireland and Portugal without crossing the Rubicon to pan-EMU debt-pooling. The escalating crisis in Spain and Italy changes the nature of the crisis entirely. The world is now intervening.
Chancellor Angela Merkel came under intense pressure in late June from the US and China, as well as a united Latin bloc, to permit the direct recapitalisation of Spain’s crippled banks by Europe’s bail-out fund (ESM). It marks the start of debt mutualisation, leaving Germany on the hook. Mrs Merkel had no mandate from the Bundestag to make such a concession and has been rowing back ever since.
Social-Democrat spokesman Carsten Schneider warned the government not to “play games” with parliament, saying a direct ESM bail-out of Spain’s banks “violates the law.”
A document submitted to the Bundestag on Tuesday states that the €100bn package is a loan to the Spanish state. “The uncertainty is put to rest: Spain alone is responsible,” said Michael Meister, the Christian Democrat leader in the Bundestag.
Spain faces the worst of all worlds. The EU has imposed a highly-intrusive Greek-style “Memorandum” on the country, forcing drastic cuts as the country slides deeper into slump. This is leading to bitter street protests, with even police joining marches in Madrid on Tuesday.
Yet the promised bank recapitalistion is hostage to German politics. The rescue will be a sovereign loan for the foreseeable future, pushing public debt to 90.3pc of GDP this year.
Spain was able to raise 12-month funds at 3.9pc on Tuesday, down from over 5pc last month, despite warnings by the International Monetary Fund that the economy will contract again next year with no stabilisation of public debt in sight. The real test will come in October when the Spanish Treasury must raise €20bn.
For hedge funds lining up to “short” German bonds, it scarcely matters whether Germany opts to save the eurozone by sharing – or inflating away – the debts of Italy and Spain or whether it stands firm and lets the system fall apart. Either outcome entails huge losses for the country. On that basis the German 10-year Bund is on borrowed time as a safe-haven asset.
* * *
and Greece looks to find a bridge over troubled waters - or at least a bridge until September 20th ( drop dead date includes 30 day period to cure payment which will be missed on August 20th ) .......
and Greece looks to find a bridge over troubled waters - or at least a bridge until September 20th ( drop dead date includes 30 day period to cure payment which will be missed on August 20th ) .......
Bridge loan needed for August
Athens has already asked the eurozone for intermediary funding of 3.8 bln euros to pay back bonds 
Greece is hoping to receive a bridge loan this summer to cover bonds worth 3.2 billion euros that mature on August 20, along with their interest (worth another 600 million). “We are trying to secure some bridge funding by September,” a high-level official at the Finance Ministry said, adding that the government has already submitted a request to the eurozone. Nevertheless, a source from the troika of Greece’s international creditors -- the European Commission, European Central Bank and the International Monetary Fund -- noted that, at the moment, “it would have been unrealistic for the finance ministers of the eurozone to agree to such a thing.” The same source added that this could happen later, “after Greece has made specific steps,” such as a commitment to the promotion of privatizations. The bridge loan idea provides for Greece asking the eurozone to deliver an extra loan to Athens between two planned disbursements of installments of the existing bailout. For the Eurogroup to agree to a planned tranche, it will have to receive a positive report from the troika regarding the course of the adjustment program. The troika, however does not have to give its consent for a bridge loan. The eurozone delivers such loans provided that their amount will be deducted from the next planned installment. That is exactly where the problem lies right now, because given that the troika report will not be ready before September, the next tranche is not certain at all. Therefore, if the eurozone decides to give Greece 3.8 billion euros by August 20, it will have to take the risk of presuming that the troika report regarding the course of the Greek economy will be positive, and the data to date does not point in that direction. On the other hand, since the Greek bonds and interest maturing on August 20 are in the European Central Bank’s portfolio, if there is no intermediary funding to Greece it will appear as if the eurozone itself is unwilling to pay the ECB. The balance is tight, while Athens understands that the International Monetary Fund at this stage has no intention of approving any loans to Greece without any tangible progress in the program. |
and non Libor Gate , non Bernanke testimony and non redundant items from The Telegraph live blog....
18.15 Greece's coalition government will seek a bridging loan to tide it over while it scrambles to find €11.7bn of spending cuts to bring its bailout plan back on track, Reuters reports:
The measures must be submitted for approval by July 24, when auditors of the so-called "troika" of the European Union, the International Monetary Fund and the European Central Bank are expected to return to Athens for a check-up mission.
The visit, and subsequent haggling that is expected to last until September, will determine whether the EU and IMF continue bank rolling Athens or abandon it and let it slide towards chaotic default and eventual exit from the euro zone.
The troika has already turned the screws on cash-strapped Athens, effectively suspending payments under its ongoing 130 billion euro rescue and prompting it to seek a bridging loan from its lenders to cover financing needs until September.
"We are fighting to secure the bridging loan by September," a finance ministry official told reporters, speaking on condition of anonymity.
17.43 Nick Squires, the Telegraph's man in Rome, has filed this story about how poverty is on the increase in Italy. A report has found that 11pc of Italian families now live in relative poverty:
Eight million Italians, out of a population of 60 million, are struggling to make ends meet, according to Istat, the national statistics agency on Tuesday.
Of those, 3.4 million are living in absolute poverty, representing 5.7 per cent of the population, up from 5.2 per cent in 2010.
The problem is worst in the sun-baked south, known as the Mezzogiorno, where one in four families now live below the poverty line.
The definition of absolute poverty is based on a basket of necessary goods and services, while relative poverty is measured by average household consumption.
17.31 Evangelos Venizelos (pictured below), leader of the socialist Pasok party, has been speaking to Vima FM radio today. He's said that a pledge by Greece to save €11.5bn in the next two years in return for EU-IMF loans is "nearly impossible" to keep:
It is very difficult, it is nearly impossible to gather €11.5bn through spending cuts in 2013 and 2014. This difficulty was always there but now it is exacerbated by recession forecasts.
Greece's government says the economy could contract by 6.7pc this year, compared to an earlier forecast of 4.5pc.
16.49 In a sign that Spaniards are heading for the exit of their recession-wracked country, the number of emigrants jumped 44pc in the first six months of the year compared with the same period last year.
Current estimates show 40,625 Spaniards emigrated between January and the end of June, compared with 28,162 last year, the institute said. Another 228,890 foreigners who had been living in Spain left the country during the six-month period.
16.40 In Hungary today, the country has begun negotiations with the International Monetary Fund on a new €15bn credit line designed to strengthen the country's financial stability.
Hungary's government decided to initiate a loan agreement with the IMF last November when the cost of financing the state budget and renewing debt begain to rise.
Four years ago, Hungary became the first country in the European Union to receive an IMF-led bailout, agreeing on a standby deal of €25bn to avoid default. But in late 2010, a new government decided not to renew the IMF agreement and avoid close international scrutiny of its economic policies.
15.48 Back in the eurozone, Portugal may have its 2012 deficit target relaxed if the country’s economy continues to weaken, the International Monetary Fund (IMF) has suggested.
The IMF’s team of debt inspectors concluded that while Portugalremained on track to meet its 2012 deficit target of 4.5pc, the recent rise in unemployment had generated a gap of about 0.5pc of GDP. The IMF said that the gap would be offset by lower than expected interest payments on its debt and "re-programming of EU funds". It added:
However, there is now much more uncertainty regarding the impact of these acroeconomic developments on the fiscal outlook, and downside risks. are elevated. While staff and the authorities agreed that no new measures to achieve the 2012 target were warranted at this stage, close monitoring of developments in the next months will be important.
14.34 On the economic data front, Spain has published its trade balance, showing that the deficit fell by 43.5pc year-on-year in May. Imports fell by 1.6pc to €21.388bn and exports rose by 6.2pc to €19.462bn, the Spanish economy ministry said.
A trade surplus is a factor of expansion in an economy and countries in difficulty due to overstretched public finances, such as Spain, are looking to an increase in exports to bolster growth.
14.29 Irish finance minister, Michael Noonan (pictured above), is meeting Mario Draghi, the European Central Bank president, in Frankfurt. It is thought that Mr Noonan may press for a break on bank debt, with talks coming against a backdrop of a move by the ECB to advocate losses on senior bondholders at struggling eurozone banks.
The talks come as the Irish government announced a stimulus packageworth more than €2bn. Major roads in Galway and Wexford are among the infrastructure projects receiving funding, as well as investment in shcools and primary healthcare facilities. The Irish Times has more details.
13.19 More from Luis Maria Linde, the Bank of Spain governor - who I inadvertently referred to as the Bank of England governor earlier, apologies. He has said Spain will set up a single "bad bank", where it will park the toxic property assets of its ailing lenders to later sell them off:
I understand that it will be done by reviewing the balance sheets of the banks which receive public aid and there will be a separation of assets.
This will involve a very big entity, with a very complicated management. This is not something easy which can be resolved in a few months or in a few years.
12.37 The European Financial Stability Facility has sold six-month treasury bills at a negative yield for the first time ever. Germany's central bank, which managed the issue, said the facility placed €1.488bn of six-month bills at a yield of -0.0113pc. A negative yield means that investors paid the EFSF to lend it money.
The bailout fund has continued to attract solid demand with the bond markets pressuring Spain and italy, pushing up their borrowing costs.
The EFSF, which was established with a total lending capacity of €440bn, is to be replaced eventually by a permanent rescue fund - the European Stability Mechanism. It had been due to come into force on July 1, but has suffered delays, particularly due to legal challenges in Germany.
12.14 As well as Spain, Greece has also been auctioning debt today. It raised €1.625bn in an auction of three-month debt. The yield was slightly lower, coming in at 4.28pc compared to 4.31pc last time.
11.07 Still with Spain, eurozone finance ministers will hold a conference call on Friday to discuss the terms of emergency aid for Spain to recapitalise its banks.
Earlier this month, euro area finance ministers agreed that €30bn of urgent funding can be ready by the end of July for Spain's struggling banks in an effort to save Spain from needing a full bailout.
and.....
http://www.zerohedge.com/news/sicily-san-bernardino-first-italian-region-verge-default-montius-pilate-washes-his-hands
Sicily Is San Bernardino: With First Italian Region On Verge Of Default, Montius Pilate Washes His Hands
Buried deep in the newsflow from Ben Bernanke is the following piece of very critical news for anyone who is still long Italian bonds: namely that Italy may not be Spain, or Uganda, but Sicily is about to become San Bernardino. From Reuters: "Italian Prime Minister Mario Monti said on Tuesday he expected the governor of Sicily to resign following a growing financial crisis that has pushed the autonomous region close to default." Because the resignation of Sicily Governor Lombardo will somehow allow all those who care about the fundamentals of Italy to stick their heads in the sand... at least until Sicily is followed by Calabria, Campania, Lazio, Abruzzo, Tuscany, Lombardy, Umbria, Liguria, Veneto and so on. At least the governors of those respective provinces now have an advance warning what the endgame is.
More:
and spain and Finland announce their collateral deal.....Monti said in a statement there were "grave concerns" that the island could default and he said he had written to the governor Raffaele Lombardo seeking confirmation that he would resign by the end of the month.
"The solutions which could be considered that involve action on the part of the government cannot fail to take account of the situation of the administration at regional level but rather have to be matched to this so as to deploy the most efficient and appropriate instruments," the statement said.
As to how Italy will actually fund the bailout its insolvent regions, fear not: ze Germans will be delighted to step in and make it rain cash courtesy of the ESM, which may or may not be active one day.
http://www.zerohedge.com/news/spain-and-finland-reach-collateral-deal
Spain And Finland Reach Collateral Deal
Animal Farm rears its European head, where we learn that some bailout agreements are more subordinated than others. Bloomberg brings us the details of the just completed collateral deal between Finland and Spain, which has terms identical to that of Greece, where there was absolutely no debate about whether bailout loans were senior to public and private sector debt. Following this deal the semantics of the ESM subordination, implied or explicit, should also end.
- Collateral deal bilateral between Finland, Spain, Finnish Finance Minister Jutta Urpilainen spoke to reporters.
- Deal structured as Greek collateral was
- Other countries not asking for collateral - YET!
- Collateral to come from deposit guarantee fund
- Negative pledges mean deal can’t be directly with state
So courtesy of bullet point 4 we learn that Finland is right in seniority as Spanish depositors. And one Spanish bonds pass 7%, then 8% and so on, every other country will seek the negative pledges we discussed back in January, and demand exactly the same conditions as were just granted to Finland. It is just a matter of time.
and details for the collateral deal.......
http://ftalphaville.ft.com/blog/2012/07/17/1086131/finlands-spanish-seguridad-some-details/
Finland’s Spanish seguridad, some details
Spain’s banks really are providing Finland’s collateral for the EFSF/ESM bailout of Spain’s (weaker) banks.
The Finnish finance minister announced a deal on Tuesday. Here’s the presentation (in Finnish, hat-tip Aleksi Moisio)
There’s also an official run-down in English, here.
It was spun as a deal with Spain. Some flashes via Bloomberg:
*URPILAINEN SAYS COLLATERAL FROM SPAIN WILL BE CASH*FINLAND SAYS COLLATERAL DEAL STRUCTURED AS GREEK COLLATERAL WAS*FINLAND: NEGATIVE PLEDGES MEAN DEAL CAN’T BE DIRECTLY W/ STATE*FINLAND SAYS COLLATERAL TO COME FROM DEPOSIT GUARANTEE FUND
Finland gets €770m in collateral, or 40 per cent of its share of eurozone guarantees on the EFSF loans to Spain.
Very interestingly, the finance minister said the deal would be public (the government also previously said it would act in line with Finland’s freedom of information laws). By contrast, the terms of the Greek collateral have been kept highly secret for ‘commercial’ reasons.
Anyway, as to details:
“Negative pledge” means Spain was at risk of having to provide the same collateral to the holders of some of its bonds issued under foreign law, if it served as Finland’s direct counterparty.
“Structured as Greek collateral was” means the collateral will likely be held within an escrow account and invested in (safe) government bonds. It’s paid out if Spain defaults on its EFSF loans. Greece’s original collateral to Finland was in fact Greek government bonds (yeah, we know) not cash. So the Spain deal is different here. Finland’s Greek collateral was furthermore structured as a total return swap.
“Collateral to come from deposit guarantee fund”. That’s an interesting bit.
Spain’s deposit fund is not part of the Spanish state in the way its public enterprises are. It’s established under private law. At the same time it’s not a business per se. As this Finnish government release says, that’s why the collateral terms can’t be kept secret. Interesting in view of the negative pledge issue…
The main thing is that the deposit fund is financed by Spanish banks, who pay in an amount equal to between 0.2 and 0.3 per cent of eligible deposits as the fund’s equity. It can also sell debt. The deposit fund had €7.9bn in assets at the end of October 2011, €4.1bn of which were liquid. Compare that to €770m of collateral payments. Not hugely onerous.
It’s more the irony…
