http://soberlook.com/2012/08/possible-policy-actions-by-ecb.html
Let's quickly go through each of these (with links to further discussion).
1. "Readiness to act" is very likely and the easiest thing for a central bank to say. The Fed just made a similar statement as well.
2. A new long-term LTRO program is quite possible but given the latest collateral restrictions on banks' own bonds (see document at the bottom of this post), it won't have the impact on sovereign debt it did in the past.
3. Granting the ESM a banking license would be quite powerful but lacks the necessary political support.
4. A cut in deposit rate to negative levels will further disrupt money market functioning, sending repo rates and German yields deeper into negative territory. But it may help reduce Italy's and Spain's very short term (only) rates.
5. A cut in refi rate is likely and will be helpful for banks in reducing interest expenses. But as discussed earlier the constraints are not driven by funding costs but by availability of eligible collateral.
6. The reserve requirement was cut late last year from 2% to 1%, releasing €100bn. Cutting it to 50bp will release say €50bn more across all of the Eurozone. We are at the point of diminishing returns.
7. Barclays assigns a relatively high probability to collateral rule changes. Accepting pools of whole loans as collateral could be the only helpful change. But pledging unrated loans in unsecuritized form is nearly impossible because perfecting security interest without being a lender is legally tricky. Anything that can be securitized and rated as acceptable for the ECB has been pretty much used up. Spain is trying to pool export finance into securities and there are other efforts under way. But it's not clear how much "blood can be squeezed from this stone".8. QE across the Eurozone would involve purchases of sovereign debt in proportion to countries' GDP. That means the ECB would be buying a great deal of German and French debt, which is not where help is needed. Allocating purchases by total debt outstanding would help Italy, but creates a moral hazard - the more debt you have outstanding the more the ECB would need to buy. Pro rata QE is pretty much out of the question.
9. Buying private securities is unlikely, but the Eurozone could definitely benefit from an ABS program like TALF. That would help provide loans where they are most needed - households and small businesses. In effect the ECB is already doing it by accepting securitized loans as collateral.
10. Capping bond spreads on periphery bonds idea has been floating around for a while. The danger with this program would be that by the time some sovereign spreads are brought to a certain level, the ECB may end up owning all of the outstanding bonds. This is a highly unlikely outcome.
11. Periphery bond purchases by the ECB (SMP) sterilized by term deposits is really what the market is now betting on - all based on Draghi's statement. But it's not clear just how much buy-in there is from his colleagues. If this expectation doesn't materialize, we are going to have a violent selloff across risk assets.
and....
http://www.zerohedge.com/news/hyper-mario-and-germany-verge-all-out-warfare
Submitted by Tyler Durden on 08/01/2012 19:30 -0400
Samaras, though, insisted that Greece should only begin the process of asking for better terms after the cuts have been agreed and once Athens has shown that it is picking up the pace of structural reforms. The prime minister told his coalition partners that following discussions with European Commission President Jose Manuel Barroso, who visited Athens last week, and with European Council President Herman Van Rompuy, who Samaras spoke to on the phone on Wednesday, he was left in doubt that this was the right strategy. Following a heated discussion, during which Venizelos and Finance Minister Yannis Stournaras exchanged angry words, Samaras’s position won out.
“The prime minister recommended that we should accept the reduction of public spending by 11.5 billion euros as a necessary prerequisite for Greece remaining in the eurozone and being able to negotiate further,” said Stournaras after leaving the meeting. “This recommendation was accepted.”
Stournaras said that negotiations with the troika would “begin” and that the details of the savings would be agreed by the end of August. Venizelos indicated that he had grudgingly given his support to the position adopted by the prime minister and finance minister.
“If the Prime Minister believes that immediately making 11.5 billion euros in savings is the only way to secure the country’s position in the eurozone, I am obliged to support him,” he said, adding there was no point in sticking to his strategy anymore. “When we cannot agree on a domestic level, it is futile to pursue something on the international level.”
WEDNESDAY, AUGUST 1, 2012
Possible policy actions by the ECB
Now that we got pretty much what was expected from the Fed (except maybeextending the rate guidance to 2015), the markets turn to the ECB. If the "fix" is unavailable from one dealer the addicts turn to the other. Barclays Capital assigned probabilities to the possible actions by the ECB that could be announced on Thursday as well as at the following meeting in September.
 |
| Possible ECB actions (source: Barclays Capital) |
Let's quickly go through each of these (with links to further discussion).
1. "Readiness to act" is very likely and the easiest thing for a central bank to say. The Fed just made a similar statement as well.
2. A new long-term LTRO program is quite possible but given the latest collateral restrictions on banks' own bonds (see document at the bottom of this post), it won't have the impact on sovereign debt it did in the past.
3. Granting the ESM a banking license would be quite powerful but lacks the necessary political support.
4. A cut in deposit rate to negative levels will further disrupt money market functioning, sending repo rates and German yields deeper into negative territory. But it may help reduce Italy's and Spain's very short term (only) rates.
5. A cut in refi rate is likely and will be helpful for banks in reducing interest expenses. But as discussed earlier the constraints are not driven by funding costs but by availability of eligible collateral.
6. The reserve requirement was cut late last year from 2% to 1%, releasing €100bn. Cutting it to 50bp will release say €50bn more across all of the Eurozone. We are at the point of diminishing returns.
7. Barclays assigns a relatively high probability to collateral rule changes. Accepting pools of whole loans as collateral could be the only helpful change. But pledging unrated loans in unsecuritized form is nearly impossible because perfecting security interest without being a lender is legally tricky. Anything that can be securitized and rated as acceptable for the ECB has been pretty much used up. Spain is trying to pool export finance into securities and there are other efforts under way. But it's not clear how much "blood can be squeezed from this stone".8. QE across the Eurozone would involve purchases of sovereign debt in proportion to countries' GDP. That means the ECB would be buying a great deal of German and French debt, which is not where help is needed. Allocating purchases by total debt outstanding would help Italy, but creates a moral hazard - the more debt you have outstanding the more the ECB would need to buy. Pro rata QE is pretty much out of the question.
9. Buying private securities is unlikely, but the Eurozone could definitely benefit from an ABS program like TALF. That would help provide loans where they are most needed - households and small businesses. In effect the ECB is already doing it by accepting securitized loans as collateral.
10. Capping bond spreads on periphery bonds idea has been floating around for a while. The danger with this program would be that by the time some sovereign spreads are brought to a certain level, the ECB may end up owning all of the outstanding bonds. This is a highly unlikely outcome.
11. Periphery bond purchases by the ECB (SMP) sterilized by term deposits is really what the market is now betting on - all based on Draghi's statement. But it's not clear just how much buy-in there is from his colleagues. If this expectation doesn't materialize, we are going to have a violent selloff across risk assets.
and....
http://www.zerohedge.com/news/hyper-mario-and-germany-verge-all-out-warfare
Hyper Mario And Germany On Verge Of All Out Warfare
Back in March we wrote "Mario Draghi Is Becoming Germany's Most Hated Man" for one reason: a few months after the former Goldman appartchik was sworn in to replace Trichet with promises he would not "print" Draghi did just that in a covert way via $1.3 trillion in LTROs, that immediately hit the economy and sent inflation across Europe soaring. We said that: "Slowly but surely the realization is dawning on Germany that while it was sleeping, perfectly confused by lies spoken in a soothing Italian accent that the ECB will not print, not only did Draghi reflate the ECB's balance sheet by an unprecedented amount in a very short time, in the process not only sending Brent in Euros to all time highs (wink, wink, inflation, as today's European CPI confirmed coming in at 2.7% or higher than estimated) but also putting the BUBA in jeopardy with nearly half a trillion in Eurosystem"receivables" which it will most likely never collect."
It now appears that the simmering hatred between the two is about to upshift to a whole new level, with the threat of open escalation finally arriving. Because if Sueddeutsche Zeitung is correct, via Reuters, in precisely 12 hours, Draghi will proceed with a plan that has neither Germany's nor Buba's blessing, in the process effectively isolating the only remaining solvent country in Europe, and its de facto paymaster, and forcing Germany to take a long, hard look at the exit sign (which, however, as reported earlier, with each passing day that drags Germany's economy is becoming less of an unthinkable outcome). To wit: "Draghi is planning concerted action using both the ECB and the future euro European Stability Mechanism (ESM) to purchase sovereign debt from Spain or Italy in order to help push down borrowing rates for those two countries." There is one problem: "highly doubtful that the German government would agree to Draghi's approach. The Bundesbank also is likely to reject the idea, the paper added."
In essence what Draghi will do tomorrow is what Monti did a month ago when together with Rajoy, he presented Germany with one option, and would not back down else risk disintegrating the Eurozone. Merkel then took the diplomatic way out and pretended to agree that the ESM would lose its seniority status, something which as Finland confirmed today, never actually happened after the Nordic country said the ESM still and will always have explicit seniority status. The problem however is that the June summit was political theater. What happens tomorrow will have all too real consequences if and when Monti injects another €1 trillion into the economy. How soon afterward can Germany again expect to once again pay a record amount for a liter of unleaded. And how quick until the latest iteration of attempted inflation fizzles and has to be replicated with a €2 trillion bond monetization episode. Then €4 trillion. Then €8. Etc.
You get the picture.
More from Reuters: which doesn't tell us anything really new, but merely confirms (allegedly) that Draghi will indeed openly go where so few have gone before - openly against the will of Germany, its Chancellor and banking head, Herr Weidmann:
The ESM would purchase sovereign debt in smaller amounts directly from both countries while the central bank would resume its purchase of debt in the secondary market, the daily wrote in an advance released on Wednesday evening. The Bundesbank has opposed further ECB debt purchases.The ECB Council will meet on Thursday and the Sueddeutsche Zeitung said it looked like a majority was emerging in favour of the ECB resuming its purchases of sovereign debt. It added there will most likely not be any official decision on such a measure.The ECB's role would be a stopgap until the ESM is approved by the German constitutional court. Which it very way may never happen.There is a greater likelihood that Draghi will spell out in more concrete terms what he said last week - that the ECB will do everything within its mandate to support the euro, the paper said. A final decision is not expected until after Sept. 12, after the German Constitutional Court rules on the ESM.The daily said Draghi's plans could lead to the ESM taking part directly in the auctions of state debt by those countries affected, leading to a reduced interest rate for the auction.The ECB's task would to be to work before the auctions to push the interest rates down to an acceptable level and to keep them fixed at that lower level for the longer term.The delusion continues because not only have we shown that the impact of each SMP episode is weaker and weaker, but that absent the ECB officially denouncing its senior status, and thus fears of bondholder subordination, the ECB will achieve absolutely no incremental interest in bond purchases by private investors who are convinced both Spain and Italy will conclude merely as yet another Greece.Sueddeutsche said it is hoped the plan would restore private investors'
confidence in the bond market. The ESM would probably only have to allotrelatively small sums of money for this or could bow out of bondauctions at the last minute if the interest rates had fallen to an
acceptable level.Finally and most crucially:The daily said it was at the same time highly doubtful that the German
government would agree to Draghi's approach. The Bundesbank also is
likely to reject the idea, the paper added.And with that the open warfare between the ECB and Germany will begin. The only question remaining is does Draghi, even if he is truly merely a figurehead for Goldman, really want to launch all out war against Germany?Especially with his office located in downtown Frankfurt.Oh, and don't call him Super Mario any more. The proper prefix now is HyperTM.Then again, just like today's violent disappointment by the Fed, all of the above could be merely well positioned media propaganda, and the reality is that Draghi will do absolutely nothing.
and.......
http://www.guardian.co.uk/business/2012/aug/01/bundesbank-warns-over-eurozone-crisis
Bundesbank warns over eurozone crisis as ECB prepares to meet
Central bankers play down claims by European politicians about the 'unlimited firepower' for bailout funds
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Jens Weidmann, governor of Germany's Bundesbank, says the ECB must 'not overstep its own mandate.' Photograph: Eric Piermont/AFP/Getty Images
European politicians and central bankers were at odds on Wednesday on the eve of a crucial meeting of eurozone policymakers that has encouraged speculation about "unlimited firepower" for bailout funds to resolve the crisis.
While Mario Monti, the Italian prime minister, spoke hopefully of the eurozone's bailout fund being granted a banking licence and access to endless funding from the European Central Bank, Jens Weidmann, head of Germany's powerful Bundesbank, strongly opposed radical action.
The 23-strong governing council of the ECB will meet on Thursday in Frankfurt for the first time since the ECB chief, Mario Draghi, declared a no-holds-barred fight to save the euro last week in London.
Draghi's pledge to "do whatever it takes" to save the currency and the confidence he voiced that "it will be enough" triggered a euro rally over the past week and curbed bond market pressure on Spain and Italy.
Since then European leaders have lined up to make similar pledges using virtually identical language. Chancellor Angela Merkel of Germany, President François Hollande of France, Monti, and Jean-Claude Juncker of Luxembourg, the president of the eurogroup, have all parroted Draghi, encouraging belief in the markets that the ECB is about to revive a dormant policy of intervening to buy up the bonds of distressed sovereigns, cut interest rates again from an all-time low of 0.75%, or support a more activist role for the European Stability Mechanism, the main eurozone bailout fund.
Draghi and the political leaders all also committed themselves to "the integrity" of the eurozone, suggesting a renewed resolve not to allow any of the 17 members, most particularly Greece, to leave the currency.
The Austrian government and its central bank chief have been arguing for the past 10 days that the ESM should be granted a banking licence enabling it to tap unlimited liquidity from the ECB to prop up teetering eurozone governments.
"[Draghi's] statement last week was interesting, bold and appropriate," Monti said in Finland on the latest leg of his tour to persuade eurozone leaders to act to bring down the costs of Italian borrowing. "I was in particular impressed by the clarity with which the president said excessive differences between interest rates undermine the transmission of monetary policy."
This was seen as pressure on the ECB to revive a policy, frozen since last summer because of German resistance, of buying government bonds.
Monti also said that the ESM bailout fund, which will not be operational until next month at the earliest, would obtain a banking licence. But the Bundesbank is strongly opposed to such action, the German government has dismissed all talk of a bank licence for the ESM, and in an interview published yesterday Weidmann sounded a warning to Draghi.
The ECB must "not overstep its own mandate," he said in an interview released by the Bundesbank to mark the institution's 55th birthday.
The Finnish prime minister is also taking a hard line. "Finnish people believe in rule-based union. [For us] a rule does not mean the starting point for creative interpretation," said Jyrki Katainen.
But the central conflict is between Weidmann and Draghi. The two men are expected to meet on Thursday morning before the governing council session. Weidmann complained eurozone politicians were abusing the ECB for "fiscal policy objectives".
"European countries today are not at loggerheads despite the common currency, but because of it," noted Jean Pisani-Ferry, head of the Bruegel thinktank in Brussels.
Weidmann delivered an implicit warning that German public opinion would not tolerate the kind of interventionist role for the ECB being pushed by others and that if German confidence in the ECB is wrecked the euro will be in even deeper trouble.
"In Europe, we are faced with some quite different ways of looking at the central bank's role – not only in politics, but also in the media and on the part of the general public. If a central bank also has to work against public opinion, things get difficult."
In Athens, the three leaders backing the country's fragile coalition agreed on the parameters of an €11.5bn (£9bn) package of spending cuts demanded by creditors in return for further EU-IMF rescue loans.
After days of often fraught talks, all three leaders had "accepted the prime minister's proposal" about what the cuts should be, the finance minister Yiannis Stournaras said.
But disagreement over the savings continues to run deep and Fotis Kouvellis, the leader of the small Democratic Left party, emerged from Wednesday's discussions saying the talks would continue. He insisted the government would continue to press international creditors to give the recession-plagued country more time to meet budget deficits by extending its fiscal consolidation programme from 2014 to 2016. The leaders' eventual aim was to "gradually disengage" from the arduous terms of the loan agreement, he said.
and.....
http://www.telegraph.co.uk/finance/financialcrisis/9445456/Pressure-on-Spain-to-bow-to-bail-out.html
9:34PM BST 01 Aug 2012
67 Comments
The frantic diplomacy comes as investors wait nervously to see if German-led officials on the ECB’s governing council will stand behind the bank’s chief, Mario Draghi, who triggered a euphoric stockmarket rally last week with hints of intervention in the Spanish and Italian bond markets.
"The situation is dramatic: markets will react very badly if the ECB doesn’t deliver,” said Dmitris Drakopoulos from Nomura, ahead of the ECB’s crucial policy meeting tomorrow. The bond markets are continuing to signal deep alarm, with safe-haven flows into German two-year debt pushing yields to minus 0.08pc.
Former ECB governor Athanasios Orphanides said Mr Draghi had boxed himself into a corner. “Expectations are now so high, the ECB will have to announce something,” he said.
Bundesbank chief Jens Weidmann shows no sign of relenting, warning today that the ECB must not “overstep its mandate” or stray into fiscal rescues. He issued a blunt reminder that the German central bank is master of the euro project, and not “just one” bank among others. “We are the biggest and most important central bank in the euro system,” he told the Bundesbank journal.
Yet the picture is changing as Europe’s industrial recession spreads north. Belgian GDP – a leading indicator for Germany – shrank by 0.6pc in the second quarter. The eurozone’s PMI manufacturing index dropped to a 37-month low of 44.0 in July, with Ireland alone above the contraction line of 50.
Marchel Alexandrovich from Jefferies said the virus was reaching the core. “The ECB has to respond. There is the risk of a deflationary process setting in next year,” he said.
Mr Monti will swoop into Madrid today after garnering support in a whirlwind tour of European capitals for a “grand plan” to shore up the euro. The mission is designed to cajole Spanish premier Mariano Rajoy into requesting help from the eurozone’s bail-out fund (EFSF), the last missing piece of a complex twin-trigger plan to buy Spanish and Italian bonds
Mr Monti was coy about details, saying he was working on “various combinations”, but diplomats say the key thrust is an EFSF “soft rescue” for Spain. This would allow the fund to buy Spanish bonds at auctions on the primary market, giving political cover for the ECB to intervene with real muscle in the secondary markets. The sequencing iscrucial. Only the EFSF can impose the tough conditions needed to satisfy Germany, the Netherlands, and Finland. The snag is that Spain would first have to sign a memorandum ceding fiscal sovereignty.
Mr Rajoy’s team is digging in its heels. Deputy premier Soraya Saenz de Santamaria repeated this week that “there is not going to be a rescue”. A volte-face would be devastating for Mr Rajoy and risk a political crisis at a time when Madrid is locked in conflict with Spanish regions.
Mr Monti has emerged as the Latin bloc’s de facto “prime minister”, working hand in glove with the White House. It is an alliance that boosts his power in talks with Germany. US President Barack Obama telephoned him again on Tuesday to offer “support for decisive action”.
US Treasury Secretary Tim Geithner piled on the pressure, saying budgetary discipline was not enough. “They have to do more to help support growth,” he told Bloomberg TV.
However, Germany seems no closer to a strategic shift in policy, and bail-out fatigue is palpable in the Bundestag. Rainer Bruderle, the Free Democrats’ floor leader, attacked proposals to give the new European Stability Mechanism (ESM) a banking licence to borrow from the ECB, saying it would create a “limitless inflation machine”. Mr Monti predicted today in Helsinki that an ESM bank licence “will in due course occur” but seems to resigned to shelving the idea for now.
Meanwhile, the Federal Reserve stopped short of introducing fresh stimulus as it delivered a downbeat assessment of the US economy. In its regular monthly statement, the Fed acknowledged that consumer spending was now slowing and that the broader economy would only recover “very gradually”.
and....
http://www.telegraph.co.uk/finance/financialcrisis/9444541/Four-Spanish-regions-rebel-against-Rajoy-debt-cap.html
Regional finance chiefs at a meeting with the national treasury agreed late on Tuesday to an overall debt ceiling for the 17 regions of 15.1pc of output in 2012 and 16pc in 2013, AFP reports.
But four regions, including two of Spain's largest, Catalonia and Andalucia, refused to accept the central government's clampdown on their finances.
Catalonia, Spain's richest region with an economy equal in size to Portugal's, boycotted the meeting altogether while the finance chief of Andalucia, Spain's most populous region, walked out of the gathering.
Two smaller regions, Asturias and the Canary Islands, voted against the targets at the meeting.
"The lack of internal cohesion is highly damaging to the international credibility of Spain at a key moment for its economy and that of the eurozone," Barcelona-based daily La Vanguardia wrote in an editorial published on Wednesday.
Spain has slashed spending and raised taxes as it seeks to convince markets that it will not need a full bailout, on top of a €100bn credit line from the EU agreed in June for its banking sector.
The regional governments, which fund education and health care, are crucial to Prime Minister Mariano Rajoy's effort to bring the country's overall public deficit down to just below a EU limit of 3pc of output by 2014.
They accounted for two-thirds of Spain's deficit slippage last year, when the country missed its target of keeping the deficit to 6pc of economic output and instead let it slide to 8.9pc.
Daily newspaper El Mundo said Andalucia and Catalonia's "irresponsible attitude" not only "blows up Mr Rajoy's strategy to balance the books, it also gives markets and European institutions the idea that the instruments which the government has to achieve this goal are ineffective".
Budget Minister Cristobal Montoro said the regions had no choice but to respect the debt limits that were set for them.
"We are talking about the application of European standards," he said.
The central government has the power to withhold the transfer of money to undisciplined regions but punishing regions would be a risky strategy since some are on the brink of default.
Catalonia said on Tuesday it could not affort to make its grant payments for the month of July to non-profit hospitals, old age homes and other social services agencies that provide services for the northeastern region.
Last week it said it was considering tapping a new central government fund worth up to €18bn set up to help regional governments in difficulty.
The central government set a debt limit for Catalonia for 2012 of 22.81pc of output and of 23.6pc in 2013.
For Andalucia the debt ceiling was set at 12.07pc for this year and 13.2pc in 2013.
Andalucia's finance chief, Carmen Martinez Aguayo, said meeting the debt ceiling for 2013 would require further spending cuts of three billion euros that year to education and health services.
"It is a disproportionate demand," she said.
The row between the central government and the regions comes as Spain's allies are looking for Germany to lobby the European Central Bank to open its purse strings and buy Spanish and Italian debt at a time when the two nations are struggling to finance themselves on international markets.
"Germany is willing to help Spain to reduce the market pressure on its debt but in exchange it wants more savings, mainly in education and health," Madrid brokerage Renta4 said in a research note.
and there still is no agreement among the Coalition where the 11.5 billion in cuts comes from.....
Coalition agrees to cut 11.5 bln euros as Venizelos, Kouvelis back down
A tense and fraught meeting between Greece’s coalition leaders ended on Wednesday night with PASOK’s Evangelos Venizelos and Democratic Left’s Fotis Kouvelis backing down over their opposition to the way Greece will implement 11.5 billion euros of spending cuts demanded by the troika and ceding ground to Prime Minister Antonis Samaras, who has now taken on full responsibility for the country’s negotiating line in talks with its lenders.
Venizelos and Kouvelis went into Wednesday's meeting with reservations about agreeing to the cuts now. The PASOK leader in particular had been adamant that only about half of the cuts should be finalized now because of fears that it could have on Greece’s economy, already in the fifth year of recession. The two junior coalition partners also favored the issue of renegotiating the terms of Greece’s bailout now, rather than waiting to regain the trust of the troika.
“The prime minister recommended that we should accept the reduction of public spending by 11.5 billion euros as a necessary prerequisite for Greece remaining in the eurozone and being able to negotiate further,” said Stournaras after leaving the meeting. “This recommendation was accepted.”
Stournaras said that negotiations with the troika would “begin” and that the details of the savings would be agreed by the end of August. Venizelos indicated that he had grudgingly given his support to the position adopted by the prime minister and finance minister.
“If the Prime Minister believes that immediately making 11.5 billion euros in savings is the only way to secure the country’s position in the eurozone, I am obliged to support him,” he said, adding there was no point in sticking to his strategy anymore. “When we cannot agree on a domestic level, it is futile to pursue something on the international level.”
| He added that the new savings must not be “unfair” or include “horizontal measures» and said that a new round of cuts to wages, pensions and benefits would worsen the recession, making demands for new cuts inevitable. Privately, Venizelos admitted that it was unlikely these cuts would be avoided. The PASOK leader added a jibe about Samaras, saying he did not wish to undermine the government and force elections as the New Democracy leader “did last November.” Venizelos also indicated he was unhappy that the conservatives had suggested to Greece’s European partners that PASOK and Democratic Left were obstructing a deal on the cuts demanded by the troika. |
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