Thursday, June 5, 2014

Markets have drifted the past couple days on ECB Watch -Updates -- Draghi Reveals More: Will Do Targeted LTRO, Suspends Sterilization, Prepares ABS Purchases; No QE Revealed............. NIRP Has Arrived: Europe Officially Enters The "Monetary Twilight Zone"............ ECB Decision-Day ( June 5 , 2014 ) Guide (In 5 Simple Questions) ... Question 6 - What will make the most money for the Banksters ?

Update ....

( Mish underwhelmed ...) 

Thursday, June 05, 2014 12:20 PM

ECB Pulls Out Pea Shooter, Fires, Misses Target

In a widely expected move this morning, ECB president Mario Draghi announced negative interest rates, the first-ever move for a major central bank.

The deposit rate in Europe is now negative 0.10%. The ECB also lowered the benchmark rate from 0.25% to 0.15%.

In a display of puffery, Draghi announced “we aren’t finished here”.

The Financial Times provided a few more details in its report: ECB unveils extraordinary moves to fight deflation, lift economy 
 The ECB will offer cheap longer-term loans, known as a targeted longer-term refinancing operations, which will resemble the structure of the Bank of England’s Funding for Lending Scheme.

There will be four TLTROs, all maturing by September 2018, worth up to €400bn. “A number of provisions will aim to ensure that the funds support the real economy. Those counterparties that have not fulfilled certain conditions regarding the volume of their net lending to the real economy will be required to pay back borrowings in September 2016,” Mr Draghi said.

The ECB will also continue to provide shorter-term cheap loans to banks at fixed rates until at least the end of 2016.

Mr Draghi said the ECB had “decided to intensify preparatory work related to outright purchases” of asset-backed securities, a limited form of quantitative easing.
Pea Shooter, Not a Bazooka

The TLRTO refinancing operations will not apply to mortgages out of fear of overstimulating housing.

Although I believe these actions will have the effect of a pea shooter,  this is not a call for the ECB to do more. 

The ECB has an irrational fear of falling prices and should not have done anything at all. Contrary to popular myth, falling prices do not cause consumers to delay purchases. The problem is debt, not low prices. For further analysis, please see Deflation Theory Reality Check

We are in this mess because central banks have blown serial bubble after bubble, each with a bigger amplitude.

ECB Goals

The ECB hopes to spur lending, especially to small businesses, stop deflation, cheapen the Euro, increase exports, and improve economic growth. 

Will the ECB's Actions Work? 

In a nut shell no.

Negative interest rates were tried before and they accomplished nothing. Denmark tried a -0.2% rate in 2012 and it did not spur lending, nor did negative rates cause customers to pull money out of banks as some feared.

As I have noted on many occasions, banks lend if and only if two conditions are met.

  1. Banks are not capital impaired
  2. Banks believe they have credit-worthy borrowers on a risk adjusted basis

What about the housing bubble? Banks knew they did not have credit-worthy customers but they thought they could dump the assets on others. Banks also believed no one would ever walk away from houses. Those were bad assumption and banks seriously misjudged the risks. Banks do see such risks now.

In this case, Draghi's moves will not spur lending because the ECB did nothing to make customers more credit-worthy. To top it off, the ECB is tightening capital requirements.

Instead of lending more, banks will raise fees to make up for the loss they take on parking money with the ECB. And if the ECB make the deposit rate negative enough, there will be a run on the bank by depositors.

All in all, slightly negative interest rates will have a slightly negative impact on lending.

The ECB hinted at QE, but in practice will be unable or unwilling to match the scale of Fed QE actions. And Germany will scream every step of the way on any move.

Thus, there is no reason to believe future ECB actions will substantially cheapen the euro or increase exports.

In short, the ECB's actions cannot possibly accomplish anything except perhaps fuel even bigger asset bubbles in stocks and bonds.

Euro 5 Minute Chart

It is risky to make assumptions based on price movements in a single day, nonetheless, today's action in the euro was interesting.

After opening lower, the euro is now in positive territory. This is arguably an early indication of the Forex market's opinion on the ECB's pea shooter approach.

ECB outlines new €400bn LTRO

This is big. Draghi is outlining the terms of a new Long-Term Refinancing Operation - designed to help banks lend to small companies and help the "real economy".
It will be €400bn in total, and priced at a mere 10 basis points over the refinancing rate (now just 0.15%)
Banks will be able to borrow up to 7% of the total value of their loans to the 'non-financial' parts of the economy, and they can't use mortgage lending either.

Draghi says the ECB has agreed a combination of measures to stimulate the eurozone economy.
That includes the interest rate cuts.
BUT that is not all!
The governing council has agreed new "targetted long-term refinancing operations".
It has also agreed to undergo "Preparatory work" on buying asset-backed securities
And they have suspended the sterilisation of the bonds it bought during the crisis in 2012.

Draghi says the governing council is unanimous in its commitment to using all unconventional measures available to meet its mandate.

Today's decisions were unanimous, Draghi says. So, no opposition from the Bundesbank.

The euro is tumbling further on the news that the ECB has agreed new measures to stimulate the eurozone economy, to $1.351.
And the German DAX has shot through the 10,000 mark.

Draghi reiterates that the governing council has agreed to "intensify" its preparatory work on the 'asset-backed security' market.
That means creating a system where commercial banks can combine their small business loans into a new security, and then sell it on --perhaps to the ECB?


Draghi Reveals More: Will Do Targeted LTRO, Suspends Sterilization, Prepares ABS Purchases; No QE Revealed

Tyler Durden's picture

The much anticipated additional measures have been revealed:
In other words, even more actions along what was expected: keep in mind the last time the ECB did €1 trillion in LTROs it did exactly nothing to boost inflation or the "real economy." Furthermore, the ABS purchases aren't activated: just being "prepared." However, what was not revealed was the biggest wildcard: European QE, which as we said repeatedly, won't happen until Europe's deflation is far worse, if ever.
Good news for Europe's collateral starved economy: Greek oil and feta are still eligible as ECB collateral
More headlines from Bloomberg:

NIRP Has Arrived: Europe Officially Enters The "Monetary Twilight Zone"

Tyler Durden's picture

Today's decision by the ECB to officially lower the deposit facility rate to negative is shocking, but not surprising: we prevised just this precisely two years ago in "Europe's "Monetary Twilight Zone" Neutron Bomb: NIRP"
Here is what we wrote in June 2012 about Europe's unprecedented NIRP monetary experiment.
Just because ZIRP is so 2009 (and will be until the end of central planning as the Fed can not afford to hike rates ever again), the ECB is now contemplating something far more drastic: charging depositors for the privilege of holding money. Enter NIRP, aka Negative Interest Rate Policy.
Bloomberg reports that "European Central Bank President Mario Draghi is contemplating taking interest rates into a twilight zone shunned by the Federal Reserve. while cutting ECB rates may boost confidence, stimulate lending and foster growth, it could also involve reducing the bank’s deposit rate to zero or even lower. Once an obstacle for policy makers because it risks hurting the money markets they’re trying to revive, cutting the deposit rate from 0.25 percent is no longer a taboo, two euro-area central bank officials said on June 15... “The European recession is worsening, the ECB has to do more,” said Julian Callow, chief European economist at Barclays Capital in London, who forecasts rates will be cut at the ECB’s next policy meeting on July 5. “A negative deposit rate is something they need to consider but taking it to zero as a first step is more likely.” Should Draghi elect to cut the deposit rate to zero or lower, he’ll be entering territory few policy makers have dared to venture. Sweden’s Riksbank in July 2009 became the world’s first central bank to charge financial institutions for the money they deposited with it overnight."
There is only one problem when comparing the Riksbank with the ECB: at €747 billion in deposits parked at the ECB as of yesterday, the ECB is currently paying out 0.25% on this balance, a move which may or may not be a reason for the depositor banks, primarily of North European extraction, to keep their money parked in Frankfurt. However, once this money has to pay to stay, it is certain that nearly $1 trillion in deposit cash, currently in electronic format, would flood the market. What happens next is unknown: the ECB hopes that this liquidity flood will be contained. The reality will be vastly different. One thing is certain: inflating the debt is the only way out for the status quo. The only question is what format it will take.
More from Bloomberg:
It won’t help the prospect of a functioning money market because banks won’t be compensated for the risk they’re taking,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. It would make more sense to lower the benchmark rate, thus reducing the interest banks pay on ECB loans, and keep the deposit rate where it is, Green said.

The ECB has lent banks more than 1 trillion euros in three- year loans, with the interest determined by the average of the benchmark rate over that period. Societe Generale SA estimates that cutting the key rate by 50 basis points would save banks 5 billion euros a year.

The deposit rate traditionally moves in tandem with the benchmark, which policy makers kept at a record low of 1 percent on June 6. Draghi said “a few” officials called for a cut, fueling speculation the bank could act next month.
Sadly, because all this is merely operating in the confines of a broken system, just as the LTRO provides a brief respite only to commence crushing banks such as Monte Paschi, so any further intervention by the ECB will only lead to a faster unwind of an unstable system.
Other institutions have opted against such a move. The Fed started paying interest on deposits to help keep the federal funds rate near its target in October 2008 and has reimbursed banks with 0.25 percent on required and excess reserve balances since December that year.

Some Fed policy makers last August argued that reducing the rate could be helpful in easing financial conditions. While they discussed doing so in September, many expressed concern that such a move “risked costly disruptions to money markets and to the intermediation of credit,” the Fed said in minutes published on Oct. 12.

The Bank of Japan (8301) introduced a Complementary Deposit Facility in October 2008 to provide financial institutions with liquidity and stabilize markets, and has kept the interest it pays for the funds at 0.1 percent since then. Governor Masaaki Shirakawa told reporters on May 23 there would be “large demerits” to reducing the deposit rate because it could lead to a decline in money-market trading.
It gets worse: by trying to help banks, the ECB will actually be impairng them:
If the ECB cut the deposit rate, it would take an important profit opportunity away from banks,” said Tobias Blattner, an economist at Daiwa Capital Markets Europe in London. By doing so, the ECB would also be “encouraging banks to lend to the real economy” even though “there’s hardly any demand for credit,” he said. Blattner predicts the ECB will cut its benchmark and leave the deposit rate at 0.25 percent.

ECB Executive Board member Benoit Coeure said on Feb. 19 that market interest rates of zero or lower “can result in a credit contraction.”

That’s because banks, trying to preserve their deposit bases by paying customers a reasonable interest rate, may reduce lending to companies and households because the return is too low and invest in higher-yielding assets instead.
Finally kiss money markets - which together with Repos are one of the core components of shadow banking - goodbye:
“A deposit rate at zero will be of particular support to banks in southern Europe because it could help encourage some flow of credit,” said Callow. “A negative deposit rate can be damaging for money markets.”

Negative rates would destroy the business model for money- market funds, which would face the prospect of paying to invest, said Societe Generale economist Klaus Baader.

“But the ECB doesn’t set policy to keep alive certain parts of the financial sector,” he said. “Policy makers want to show that they haven’t exhausted their options yet.”

ECB Cuts Deposit Rate To Negative For The First Time Ever

Tyler Durden's picture

Congratulations Europe: you now get to pay your insolvent bank to keep your deposits for you. Today's cuts summarized and largely as expected:
  • Main Refinancing Rate cut by 10 bps to 0.15%
  • Marginal lending facility cut by 35 bps to 0.40%
  • Deposit facility rate cut by 10 bps to -0.10%. As in negative. As in deposits are now charged a fee.
And the ECB leave with the cryptic: "Further monetary policy measures to enhance the functioning of the monetary policy transmission mechanism will be communicated in a press release to be published at 3.30 p.m. CET today."
At today’s meeting the Governing Council of the ECB took the following monetary policy decisions:
  • The interest rate on the main refinancing operations of the Eurosystem will be decreased by 10 basis points to 0.15%, starting from the operation to be settled on 11 June 2014.
  • The interest rate on the marginal lending facility will be decreased by 35 basis points to 0.40%, with effect from 11 June 2014.
  • The interest rate on the deposit facility will be decreased by 10 basis points to -0.10%, with effect from 11 June 2014. A separate press release to be published at 3.30 p.m. CET today will provide details on the implementation of the negative deposit facility rate.
The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 2.30 p.m. CET today. Further monetary policy measures to enhance the functioning of the monetary policy transmission mechanism will be communicated in a press release to be published at 3.30 p.m. CET today.

ECB Decision-Day Guide (In 5 Simple Questions)

Tyler Durden's picture

As we have heard numerous times this year already, tomorrow may be 'another' most important day of the year/cycle as Mario Draghi and his band of merry men at the ECB appear to be finally cornered(by market exuberance, macro weakness, and excess positioning) into "doing" something as opposed to just talking about it. While we have discussed the ins and outs of the potential for a small focused ABS bailout QEnegative rates, and why whatever Draghi does tomorrow will have minimal impact on the real economy; Bloomberg provides a quick and easy guide to the five things to watch for from Mario Draghi tomorrow...

Via Bloomberg's Alessandro Speciale,
1. Which interest rates will Draghi cut, and how far?
While all but two of 60 economists surveyed by Bloomberg News predict a cut in the main refinancing rate from the current record-low 0.25 percent, they’re divided over the size of the reduction. Twenty one economists predict the ECB will lower its benchmark by 10 basis points to 0.15 percent; 34 analysts forecast a cut by 15 basis points to 0.10 percent. Three expect the rate to fall even further.
The majority of economists in a separate survey predict the ECB will become the first major central bank to introduce a negative deposit rate, with 32 of 50 analysts saying the rate will be cut to minus 0.10 percent and 12 forecasting a reduction to minus 0.15 percent. Such a move would weaken the euro, which has appreciated 4 percent against the dollar in the past 12 months. Only six economists see the ECB keeping the deposit rate at zero.
2. Which non-standard measures is Draghi debating?
Policy makers are contemplating a package of measures, and analysts from Goldman Sachs Group Inc. to Nomura International Plc expect a rate cut to be complemented by tools aimed at reigniting credit supply. “The combined use of several monetary-policy instruments is conceivable,” Executive Board member Peter Praet said in an interview with Die Zeit.
Longer-term loans to banks conditional on increased lending to companies may take center stage, with a program modeled on the Bank of England’s Funding for Lending Scheme being one option officials have discussed. Other measures up for debate include the suspension of sterilizing crisis-era bond purchases, changes in reserve requirements and collateral policy and an extension of the fixed-rate, full-allotment regime currently scheduled to be in place until July 2015, under which banks can borrow as much cash as they like against eligible collateral.
3. How serious is the threat of deflation in the euro area?
Inflation, which the ECB aims to keep just under 2 percent, has remained below 1 percent since October and slowed to 0.5 percent last month. In March, the ECB predicted it won’t return toward its goal until the end of 2016. Draghi is set to unveil new staff projections on prices, growth and unemployment that may force the ECB further into uncharted territory.
4. What can the ECB do later in the year if the situation worsens?
Draghi said on April 24 that large-scale asset purchases would be justified if the medium-term outlook for inflation worsens. Any program would target a mix of assets to reduce “term premia across markets and jurisdictions,” Executive Board member Benoit Coeure said on April 13.
The ECB and Bank of England have called on regulators to ease rules on asset-backed securities in Europe. That would provide a broader range of funding options for companies and create assets the ECB could buy to supply liquidity.
5. What else is on the ECB’s agenda?
Draghi may be quizzed on the progress the ECB has made on minutes. Officials started drafting trial versions earlier this year and are debating a reduction in the frequency of rate-setting meetings once they start publishing the accounts.
Developments in the ECB’s comprehensive assessment of the banking system may also be a topic in the press conference, in particular in how it may take account of rising legal costs after U.S. authorities threatened to levy a $10 billion dollar fine on BNP Paribas SA for breaching trade sanctions. In addition, the place of Dexia SA, the bailed-out French-Belgian lender, in the Comprehensive Assessment may be raised, after the ECB supervisors decided to exempt it from a stress test.
*  *  *
And so while they are the key five questions... here is what the world is hoping for / expecting...

Better not disappoint Mr. Draghi