The euro may have been pointless, but it might have been a whole lot less pointless if there’d been political union from the onset. So implied Mario Draghi, ECB President, at the BoE Open Forum on Wednesday.
For the laissez faire radicals out there, here’s how he went on to define the nature of “truly free” markets in that context (our emphasis):
Consider the case of markets that are truly open – by which I mean, as open as the Single Market of the European Union, where internal frontiers have been abolished entirely, where passporting of services across the entire EU is a right, not a privilege.
In this situation, national governments, or national courts of law, cannot alone provide full protection to their citizens against abuse of property rights or any form of unfair competition that may arise from abroad. Nor can they alone protect the rights of their citizens to carry out business abroad unimpeded by protectionist restrictions. For the market to be truly free, there needs to exist a judiciary power that can enforce the Rule of Law on all, everywhere. It has to have jurisdiction across the entire market.
So charted by Citi.
As they say, the coolness of global inflation is not just an energy price story:
Someone had to, because the net supply of new bonds was minimal and the European Central Bank has been buying €60bn per month.
Foreigners? No, according to a chart from Citi’s Han’s Lorenzen, it was the locals:
Peter Stella is an experienced IMFer on a crusade to champion base money understanding in a world of hard money obsessives who refuse to listen to reason.
From his latest blog post this week:
Bank reserves are demand deposits held at the central bank. Individual banks can and do transfer deposits among themselves constantly during business hours through electronic large value transfer systems (LVTS). Among the universe of LVTS, the largest are FEDWIRE and CHIPS in the US, CHAPS in the UK, BOJNET in Japan and TARGET2 in the Eurozone. From an individual bank’s perspective, reserves are “ultimate” liquidity—available instantly in real time to satisfy payments obligations to other banks.
The writer is Mohamed El-Erian, chief economic adviser to Allianz and chair of US President Barack Obama’s Global Development Council.
Here are three quick takeaways from today’s press conference by the European Central Bank: Read more
Easier than grabbing from the wires, from @ecb:
And on that choice…. This, from RBS’s Alberto Gallo, is timely: Read more
The writer is Mohamed El-Erian, chief economic adviser to Allianz and chair of US President Barack Obama’s Global Development Council.
Wondering why European peripherals are relatively well behaved while virtually all other risk assets have sold off this morning?
It need not be about irrational or misinformed markets. Instead, it is consistent with expectations of additional market intervention by the European Central Bank.
Concerns about China and Greece are fueling increased risk aversion. Equities are selling off, hard duration (including German and US government bonds) is rallying, commodities are getting crushed, and emerging market currencies are under pressure. Read more
Citi’s Willem Buiter-headed team of economists provides an interesting external solution for the Greek debt crisis in an opinion piece late on Monday: bail out Greek banks but not the Greek government.
Remember, the problem for eurozone banks is part of their core capital is supposed to be made up of liquid instruments like government bonds, but in the case of Greece these bonds are as toxic as subprime securities and depreciating quickly.
Even if the ECB continues accepting Greek bonds as collateral for Emergency Liquidity Assistance, the terms would no doubt involve much larger haircuts, bringing us back to a 2011 capital hole scenario very quickly. So, it actually makes more sense for Greek banks to start swapping government bonds into different types of assets. Read more
Remember the Comprehensive Assessment? You know, the European Central Bank’s report in October 2014 that said three Greek banks were adequately capitalised to survive a stressed scenario thanks to their fundraising efforts earlier in the year, while the fourth was only off by five basis points?
We ask because the ECB seems to have forgotten. Otherwise, we can’t think of why the euro area’s central bank is choking off Greek lenders and effectively forcing the Greek government to impose capital controls. (Immense thanks to Karl Whelan for making this point at our panel at Camp Alphaville.)
To see the oddity, it helps to explain what central banks are for. Read more
The decision being to keep emergency liquidity to Greek banks going at its level last week. From the ECB’s Sunday statement: Read more
A flurry of fresh headlines: Greek stocks pummelled; “Air of unreality” as IMF quits talks. A seemingly credible report from Germany’s Bild saying Angela has resigned herself to possible Grexit.
There was that aggressive Giavazzi op-ed in the FT.
Oh, and 10,000 Greeks have taken their own lives over the past five years of crisis, according to Theodoros Giannaros, a public hospital governor, whose own son committed suicide after losing his job.
Maybe this is the end, end game. Read more
Greece’s creditors tabled their alleged take-it-or-leave-it proposals on Wednesday evening, but Greece has now also come up with its own final proposals. Thanks to leaks through the Greek press on Thursday afternoon, you can now compare the two draft proposals side-by-side.
The Troika stuff comes in two parts, policy commitments and prior actions, courtesy of Tovima. Click the images tow read: Read more
A post-dated cheque without the drawing rights, that is.
As Tsipras and co stagger towards the next IMF payment deadline on Friday, all the while spitting furiously about the supposed abolition of democracy in Europe, it seems extraordinary that Greece has made it thus far without an event. Consider the payment schedule so far, from JP Morgan, published at the beginning of March… Read more
Some of you may remember how the ECB fecked up last week, when “an internal procedural error” meant an eventually market moving speech given by one Benoît Coeuré on Monday to, amongst others, a load of hedgies wasn’t made public until Tuesday morning.
The speech — apart from starting a debate about Chatham House rules, priviliged information and knee jerk responses by the ECB — was about ECB plans to front-load their bond purchases in May and June.
And as Citi’s credit specialist Matt King said: “If the ECB had wanted to test the extent to which traders were hanging on their every word, they could hardly have come up with a better experiment than to promise to boost the pace of QE purchases today, only to cut it back during the summer.” Read more
In this short note, we describe the characteristic of a VaR-shock, an often abused expression for a rapid and significant market correction
- Alessandro Tentori, Citi, May 13
And, yeah, “VaR-shock” comes just after “an Uber for x”, “breakout move”, “confidence level”, “flight to safety”, “liquidity”, “money; dumb, smart, hot”, “more buyers than sellers”, “oversold”, “profit taking”, “range bound”, “relief rally”, “safe haven”, “sentiment”, “shadow banking”, “short squeeze” and “technical correction” in the latest edition of the markets abuse dictionary.*
But Tentori, with no obvious sign of tongue in cheek, also says the recent Bund “tantrum” (add it to the list — ed) can be defined as a VaR-shock.
Useful since we already went there a few times. Read more
What will save the Wunderbund* (and related QE trades)?
From a hyperbolic Citi, a new normal stat du jour:
The end of the world as we know it is approaching. Very few market participants remember a bond market where the structural trend in yields wasn’t relentlessly lower.
We can continue to quibble about the scope for marginal performance in both rates and credit – and quibble we will over the coming months. But for all intents and purposes any € fixed income investor is now picking up pennies – if not outright paying for the privilege of taking someone else’s credit risk. The 30yr bull-run in fixed income is on its last legs.
One third of €-denominated bonds have negative yields. 82% now yields less than 1%
With Greek sovereign yields blowing wider on Thursday (and pretty much staying there), it’s worth revisiting what exactly might happen if, say, May 1 arrives and Greece fails to pay the €200m due to the IMF that day.
Received wisdom has it that the ECB will withdraw the ELA — emergency liquidity assistance — currently propping up the Greek banking system, which will promptly collapse; Tsipras and Co would then be forced to bring back the Drachma (or similar) and Greece would exit the eurozone.
But what do the “rules” here say? In the case of the ELA they run to all of two pages. Click the image to read in full. Read more
Citi’s chief economist and former BoE MPC member Willem Buiter is worried that the ECB’s new profit-and-loss sharing stance on National Central Bank asset exposures risks transforming the 19 NCBs of the eurosystem into a glorified currency board.
It’s a policy that also stands to bring needless uncertainty and volatility into the system. Making NCBs accountable for their own assets in his opinion only delays risk-sharing. If Europe is to defend its currency union there’s no way out of risk sharing in the long run. In fact, risk-sharing is precisely the point of a currency union. It’s what makes a currency union work. Read more
Citi’s Chief Economist Willem Buiter spent some time with FT Alphaville explaining why he believes Draghi’s concession on profit and loss sharing among ECB member national central banks turns, in all likelihood, the single monetary unit into nothing more than a glorified currency board.
Quick background: The ECB’s profit-and-loss sharing mechanism became a key negotiating point ahead of European QE. For the Bundesbank, QE was only viable if NCBs assumed most of the responsibility for losses on assets they brought into the consolidated balance sheet. In the end Draghi acquiesced by reducing risk-sharing to only 20 per cent of assets.
A currency board works by pegging liabilities (central bank reserves and currency) to an exchange rate target, rather than a CPI or employment target. The monetary authority managing the board achieves the target by ensuring all commercial entities served by the system can convert the authority’s liabilities into foreign currency at any point. In short, there’s a guaranteed FX convertibility promise at the central bank. Read more
From JPM’s Raphael Brun-Aguerre
And from the same source (with our emphasis): Read more
All hail the Euroglut, that oh so corpulent result of Europe’s (read: Germany’s) huge excess savings — which hit a record €234bn at the end of last year as oil prices collapsed and are projected to hit €300bn over the course of 2015 if oil prices stay that way.
You can, in part, blame said Euroglut (along with ECB QE and negative rates) for this type of thing…
As to the eventual size of these outflows? Read more
The UK did worse than almost every other developed economy from 2007-2012 but has been among the best performers since the start of 2013. Slightly out-of-date chart via the Reserve Bank of Australia:
What gives? According to a new analysis from Goldman, this demonstrates both the damage to the UK’s banking system after the crisis and the subsequent power of credit easing, specifically the magic that was worked on bank credit spreads after Mario Draghi uttered his priestly incantation in July, 2012: Read more
Peter Doyle, an economist and former IMF staffer, argues that for Greece continued emergency lending assistance is a necessity.
_________ Read more
This from Dan Davies is worth a bit of your time — supposedly four minutes of your time according to Medium’s time-thingy.
It makes the very good point that the lack of Greece-dominated headlines over the weekend is most probably good news. As Dan says, we haven’t had stories of deposit flight and bank runs, there haven’t been anymore leaked documents, the ECB hasn’t piled on any more pressure and there has been no grandstanding of note — from Greek or German politicians.
From Davies: Read more
You know how Bitcoin miners get a natural advantage in the cryptocurrency pyramid of inequality because of being early adopters that get first dibs on all new currency that’s created?
Turns out the ECB has a similar problem.
Here’s a nice write up of the distributive problems associated with QE-style helicopter drops in the current asset-purchasing framework from Pierre Monnin, a fellow at the Council on Economic Policies (our emphasis):
In practice, targeted money drops, like quantitative easing (QE), do not spread instantaneously throughout the economy. Like a vaccine, money is injected at one place and then disperses more or less quickly to other areas. Stephen Williamson and Olivier Ledoit have closely looked at how a money injection moves through the economy. They both use a model in which different economic groups trade randomly and repeatedly with each other.
On the day Yanis Varoufakis declared “I’m the finance minister of a bankrupt country”: Read more
The fact that inflation is low is not, by itself, bad; with low inflation, you can buy more stuff.
– Mario Draghi, June 6, 2013 Read more
The Bank of Canada cut rates yesterday and the European Central Bank announced its sovereign bond-buying scheme today. In both cases, there were sharp responses in the currency markets, but they seem to have cancelled each other out: