The European Central Bank is facing a full-blown leadership crisis. Mario Draghi’s authority is ebbing, with powerful implications for financial markets and the long-term fate of monetary union.
Both Die Zeit and Die Welt report that three members of the ECB’s six-strong executive board refused to sign off on Mr Draghi’s latest statement, an unprecedented mutiny in the sanctum sanctorum of the ECB’s policy making machinery.
The dissenters are reportedly Germany’s Sabine Lautenschläger, Luxembourg’s Yves Mersch, and more surprisingly France’s Benoît Cœuré, an indication that Paris is still hoping to avoid a breakdown in relations with Berlin over the management of EMU.
The reality is that a full six months after Mr Draghi first talked loosely of a €1 trillion blitz to head off deflation risks, almost nothing has actually happened. The ECB balance sheet has shrunk by over €100bn.
Talk has achieved a weaker euro but that is not monetary stimulus. It does not offset the withdrawal of $85bn of net bond purchases by the US Federal Reserve for the global economy as a whole. It is a zero-sum development
The European Central Bank has dashed hopes for quantitative easing this year and acknowledged for the first time that the institution’s elite board is split on plans for a €1 trillion liquidity blitz.
Equity markets fell across southern Europe,with Italy’s MIB off 2.77pc, led by sharp falls in bank stocks. Spain’s IBEX dropped 2.35pc.
The euro surged by more than 1pc to $1.2455 against the dollar in early trading as speculators rushed to cover short positions. Expectations for immediate stimulus had been riding high after the ECB’s president, Mario Draghi, pledged action “as fast as possible” last month.
The bank slashed its forecasts for economic growth to 1pc next year, and admitted that inflation will remain stuck at just 0.7pc, a combination that traps large parts of southern Europe in deflationary slump and corrodes debt dynamics. BNP Paribas said eurozone inflation is likely to average 0pc in 2015, after turning negative this month.
“The ECB’s measures are woefully behind the curve,” said Ashoka Mody, a former EU-IMF bailout chief now at the Bruegel think-tank in Brussels.
“You have to think about a huge tower of debt on shaky foundations where central banks pump concrete in the foundations in an emergency effort to avoid the building from collapsing and at the same time builders are adding additional floors on top”
“Today central banks give money to institutions, which are not solvent, against doubtful collateral for zero interest. This is not capitalism.“
“It is the explicit goal of central banks to avoid the tower of debt to crash. Therefore they do everything to make money cheap and allow more speculation and even higher asset values. It is consistent with their thinking of the past 30 years. Unfortunately the debt levels are too high now and their instruments do not work anymore as good. They might bring up financial assets but they cannot revive the real economy.”
A closely-watched gauge of manufacturing activity in the eurozone disappointed in November, falling dangerously close to the level that indicates a contraction in activity.
The manufacturing purchasing managers’ index fell from 50.4 last month to just 50.1 in November – perilously close to the 50 mark that signals the difference between rising or falling activity. Economists had expected the reading to stay at 50.4.
The eurozone’s economic recovery has fizzled out this year, with France stagnating, Germany flirting with recession and Italy unable to escape one.
That has ramped up pressure on the European Central Bank to start full, sovereign quantitative easing, but many economists doubt that will be enough to reinvigorate growth.
Italy, Germany and France’s manufacturing PMIs all came below the 50 mark that signals the difference between rising or falling activity.>> Read More
The European Central Bank’s plans for €1 trillion of monetary stimulus is fraught with risk and is likely to fail without full-blown bond purchases, Standard & Poor’s has warned.
The agency said the ECB’s blitz of ultra-cheap loans to banks (TLTROs) cannot generate more than €40bn of net stimulus once old loans are repaid, given regulatory curbs imposed on lenders.
Jean-Michel Six, the agency’s chief European economist, said ‘doves’ on the ECB’s governing council know that the loan plan is unworkable but are going through the motions in order to persuade German-led ‘hawks’ that all conventional measures have been exhausted, even if this means a debilitating delay.
“Risks of a triple-dip recession have increased,” said Mr Six. “The ECB has one last arrow and that is quantitative easing of €1 trillion, needed to restore the M3 money supply to trend growth.”
After 6 weeks of the ECB’s (3rd) Covered Bond Purchase Program, the cumulative buys amount to a mere EUR 10.485 billion. It appears they are limited (by collateral availability and market liquidity.. and dealers unwillingness to sell) to around EUR3 billion per week - around the same amount The Fed’s QE3 would suck up in 1-2 days of POMO. At this rate, it’s a long way to go to reach the $1 trillion goal. Is it any wonder that Mario Draghi once again used the ‘w’ word – uttering ECB will do “whatever it takes” (cough within its mandate).
*DRAGHI SAYS ECB WILL DO WHATEVER IT TAKES, WITHIN ITS MANDATE
So just 6 more years of buying to reach $1 trillion?
It seems Draghi is getting desperate:
*DRAGHI SAYS EXPANDED PURCHASE PROGRAM COULD INCLUDE GOVT BONDS
The investment climate rests on three legs: the divergence that is characterized by the de-synchronized business cycle, the decline in commodity prices and a slowing of China. Data that underscores these factors appear to have stopped having much significance for investors.
At the same time, small changes to perceptions, like the downtick in the University of Michigan survey’s inflation expectations, can have seemingly out-sized market impact. Before the weekend, it reported that the five-year inflation expectation slipped through the 2.7%-3.0% range that has confined expectations over the past year or two. It now stands at 2.6%, the same the as the one-year expectation, which eased from 2.9%. It was sufficient to push US 10-year Treasury yields back to the lower end of their recent range (~2.30%), and sparked a pullback of the dollar.
The flash euro area PMI and ZEW survey, on the other hand, are most unlikely to change perceptions of the near stagnant economies. It will not alter ideas that policy makers have to do more to get back to a meaningful growth path. Some observers are emphasizing the possibility that the ECB announces some measures to increase the participation of the second TLTRO next month. And despite our claim that there is no agreed upon definition of quantitative easing, many say the ECB is slowly moving toward it. By that they mean the purchase of sovereign bonds.
The technical, legal and political obstacles remain formidable. There are several other classes of assets that the ECB can buy, including supra-nationals, corporates and non-covered bank bonds that are less cumbersome. Moreover, it is possible that the low point of inflation is at hand, and the second TLTRO will be considerably more successful than the first. Together they could be worth about 250 bln euros. Some of the second TLTRO may be used to pay back part of the LTRO funds outstanding, especially among Italian banks. >> Read More
Industrial production in the euro area rebounded by 0.6 per cent in September, after August’s gloomy 1.4 per cent contraction, but it undershot expectations and concerns over the continent’s economic health continue to simmer.
The eurozone’s economic recovery has spluttered badly this year, as all the biggest members have either stagnated or slumped back into recession.
Industrial production has been a particular weak spot across the common currency area. Italian and French production shrank in September, while Germany suffered a disappointingly weak rebound after August’s awful 3.1 per cent contraction.
The continued economic gloom and stubbornly low inflation in the eurozone has sparked speculation that the European Central Bank will eventually be forced to expand its quantitative easing programme to include buying sovereign government bonds – perhaps as early as next year.>> Read More
Europe’s volatility gauge has slipped below the 20 mark for the first time in just over a month, after the turmoil of October has subsided and traders look forward to more decisive action from the European Central Bank in the coming months.
The Vstoxx index, the European counterpart to Wall Street’s Vix, is a measure of the expected volatility of European stocks and is therefore seen as a yardstick of investor fear in the continent.
The gauge spiked to a two-year high of 31.52 last month, as European markets suffered some severe blows from the global turbulence that erupted as the Federal Reserve prepared to end its quantitative easing programme.
But the Vstoxx has come down sharply since and today fell to 19.8, which would be the first close below 20 since October 6.>> Read More