The European Central Bank again issued a terse message to the Greek government on Wednesday by not extending the limit on the cash made available to Greek lenders through the emergency liquidity assistance (ELA) of the Bank of Greece beyond the level of 80.2 billion euros.
The decision generated concern in Athens as it had been widely expected that Frankfurt would extend the limit by a few hundred million euros as it had done in previous weeks. Government sources were quick to reassure that there had been no Greek demand for an extension to the limit as the existing amount suffices to serve the needs of the local credit system.
However, the ECB decision is seen as a call to Athens to wrap up its negotiations with the country’s creditors, without Wednesday’s decision triggering any immediate developments.The ECB tests the safety reserves that local banks have maintained, estimated at around 3 billion euros, which could evaporate very quickly if there are no positive developments in the talks over the coming days. >> Read More
Less than 48 hours after the official launch of the ECB’s celebrated PSPP Q€ initiative (or what we might call ‘Draghi’s descent into delirium’), we examined the program’s structure and noted that full implementation might prove challenging. Citi had already posited a scenario whereby the central bank may be forced to raise the issue cap on non-CAC bonds in the event sourcing enough purchasable assets in core countries proved difficult. Here’s what we said at the time:
Only two days into PSPP and there’s already talk of a taper tantrum triggered by the core’s inability to source enough bonds to meet quotas (everyone saw this coming of course, including us).
As time went on and the Bund curve converged on -0.20%, it was becoming readily apparent that the depo rate floor effectively made the program self-defeating because if the goal is to drive down rates but there’s a floor under which you will not buy, then the more successful you are, the fewer options you have in terms of meeting the program’s monthly purchase totals.
Of course Bunds sold-off dramatically starting on April 21, with yields on German 10s jumping from under 10bps to over 70bps prompting every sell-sider and pundit to speculate on the cause of the ‘great Bund rout’. We’ve covered various explanations at length (here, here, and here for instance), so we’ll leave that aside for now other than to say that one possible contributing factor that we discussed late last month was the fact that EGB supply is set to be positive in May before reversing course into the summer “drought” when supply will turn negative, deeply so in July.
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Since the global financial crisis, mankind has learnt to live with a third certainty along with death and taxes — monetary loosening.
Central banks have slashed interest rates to record lows and embarked upon unprecedented programmes of asset purchases in an attempt to raise inflation and restart economic growth.
The common path on which monetary policy makers have strolled, however, is expected to diverge this year. The timing of the partition and the way in which its side effects are managed hold big implications for financial stability and the global recovery.
After years of respectable growth and sizeable falls in unemployment, the US Federal Reserve and the Bank of England have ceased to expand their quantitative easing programmes and are eyeing a first rise in interest rates in nearly 10 years.
The European Central Bank, conversely, is in full loosening mode, having launched a €1.1tn scheme of asset purchases. In Asia, the Bank of Japan is busy with its own bond-buying programme, while the People’s Bank of China has just cut interest rates three times in six months.
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Mario Draghi has called for central banks to keep a close eye on the side effects of their aggressive monetary easing, including the impact of mass bond buying by the world’s monetary authorities on financial instability.
Speaking in Washington, DC on Thursday, the European Central Bank president said the fact that policies such as his central bank’s landmark €1.1trn quantitative easing package seemed effective should not “blind” policy makers to the consequences of their actions on risk taking in financial markets and in exacerbating wealth inequality
While Mr Draghi defended the decision to launch QE and the other aggressive easing measures that the ECB has undertaken over the past year, he also said policy makers had “to be mindful that too prolonged a period of very low real rates can have undesirable consequences in the context of ageing societies.”
In such societies, monetary easing may have the opposite effect from what central banks intended.
The ECB president said: >> Read More
Factories in the eurozone have had a disappointing start to the second quarter despite hopes that the European Central Bank’s €60bn a month quantitative easing programme would have provided an additional shot in the arm to economies in the common currency area.
A final reading of the April manufacturing purchasing managers’ index came in at 52 from an initial “flash” reading of 51.9 but down from 52.2 in March. Any reading below 50 represents a contraction in activity.
The index was dragged down by continued contractions in France and Greece’s manufacturing sectors.
The French purchasing managers’ index for April dipped to 48 from an earlier “flash” reading of 48.4 and down from 48.8 in March.
Greece’s manufacturing PMI fell to 46.5 in April from 48.9 in March – a 22-month low.
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It’s nice to know we’re being read, and Thursday’s editorial on “The Slow-Growth Fed” sure got a rise out of Ben Bernanke. The former Federal Reserve Chairman turned blogger turned Pimco adviser wrote to defend the central bank and by implication his policies as innocent of responsibility for subpar economic growth.
This is fun, so let’s parse the Revered One’s arguments. First, Mr. Bernanke accuses us of “forecasting a breakout in inflation” at least since 2006. The central banker is getting into the polemical swing, but he’s wild with that one. We’re not always right. But we’ve been careful not to join some of our friends in predicting inflation from the Fed’s post-crisis policies. We’ve written that we are in uncharted monetary territory with risks and outcomes we lack the foresight to predict.
Our view has been that the Fed’s first round of quantitative easing was necessary to stem the financial panic—and that it worked. We were skeptical of the later bouts of QE, and in our view these have been notably less successful in helping the economy return to robust health. Asset prices are up and the wealthy are better off, but the working stiff is still waiting for the economic payoff.
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Greece is hoping that it will find enough common ground with its lenders to trigger an emergency Eurogroup before May 6, when the European Central Bank’s government board is due to meet next to decide on the provision of liquidity to Greek banks.
Wednesday is seen as a key day by the Greek government not just because it wants to alleviate its cash shortage problems as soon as possible but also because ECB officials could opt to increase the haircut that the central bank applies to the collateral offered by Greek lenders in exchange for liquidity.
Kathimerini understands that the ECB is working on three scenarios: Haircuts of 44 percent, 65 percent and 80 percent. The current discount applied to Greek banks’ collateral is 23 percent. Should the ECB choose the more drastic scenarios, local lenders would find it increasingly difficult to come up with the amount of collateral needed in order to maintain the flow of liquidity from Frankfurt.
The next key date after that is May 12, when Greece has to pay more than 700 million euros to the International Monetary Fund. This payment is due a day after the Eurogroup has its next scheduled meeting. The May 11 gathering of eurozone finance ministers is the latest point at which Greece hopes that its state liquidity problems will be resolved, at least temporarily. >> Read More
The Bank of Japan has maintained the pace of its aggressive monetary policy programme.
In its statement on monetary policy, the central bank maintained its guidance to increase the monetary base at an annual pace of Y80tn a year.
However, it’s statement (which you can read here) is short – a single page, rather than the normal two – and is devoid of any commentary on inflation targets and growth forecasts, which is what the market was really hanging out for.
For that, investors will have to wait till later in the afternoon, when governor Haruhiko Kuroda is also due to give a press conference. Expectations are high that the bank will cut those forecasts.
According to data posted by the European Central Bank (ECB), commercial lending in the Eurozone expanded this past March after some 36 months of steady contraction, suggesting a bold pickup in economic growth. The immediate and most evident consequence of the increased borrowing by both European businesses and households is the feverish demand for bonds issued by select Eurozone member-state governments.
The total volume of lending by European banks rose by an annualized 0.1% in March, the ECB announced Wednesday, marking the first rise in 26 months. Since March 2012 the Eurozone private-sector loans had been declining, losing as much as 2.5% a month during the trough of November 2013 — January 2014.
The month-on-month increase in March against this February’s reading equaled 0.2%.
The pickup in commercial credit is largely attributed to the set of unconventional monetary policies, introduced by the ECB early this March. However, the numbers show that the Eurozone’s lending has been moving toward a positive reading since at least May 2014, and is more likely linked to the German economy accelerating on a solid foreign trade surplus.
Meanwhile, the whole business process is becoming healthier in the Eurozone, as evidenced by recent quarterly profits reports. With the business cycle returning to normal, the movement of money and credit is picking up, not least due to the low borrowing costs.
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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.