Posts Tagged: central banks

Haircut on Greek banks’ collateral?

22 April 2015 - 11:05 am

The European Central Bank is examining ways of reducing the supply of liquidity to Greek banks, according to a report from Bloomberg on Tuesday. This could be done by increasing the haircut imposed on Greek collateral used for drawing cash from the Eurosystem.

According to sources, ECB technocrats have processed three alternative scenarios for increasing the collateral haircut. If a significant increase were implemented, it would severely reduce local lenders’ capacity to cover the loss of capital – through the flight of deposits – via the emergency liquidity assistance (ELA) mechanism. Some banks could even face a dead end as it is doubtful whether they possess any more collateral.

A further increase in the haircut would not only concern new collateral supplied but also previously submitted collateral, effectively leading to a halt in the cash flow to local lenders and therefore the imposition of capital controls.

Up until now, Greek banks have tapped an estimated 74 billion euros through ELA and another 38 billion euros through the ECB. The total of 112 billion euros exceeds 50 percent of their assets.


Mario Draghi said this week that the transmission channels for European Q€ were opening up and crowed how well his cunning plan was working (by well we assume he means stocks are up). Today we get the ultimate test of that ‘transmission’ as 3-Month EURIBOR fell below 0.00% for the first time ever (likely wreaking havoc on European derivative pricing models). In English that means banks are being paid to borrow from one another in the interbank money-markets (which sounds a lot like a ‘glut’ of excess cash) seemingly confirming ICMA’s de Vidts fears: “We are scared about the [repo] market freezing,” as the ECB is “driving without headlights in the dark.” Of course this is yet another disturbing distortion on the heels of homeowners being paid to take out mortgages…

Banks now paid to borrow from one another…

As fears of the repo market in Europe freezing appear to be confirmed… (via Reuters), 

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China’s central bank is considering taking a page from Europe’s financial-crisis handbook to free up more credit as growth in the world’s second-largest economy slows.

The proposed strategy would allow Chinese banks to swap local-government bailout bonds for cash as a way to bolster liquidity and boost lending, said people familiar with the People’s Bank of China talks.

Adopting the strategy would mark a major shift in the central bank’s money-supply policy and underscore the leadership’s deep concern about missing already lowered growth expectations.

In recent months, China’s leaders have directed the central bank to try to beef up bank lending and lower borrowing costs as the economy slows and capital leaves the country.

But a barrage of easing measures—including two interest-rate cuts since November—has had limited success. Instead of stimulating targeted areas of the economy, such as small businesses, they have helped companies already heavily in debt. >> Read More

India: A Tata Truck Without Gearbox

16 April 2015 - 12:39 pm

India is set for a sweeping transformation, but the pace of the process will be slower than what most investors are hoping for, said Rajeev Malik, senior economist at CLSA, Singapore. The game plan of the Narendra Modi government is to lay a strong foundation in the initial years, even if it means moving slowly, and this will pay dividends in the second half of its term and aid in the re-election of the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA), he said in an interview. Edited excerpts:

Soon the BJP-led NDA government will complete a year in office. Your take on its performance so far.

Hardly has any Indian government come to power with as favourable an economic backdrop of growth bottoming and the welcoming prospects of a multi-year recovery. India is also positioned relatively favourably compared with other emerging economies. The government’s performance should be assessed in the context of the sky-high expectations, not against the previous non-performing government which specialized in economic mismanagement. >> Read More

5 takeaways from the ECB

15 April 2015 - 21:45 pm

QE Exit Discussions Are Extremely Premature.

The ECB’s program of quantitative easing was launched as recently as March 9, but questions are already being asked about its likely duration. “I’m quite surprised by the by the attention a possible exit from the program receives when we’ve only been in the program for a month,” Mr. Draghi told reporters, and insisted that it remains the governing council’s intention to  but more than €1 trillion ($1.1 trillion) in mostly government bonds through September 2016.

There’s No Shortage of Bonds

The ECB has to buy €60 billion of bonds a month, distributed around each of the currency area’s 19 members and carrying a yield no lower than the deposit rate, which stands at minus 0.20%. Moody’s Investors Service Tuesday warned the ECB could run out of eligible bonds from some governments around the turn of the year, and it’s not alone. “These worries are premature, certainly not supported by the current evidence,” Mr. Draghi said, adding the program could be adjusted if needed, but ruling out a cut in the deposit rate.

Things Are Looking Up

Accentuating the positive, Mr. Draghi cited a number of reasons for believing that the pickup in the pace of economic recovery that appears to have started in early 2015 can be sustained, ranging from an expected increase in investment to repair neglected infrastructure, to an easing in fiscal tightening, and a reduced general need to cut borrowing.

No Bubbles Here

The many critics of quantitative easing in Europe fear it will fuel asset prices bubbles, and sow the seeds of future crises. Mr. Draghi said he was aware of those risks, but didn’t see any evidence they were actually present. And if they did materialize, the best way of dealing with them is to tighten “macroprudential” regulation, not reverse course on monetary policy.


There was not much new on the eurozone’s most pressing problem. Mr. Draghi repeated that it’s up to the Greek government to establish the conditions under which Greek bonds might be accepted as collateral again, but seems intent on leaving negotiations to the politicians.


The European Central Bank has kept interest rates on hold for the sixth meeting in a row, as Mario Draghi prepares to give his take on the recent signs of an improvement in the eurozone economy.

The ECB’s governing council held the benchmark main refinancing rate at 0.05 per cent, a record low. The deposit rate charged on a portion of eurozone lenders’ reserves parked at the central bank stayed at 0.2 per cent

Mr Draghi, ECB president, will meet the press at 1.30pm UK time this afternoon. He is expected to address questions on the region’s economic outlook, which has strengthened more quickly than expected.

Official data published on Wednesday showed the value of eurozone goods exports rose by 4 per cent between February 2014 and February 2015, indicating the region’s manufacturers are beginning to benefit from the cheaper euro. The value of imports into the region remained the same. >> Read More


The eurozone’s trade surplus with the rest of the world almost tripled in February from the month before, as the weak euro propelled exports higher.

In an environment where European consumers are still not shrugging off the effects of the 2012 eurozone crisis to hit the shops, exports rose 4 per cent and imports were flat, taking the month’s surplus to €20.3bn from a revised €7.6bn in January.

The euro’s value has fallen by 25 per cent against the dollar since last May, making European goods such as Germany’s cars and high-tech products cheaper abroad.

The common currency has been driven down both by a resurgence in the US dollar since the Federal Reserve ended its monetary stimulus and hinted of an interest rate rise, as well as by the European Central Bank’s recently launched €60bn a month asset purchasing plan.


A government-appointed panel has recommended doing away with caps on external commercial borrowing (ECB) but limiting these to the percentage of hedging that companies undertake.

The M S Sahoo committee, set up to review the domestic and foreign capital markets, gave its report to the finance ministry in February. This was made public on Friday and the government has invited comments and feedback till May 10.

M S Sahoo, who chaired the panel, was a wholetime director in the Securities and Exchange Board of India. He is now a member in the Competition Commission of India.

“The restrictions on borrowers, lenders, end-uses, amount, maturity, all-in-cost ceiling, etc, were products of the time and have outlived their utility. These must be removed, as these do not now address the identified market failure associated with ECB, systemic risk arising from currency exposure and global risk tolerance,” the committee has said. Current ECB regulations have sector-specific caps, company-specific caps and restrictions on how the debt raised is used. Manufacturing and infrastructure companies can raise up to $750 million in a financial year. For those in the services sector, such as hotels, hospitals and software companies, raising up to $200 mn in a financial year is allowed. Raising more than this requires approval from the Reserve Bank of  India (RBI) and the central government.

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The negative yield juggernaut shows no sign of slowing down.

Switzerland has become the first country to sell benchmark 10-year sovereign debt at a negative yield, as the implications of the European Central Bank’s bond buying programme continues to ripple across markets

With a yield of minus 0.055 per cent, investors are effectively paying to lend CHF232.51m (€222.4m) to the Swiss government until 2025.

Across Europe, prices for bonds have jumped in the wake of the ECB’s full blown quantitative easing programme and investor demand for safe havens as Greece and other geopolitical events continue to create uncertainty.

A number of countries within Europe have sold shorter dated government debt at sub-zero yields but this is the first time that a major nation’s 10 year debt has been sold at a negative yield.

In January, Switzerland surprised markets by scrapping its currency peg to the euro. Falling oil prices and a strong currency is now pushing down inflation within Switzerland, leading some international banks to raise the possibility that the country’s central bank may take further action.


The eurozone is “untenable” in its current form and cannot survive unless countries are prepared to cede sovereignty and become a “United States of Europe”, the manager of the world’s biggest bond fund has warned.

The Pacific Investment Management Company (PIMCO) said that while the bloc was likely to stay together in the medium term, with Greece remaining in the eurozone, the single currency could not survive if countries did not move closer together.

Persistently weak growth in the eurozone had led to voter unrest and the rise of populist parties such as Podemos in SpainSyriza in Greece, and Front National in France, said PIMCO managing directors Andrew Bosomworth and Mike Amey.

“The lesson from history is that the status quo we have now is not a tenable structure,” said Mr Bosomworth. “There’s no historical precedent that this sort of structure, which is centralised monetary policy, decentralised fiscal policy, can last over multiple decades.”

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Technically Yours,
Team ASR,
Baroda, India.