Yup, we’re back here again. Here’s how Credit Suisse ranks the ECB’s options if, or when, the increasingly dovish governing council decides that more easing is necessary:
The first option comprises exhausting the ECB’s standard policy lever by cutting rates further. We expect this to be the first response if more needs to be done and could be prompted by inflation falling to 0.5% y/y or lower. A further cut in the key policy rate would also entail taking the deposit rate into negative territory.
Two tables below the break, courtesy of Credit Suisse, detailing the ECB board’s easing predilections. Tabled story short, the increasing north/south divide that has accompanied the euro area’s drawn out crisis has lead to the balance of power shifting to the periphery. Or: doves in the ascendant. Interesting too that the Bundesbank might thus be pushing for ECB minutes to be released in order to quell those national interests.
Out of the 23 Governing Council members including 6 Executive Board members 13 are dovish or very dovish as we show in the table below, where we have assessed Governing Council members and their recent statements. The dovish cause of the periphery is further helped by the fact that three core representatives, both French nationals and the governor of the central bank of Belgium, have also been typically perceived to be in the more dovish camp. Increasingly the Bundesbank is thus becoming more marginalized which might explain the Bundesbank having consistently increased the volume of its verbal interventions throughout the crisis.
Icap’s Chris Clark alerts us on Friday to the fact that European liquidity markets are already preparing themselves for a potential liquidity squeeze come the end of the year.
As he notes:
Month-ends have become increasingly significant events for the Eurozone repo markets over the second half of this year as levels of excess liquidity have diminished and market rates have slowly edged higher. This Thanksgivings Day/November month-end liquidity hump has proved a tricky one for the market to manoeuvre, but already attention is focusing on the impending year-end as evidence stacks up to suggest funding might be problematic for some.
Presenting Italy, a central plank in the argument for a new vLTRO or at least an extension of what we already have:
Have an expansive ECB toolkit courtesy of Deutsche (click to enlarge):
On that note, here’s Reuters on Wednesday:
The European Central Bank is considering a new long-term liquidity operation available only to banks that agree to use the funding to lend to businesses, a German newspaper reported on Wednesday, citing sources.
The ECB cut rates unexpectedly on Thursday. While there was market consensus that easing was coming, there was little agreement on the form in which the easing would take place. A cut was seen as stifling the ECB’s future flexibility by taking it to the lower bound and flirting dangerously with negative rates, while further LTROs were seen as potentially constrained by AQR-related stigma.
But the big news from Draghi’s press conference, however, is that the ECB is clearly not afraid of the former, and not necessarily scared of the latter either.
The ECB ended up cutting the main refinancing rate by 25 basis points, whilst reconfirming its commitment to fixed-rate tender full allotment in its MROs and special term refinancing operations, and its three-month LTROs. Read more
Despite the few who got it right that the European Central Bank would cut on Thursday (including this guy)… Deutsche sort of got their reaction in early.
Well, we say reaction, the FX team indicated that might raise a languid head in the direction of the market if something happened. It’s still worth noting post-announcement: Read more
Update – It’s not just the rate cut, as Mario Draghi opens the presser at pixel time:
Earlier – Bold move or way too late? You decide: Read more
Okay, so it’s not the first time we’ve heard a positive spin on deflation.
Who can forget the famous last words of Deflation Draghi in June this year? Read more
Courtesy of Icap’s market analysis team, here’s the turnaround in the Eonia December 13-January 14 spread this month:
The Credit Suisse European economics team are growing concerned about Mario Draghi’s disinflation problem:
Click for the ECB’s official introduction to its year-long “supervisory risk assessment… asset quality review and a stress test” for 124 European banks (who are all listed)…
The capital ratios to be used have already been leaked, but here it is in full from Wednesday’s note — it seems there’s a significant wriggle: Read more
FT Alphaville began writing in detail about emergency liquidity assistance in the eurozone — that is, national central banks lending to stricken, but supposedly solvent banks on highly secretive terms, against collateral not accepted at the ECB — some two and a half years ago.
Throughout that period, the ECB’s precise oversight of this liquidity assistance remained in the dark. Despite the risk being taken by taxpayers, and despite the fact ELA effectively stopped the Greek, Irish and Cypriot banking systems from going under at various points. And despite procedures having been in place since 1999 for the ECB to restrict ELA by a national central bank if it endangers the rules of the euro (as used in Cyprus). Read more
A while ago we speculated that because of the ongoing bifurcation of the eurozone market, Eonia rates could rise, and liquidity once again concentrate in core economies, as banks pay back their LTRO funds.
Even if it appeared that the system could handle the repayments, banks in core economies would still be inclined to take advantage of extremely cheap negative rates available in collateral markets, so as to earn a spread on the deposit facility in a way that arguably encumbered the remaining liquidity. That would make it less available to periphery institutions.
Meanwhile, without the additional layer of ECB liquidity in the system — which acts as a type of system-wide insurance mechanism — periphery banks would consequently be forced to make ever more competitive bids for Eonia funds, lifting rates across the board. Read more
Greg Fuzesi is quietly fuming. We get a post-holiday presser from Mario Draghi on Thursday and the JP Morgan economist really would like the ECB chief to use the opportunity to expand upon the word “extended” when offering interest rate guidance. Read more
An interesting pair of charts to juxtapose on a Monday morning, and a PMI day… courtesy of Societe Generale. They point out that the eurozone is straggling to recovery, though apparently in spite of the ECB failing to shore up money growth: Read more
So, remember how the paying back of ECB LTRO loans was signalled as awfully good news for everyone?
Also, how it was seen as unlikely that Eonia would detach too much from policy rates or cause inadvertent Eurozone rate bifurcation as a result (which some in the market were sceptical of)? Read more
Should peripheral banks like the latest ECB collateral moves?
As the FT’s Michael Steen reports, the central bank will now accept “ABS with a lower credit rating and at a lower haircut” than it had done previously, going below the previous triple-A minimum. It could mean another €20bn of collateral eligible to post at the ECB for funding, Steen notes.
But there’s something else… Read more
This is really good stuff from the FT’s Michael Steen, summing up the confusing welter of communications that has bubbled from ECB board and council members since Mario Draghi attempted some light forward guidance at the last ECB press conference:
During his press conference on the subject, the ECB chief did his best not to define that extended period but became unstuck when asked if it was six or 12 months, replying: “It is not six months, it is not 12 months, it is an extended period of time.”
Here’s the moment, on Reuters Video on Tuesday (03:54 on the countdown clock) , when Germany’s Asmussen said… Read more
From a very dovish Mario Draghi’s press conference following the European Central Bank’s decision to keep its key rates on hold (with our emphasis):
Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. Incoming information has confirmed our previous assessment. Underlying price pressures in the euro area are expected to remain subdued over the medium term. In keeping with this picture, monetary and, in particular, credit dynamics remain subdued.
The Great Draghini has spoken on negative rates, collateral and on volatility:
DRAGHI – HAD AMPLE DISCUSSION OF NONSTANDARD MEASURES
DRAGHI – DISCUSSED NEGATIVE DEPOSIT FACILITY
DRAGHI – TECHNICALLY READY FOR NEGATIVE DEPOSIT RATES, BUT NO REASON TO ACT RIGHT NOW
From Morgan Stanley’s combined banks/economics/credit/rates research team on Tuesday:
If the ECB were to introduce negative rates, FT Alphaville has mostly focused on the idea that the it would do so primarily in its deposit rate. That’s where market chatter has largely concentrated.
But as someone wiser than us noted in an emailed comment, that would be almost entirely redundant. Read more
This is a short follow-up to Monday’s negative rate confusion and prepay-tax option post.
In it we argued two very simple points:
1) Negative rates might very well cause Eonia to go up because they are in fact liquidity contractionary.
2) Negative rates are contractionary because they encourage all of the following: banknote hoarding instead of excess reserves, capital flight (which manifests by means of a depreciating exchange rate which can impact non-depository asset valuations), the prepayment of private tax liabilities, the unwinding of LTROs/MROs, the resale of ECB held bond assets back into the market.
The ECB meets this week and expectations about what Draghi and team may or may not do seem to be erring towards the non-event side of things.
But, as Beat Siegenthaler at UBS observed in a note on Monday, there still seems to be a lot of confusion about the likelihood and usefulness of negative rates being introduced. A rise in eurozone rates over the past two weeks has only added to the confusion: Read more
This is one way to respond to the mess Euroland is in over who should make the calls for recapitalising banks…
The European Banking Authority is delaying its next banking stress test to 2014, to wait for both new asset-quality reviews and the ECB’s Single Supervisory Mechanism (so is it to wait for Wolfgang Schaeuble?): Read more
Consider this chart from JP Morgan’s Flows & Liquidity team. It shows the evolution of non-performing loan ratios (as percentages of total loans) across three different Euro area blocks: Germany, core and periphery.
The definition of a non-performing loan (NPL) differs across countries but the picture is definitely not pretty. Read more
Back in July, 2012 the Danish central bank, Nationalbanken, lowered the deposit rate to -0.2 per cent. Back then we wrote that it was going to be costly for the banks, and that money market rates were going deeper into negative territory. With Draghi’s comments last week, how did that whole negative deposit rate action turn out for Denmark?
Nordea had a note out last week on that very subject. Now, before we move, let’s remember that Danish monetary policy is tailored around the FX peg. The deposit rate was there to assure outflow because of mounting pressure on the EUR/DKK pair. Read more