Quinta-feira, 5 de Julho de 2012
Eurointelligence Daily Briefing, 5 de Julho de 2012. Enviado por Domenico Mario Nuti.
http://www.zerohedge.com/news/ecb-margin-calls-surge
ECB Margin Calls Surge And Basis-Swaps Plunge
Despite the easing of collateral standards,ECB Margin Calls surged last week by their most in over 9 months (ex-Greece). As yields rose (and prices fell) pre-summit, so the collateral that European banks have lodged with the ECB fell in value and thus, the banks had to find cash to cover those margin calls. The rally from Friday may have eased that strain a little but today's give-back of all those gains (and in fact to a worse level) suggests that these margin calls will continue to rise and put further liquidity stress on cash-strapped European banks. Most critically, the ECB (while extending some of its collateral) reduced banks' ability to self-reference and post ponzi-bonds as collateral (i.e. a Spanish bank cannot get a government guaranteed issue off and then turn round and pledge it with the ECB). Between negative Swiss interest rates (and Denmark), stressed basis-swaps, and now rising ECB margin calls, things are going from bad to worse behind the scenes in Europe - no matter what reflexive perspective an equity market rally is telling you.
ECB Margin Calls have surged by the most since September this week (the large rise and fall in March is the Greek restructuring).
and at the same time liquidity stress is breaking down rapidly...
We wonder if this is the entire purpose of the panic levels at the EU Summit as without the ECB reducing its margin rules dramatically (which would be a NEIN from the Germans), we appear to have hit the limit on asset values for collateral.
This is yet another unintended consequence of the LTROs by which the most stressed banks used more of LTRO and pledged more of their government's debt with the ECB which is now stressed itself and implies a need for more cash to cover those shortfalls from the most-stressed banks...
and.....
http://www.zerohedge.com/news/central-banks-helpless-denmark-goes-nirp-cuts-certificate-deposit-rate-negative-02
Central Banks Helpless As Denmark Goes NIRP, Cuts Deposit Rate To NEGATIVE 0.2%
A few days ago we noted that the ECB may well be contemplating the monetary neutron bomb, which would see it lower rates to below zero, ushering in a Negative Interest Rate Policy. Today, Mario Draghi cut such speculation short promising the ECB has not discussed this. Yet one bank which certainly has is the Danish Central Bank, which just lowered its Discount Rate to 0%, joining China, England, the ECB, and, of course, Kenya in easing, but also went one step further and cut its deposit rate tonegative 0.2%. Keep a note of this: NIRP is coming to a central bank, and shortly thereafter to a bank deposit branch, near you very soon.
From Bloomberg:
and.....Denmark’s central bank cut its main borrowing costs to record lows and brought the rate it offers on certificates of deposit below zero, as policy makers test uncharted territory to fight a capital influx.The benchmark lending rate was cut to 0.2 percent from 0.45 percent, while the deposit rate was reduced to minus 0.2 percent from 0.05 percent, Copenhagen-based Nationalbanken said in a statement today. The move followed a quarter of a percentage point cut in the European Central Bank’s main rate to 0.75 percent. Nationalbanken doesn’t hold scheduled meetings and only adjusts rates to defend the krone’s peg to the euro.
“There’s no experience of how negative deposit rates will affect the financial markets and the krone,” Jacob Graven, chief economist at Sydbank A/S, said in a phone interview today before the decision was announced. “It’s a sign of the strong Danish economy. This is good. The opposite situation would be far worse, if the central bank would have to hike rates to defend the krone. We have a luxury problem.”Denmark has stepped up its battle to prevent the krone from strengthening beyond its currency band as the nation’s haven status attracts investors. Danske Bank A/S, the country’s biggest lender, said last week it now has a risk scenario that envisages Denmark abandoning the peg should the cost of fighting currency appreciation grow too high. The bank doesn’t view this as a likely outcome, it said.
The liquidity trap has been sprung. Soon everyone will be paying their banks for the privilege of holding their cash for them.
http://globaleconomicanalysis.blogspot.com/2012/07/global-coordinated-easing-ecb-cuts.html
Thursday, July 05, 2012 10:25 AM
Global Uncoordinated Panic; ECB Cuts Rates to Record Low, Deposit Rate to Zero; Bond Market Response Was "Not Enough"; Words "Heightened Uncertainty" Explained
Global Uncoordinated Panic
In a 45-Minute Salvo today, the ECB cuts rates to a record low 0.75 percent and reduced the deposit rate to zero. Meanwhile, the People’s Bank of China cut their benchmark borrowing costs (the second time in a month), and the Bank of England raised the size of its asset-purchase program.
Also note the central banks of Australia, the Czech Republic, Kazakhstan, Vietnam and Israel cut rates in June, while the Swiss National Bank is buying euros to defend its franc ceiling.
ECB president Mario Draghi said these events were not global coordinated easing.
In a 45-Minute Salvo today, the ECB cuts rates to a record low 0.75 percent and reduced the deposit rate to zero. Meanwhile, the People’s Bank of China cut their benchmark borrowing costs (the second time in a month), and the Bank of England raised the size of its asset-purchase program.
Also note the central banks of Australia, the Czech Republic, Kazakhstan, Vietnam and Israel cut rates in June, while the Swiss National Bank is buying euros to defend its franc ceiling.
ECB president Mario Draghi said these events were not global coordinated easing.
The market response to this 45-minute volley of coordinated easing was "not enough". One look at the bond market in Italy and Spain makes that point crystal clear.
Spain 10-Year Government Bond Yield
Italy 10-Year Government Bond Yield
Certainty vs. Uncertainty
Bloomberg reports ECB President Mario Draghi said “heightened uncertainty” was weighing on confidence. Draghi also said the council didn’t discuss other non-standard tools.
Clearly the market wanted "non-standard" tools such as more direct bond purchases. However, bond purchases are viewed by Germany as "monetary financing of government". Nonetheless, the ECB has done them before, over strenuous objections from the German central bank.
It is 100% certain Europe is in a recession and that recession will strengthen. It is also 100% certain the 19th summit solved nothing. So what is with all this talk about “heightened uncertainty”?
Meaning of Heightened Uncertainty
The words "heightened uncertainty" can be reasonably translated as "The economy is going to hell in a hand basket and we have no idea what to do about it".
Since the ECB and government officials cannot say that, nor can they says they are out of policy tools, they simply moan about "heightened uncertainty". Certainly they are uncertain about what to do, primarily because the problem at hand is not fixable.
Fed Uncertainty Principle
Now would be a good time to review the Fed Uncertainty Principle, especially corollaries one and two.
Meaning of Heightened Uncertainty
The words "heightened uncertainty" can be reasonably translated as "The economy is going to hell in a hand basket and we have no idea what to do about it".
Since the ECB and government officials cannot say that, nor can they says they are out of policy tools, they simply moan about "heightened uncertainty". Certainly they are uncertain about what to do, primarily because the problem at hand is not fixable.
Fed Uncertainty Principle
Now would be a good time to review the Fed Uncertainty Principle, especially corollaries one and two.
Corollary Number One:
The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn't know (much more than it wants to admit), particularly in times of economic stress.
Corollary Number Two:What I said about the Fed apples to central banks in general.
The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.
and.......
http://www.acting-man.com/?p=18137
German Governing Coalition Under Strain
Shortly after it became known that the Netherlands and Finland won't agree to the yet-to-be-established ESM buying the bonds of sovereigns, more signs of a splintering of the political cohesion within the euro area emerged. This time it was in the form of a decades old political alliance suddenly seeming to totter on the brink of dissolution.
The Bavarian CSU (Christian Social Union) and the CDU (Christian Democratic Union) have always acted almost as though they were a single party in Germany on the federal level. The CSU can basically be seen as a regional off-shoot of the CDU, which has ruled in Bavaria for as long as anyone can remember. If one looks a the two parties in more detail, the main difference between them seems to be that the CSU is a tad more conservative. In principle though, both parties stand for the same policies.
Along came the euro crisis, and the last summit, where Mrs. Merkel seemingly had to compromise on a number of points in order not to leave the summit empty-handed.
To some extent there is always an element of political theater when differences are suddenly publicly aired. Everyone tries to ingratiate themselves to their voters, and not everything that is being said must be taken overly serious. However, the euro project, and with it the entire EU, looks increasingly like it is going to be flattened by the steamroller of a deeply bearish social mood.
As Der Spiegel reports, the chief of the CSU, Horst Seehofer, threatens to render the alliance with the CDU asunder in the event that the Angela Merkel's government makes any further concessions in bailout related negotiations.
„Bavarian governor Horst Seehofer, the leader of the conservative Christian Social Union party (CSU) which is part of Chancellor Angela Merkel's center-right federal government coalition, has criticized the outcome of last week's European Union summit and threatened to let the government collapse if Berlin makes any further financial concessions to ailing euro member states."The time will come when the Bavarian government and the CSU can no longer say yes. And I wouldn't then be able to support that personally either," Seehofer said in an interview with Stern magazine released on Tuesday. "And the coalition has no majority without the CSU's seats."The CSU is the Bavarian sister party to Merkel's Christian Democratic Union.Germany's billions of euros in aid and guarantees were already "borderline," said Seehofer, who is known in Germany for his combative, occasionally populist style. "My biggest fear is that the financial markets will ask: Can Germany cope with all that? That is the point I regard as the most dangerous of all."
Seehofer said several euro countries needed to drop their debt mentality. "The fact that others want to get at our money without asking too much of themselves is deeply human," he said. "But it won't solve the problem."Seehofer has repeatedly attacked the German government on a number of issues in recent weeks including a controversial childcare benefit for stay-at-home mothers, a pet project of his party.He told Stern that the government needed to explain the agreements made at the EU summit, where Merkelbacked down and agreed to demands from Italy, Spain and France that troubled banks should receive aid directly from the permanent bailout fund, the European Stability Mechanism (ESM).'European Monster State'"We were debating about the stability pact in the Bundestag (Germany's federal parliament). And at exactly that time the government leaders of some euro countries were working to soften precisely those stability criteria. Who is supposed to understand that?"Seehofer also criticized a suggestion by Finance Minister Wolfgang Schäuble that Germany should hold a referendum on a new constitution that could relinquish national powers to Brussels. "Hands off our constitution! We have this constitution to thank for the most stable state and the most stable democracy there has ever been in German history. We don't want a different constitution," said Seehofer.He said he wouldn't accept the transfer of major powers to a "European monster state." He said he would turn the next general election and the Bavarian regional election, both scheduled for 2013, into a vote on Europe. "We will put this question to the people."Merkel on Tuesday denied there were any differences between her and Seehofer on European policy. She said her coalition was united on the issue.“
(emphasis added)
Regardless of whether the often slightly left-leaning Spiegel regards Mr. Seehofer as a 'populist', he makes a number of very important points. We already mentioned in our post summit update that the decision to shift some of the bank bailout risk from the periphery to the European 'core' may be one the euro-group could eventually come to regret. Germany is the biggest and strongest economy in Europe, but it is not a bottomless well of funding. The risks it is already taking on behalf of the floundering debtors on the periphery are gargantuan. Seehofer is quite correct when he fears that financial markets may at some point come to doubt the solvency of Germany as well. What then?
More important though may be his comment regarding the undesirability of creating a 'European Monster State'. The Merkel government has decided to pursue a strategy that will in the end lead to exactly such an outcome. In its understandable desire not to lose control over the financial guarantees Germany is giving, it proposes that euro area member nations should relinquish a considerable part of their fiscal sovereignty to a commissar in Brussels. Where will this further increase in centralization lead? Many people already regard the eurocratic Moloch in Brussels as tyrannical.
The EU and even more so the euro, are the children of a bull market. In terms of social mood analysis, the feelings of harmony and 'togetherness' it engendered found their very pinnacle in the creation of the common currency. Its adoption in fact signaled that a major peak in the bullish social mood had likely been reached. The bearish social mood forces that now increasingly predominate in European politics are pulling in the exact opposite direction. European politicians ignore them at their peril.
And no, Mr. Barroso, the euro is certainly not 'irreversible'. Messrs. Barroso and van Rompuy say that after every summit:
EU 'fiscal pact' proves euro is 'irreversible', van Rompuy and Barroso after the March 2012 summit
Barroso on occasion of the December 8 2012 summit. 'More convergence, more discipline … the euro is irreversible'.
Nigel Farrage of UKIP once again had a field day in the European parliament after summit number 19. His speeches have become great internet hits, and he once again did not disappoint. The tolerant smiles on the faces of Herman van Rompuy's and Manuel Barroso's faces do look a bit strained by now.
Farrage comments on the alleged 'breakthrough' and welcomes the lately often absent van Rompuy back to parliament. Evidently he missed the opportunities to roast him.
CSU leader Horst Seehofer: not happy with Merkel's concessions
(Photo credit: Johannes Eisele/dpa)
Is A Referendum Over EU Membership Coming in the UK?
As it were, UKIP's popularity is surging in the UK with every speech Farrage delivers in the EU parliament. This growing popularity has now reached the point where the political establishment in the UK is getting worried – most especially the Tories, who are home to a large contingent of EU-skeptics themselves.
As a result, David Cameron is increasingly under pressure as demands for a referendum over the UK's EU membership become more and more insistent. He may actually risk a split of the Tory party if he continues to insist that no referendum is necessary at this time. Such a referendum would at present most likely lead to the UK leaving the EU, if recent polls are to be believed. This shows that the social mood in the UK is likewise embarked on a firmly bearish trend.
UKIP would of course officially welcome a referendum over EU membership – but this would also rob it of one of its main talking points. From the point of view of the Tories, it may soon be seen as the best way to get rid of what looks like increasingly serious competition.
“The British seem to have a taste for referendums at the moment. Next year, the inhabitants of the Falkland Islands will vote on their status as a British overseas territory. Then, in 2014, the Scottish government will hold a referendum on independence from the United Kingdom. Now it looks like there could be another nationwide referendum after that — on Britain's membership of the European Union.As the euro-zone countries push forward with greater integration as a response to the euro crisis, there are growing calls in Britain for an EU referendum. Prime Minister David Cameron is coming under increasing pressure to agree to a vote, especially from the right wing of his Conservative Party. In a letter sent to the prime minister last week, hundreds of Conservative members of parliament called on him to commit to an EU referendum after the next election in 2015.The pressure from euroskeptics puts Cameron, who does not want to be rushed into holding a vote, in a tricky situation. In a speech to parliament on Monday on the outcome of last week's EU summit, the prime minister said that although he is not in favor of an immediate referendum on EU membership, he does not want to rule one out for the future. He insisted that the "status quo" was unacceptable in any case. If the euro zone grows ever closer together into a political union, it will change Britain's relationship with the EU, Cameron said.In an op-ed for the Sunday Telegraph published the previous day, Cameron wrote that "the British people are not happy with what they have, and neither am I." He said he would work toward "a different, more flexible and less onerous position for Britain within the EU," adding that, as Britain gets closer to the end point, "we will need to consider how best to get the full-hearted support of the British people, whether it is in a general election or in a referendum."Supporters of a referendum argue that although the British already had an opportunity to vote on their membership of what was then the European Economic Community in 1975 (when two-thirds voted in favor), the founding of the European Union and, in particular, the euro zone in the intervening period has changed the community beyond all recognition. It is therefore necessary, they argue, to hold a second referendum.”
(emphasis added)
The article above does not delve into the challenge posed by UKIP, which is still widely regarded as a fringe party. However, it is a common feature of social mood downturns that 'fringe parties' suddenly surprise everyone by becoming formidable political forces. SYRIZA's rise in Greece from barely noticed also-ran to the second biggest party of the country serves as a recent example; so does the rise of the Front National in France.
As to our own view of Nigel Farrage: he is quite correct in his assessment of the eurocrats. Farrage's biggest worry is precisely the same articulated by Seehofer: namely that a 'Superstate' may be about to be created, one in which the subsidiarity principle will lose all meaning and citizens across Europe will be ruled by the faceless bureaucracy in Brussels with its often ridiculous and elaborate edicts and regulations.
Farrage wants to rescue the nation state from obliteration. In our own view, the nation state is a concept that should be critically scrutinized as well. If the world were to fall apart into a patchwork of much smaller regions, with far looser political affiliations than provided by the centralized nations states that exist today, we would likely all be better off. What such a patchwork would provide would be intense competition and individual freedom would no doubt benefit greatly. The more centralized political power becomes, the more liberty tends to take a backseat and suffer. The burden imposed on citizens by the vast bureaucracies and the parasitic political classes of modern-day nation states and their innumerable 'advisors' and fellow trough-feeders can hardly be overstated.
As Bob Hoye once remarked: we are slowly but surely finding out that “unlimited government requires unlimited funding” – and we evidently can't afford it.
Addendum 1: ECB Takes Away Some Candy
In a to us somewhat surprising move, the ECB has finally shut the door on a trick the banks made liberal use of in the course of the LTRO's. Stories have been making the rounds that the ECB 's staff is becoming 'overworked' and can hardly cope anymore with the strains of having to manage the crisis of the banking system.
As we have pointed out to friends in a recent e-mail exchange, back when Fannie Mae found out that it could no longer properly evaluate its 22,000 different derivatives positions, it had to hire over 2,500 outside accountants who had to labor away for half a year to make heads and tails of FNM's books. This didn't keep Fannie from going bankrupt not long thereafter, but it illustrates the difficulty of keeping track of the opaque balance sheets of large financial institutions.
The ECB is one heck of a large financial institution with its € 3 trillion balance sheet. We strongly suspect that the central bank's staff had to largely rely on the disclosures of banks presenting collateral for loans, and didn't have the time and manpower required to establish whether the quality of the submitted collateral really comported with the ECB's ever looser rules. A common trick was for governments in e.g. Spain and Italy to issue 'guarantees' for certain bank collateral, which presumably led to such collateral being waved through without further ado. In turn we are convinced – although we cannot prove it – that the banks promised to turn up at the bond auctions of their respective host governments to keep these auctions from failing.
Now the ECB seems to have second thoughts about such 'government guarantees' – presumably a first step in its evolution toward the euro-area-wide banking regulator.
“In a statement on its website, the ECB said it would cap at current levels the amount of government-guaranteed debt that banks can post as collateral in return for its loans. It said it would make exceptions in certain cases. But it said that any such exceptions would be dependent on the bank in question presenting "an acceptable funding plan."Banks across the euro zone have become reliant on ECB loans to fill their funding gaps since the financial crisis began four years ago. They also have been increasingly reliant on bonds issued by themselves, but guaranteed by their home governments, to use as collateral for such loans.The central-bank ruling comes at a crucial time for many of the region's stressed banks, which have to meet temporarily tightened minimum capital requirements from the European Banking Authority as of June 30. A number of banks have failed to meet that deadline, forcing them to turn to their governments, which haven't yet finalized their plans.James Nixon, senior European economist at Société Générale in London, said the move looked like it aimed to ensure that governments use "hard cash" as much as possible in coming recapitalization programs.Euro-zone leaders agreed last Friday to transfer major powers of banking supervision and regulation to a single supervisor—a role that is most likely to be undertaken by the ECB—by the end of the year to help it police any bank recapitalizations that depend on euro-zone bailout funds.Governments across Europe offered support equivalent to more than a quarter of gross domestic product to stop their banks from collapsing during the worst of the financial crisis, but they relied overwhelmingly on mechanisms such as guarantees, preferred shares and long-term bonds to tide the banks over.That spared them politically painful decisions about apportioning losses for shareholders and bondholders, or the replacement of banks' management. But critics say it also postponed a necessary restructuring of the sector.The ECB has been pressing national governments since 2009 to ensure that banks are properly capitalized, but instead has found itself having to lend more to a growing number of "zombie" banks that can't raise money anywhere else. Mr. Nixon said the step showed the ECB was now "playing hardball."In its statement, the ECB also noted that its ruling would apply only to bonds guaranteed by public-sector entities "with the right to impose taxes," suggesting that bonds guaranteed by the euro zone's rescue funds—the European Facility Stability Facility, or its permanent successor, the European Stability Mechanism—wouldn't be affected.Frederik Ducrozet, senior economist at Crédit Agricole, said the move may herald how the ECB will be tougher in setting conditions for its loans in the future. "This may not be the first step but this is going into that direction," he said.
The ruling cuts off one avenue of further support, if it becomes necessary, for entities such as Dexia SA, whose rescue last year needed combined guarantees of €55 billion from the French, Belgian and Luxembourg governments.It may also inhibit banks from repackaging loans as securities with the sole aim of using them for collateral at the ECB's credit windows, a tactic used heavily by Italian and Spanish banks ahead of two three-year refinancing operations held by the ECB in December and February.”
(emphasis added)
So, Europe's biggest 'bad bank' is now playing hardball. It will be interesting to see where this leads, but one thing is already all but certain: the deflationary pressures exerted by the markets on the volume of outstanding bank credit and fiduciary media are likely to intensify as a result.
Addendum 2: Spain's Social Security Fund No Longer Able to Prop Up Government Bond Market.
We have previously pointed readers to Edward Hugh's excellent analysis of the economic and financial problems of Spain. Edward inter alia discussed the Social Security Reserve Fund, which is the biggest single holder of Spanish government bonds and curiously has thus far rarely rated a mention in the mainstream financial press. It turns out that the fund has been a major factor in propping up Spain's government bond market, by selling its investments in other euro area bonds and replacing them with Spanish bonds.
Bloomberg now reports that the fund is running out of wiggle room, as it is about to produce a deficit much earlier than hitherto expected. It can no longer be counted on as a buyer of Spain's government bonds – rather, it will soon have to turn into a seller.
“By the end of 2011, 59.1 billion euros was invested in Spanish debt, and 6.7 billion euros in foreign securities, the fund’s annual report showed. That compares with 32.2 billion euros of domestic government debt and 24.9 billion euros of foreign debt at the end of 2008.
The concentration of domestic debt may pose a dilemma for Spanish authorities when they need to tap the fund, said Diaz- Gimenez of Complutense University. The fund held 2.2 billion euros, or 14.8 percent, of all of Spain’s 4.2 percent 2013 bonds in circulation at the end of 2011, according to the reserve fund’s report to parliament.“Nearly all of it is Spanish debt and if you want to sell that in the secondary market, you’ll push up the spread,” he said. “You’ll pose a serious problem for the Treasury.”
(emphasis added)
As is often the case, when it rains, it pours.
Spain's ten year yield – and this is what happened while the Social Security Fund was still able to prop the market up. In the course of this year, it will have to do the opposite. Who or what will take its place? – click chart for better resolution.
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