Archives of “central banks” Tag

Next week Watch Out For US jobs, G20, ECB

After a volatile few weeks in global financial markets, focus returns to the US labour market and central bankers in Europe.

This week brings the latest report on the US jobs market, which may sway policymakers at the Federal Reserve as they consider lifting rates. Investors will also scrutinise comments from the European Central Bank as some strategists call for additional easing.

Here’s a preview of what to expect in the coming days.

US jobs

Economists project that employers added 220,000 jobs in the US in August, roughly in line with the 215,000 jobs created the previous month. The report, to be published on Friday, is also expected to show the unemployment report dipped to 5.2 per cent from 5.3 per cent.

Recent market volatility has cast a cloud over the timing of the Federal Reserve’s first rate rise since the financial crisis. Ahead of his keynote speech in Jackson Hole, Wyoming, this weekend, Stan Fischer, vice chair of the Federal Reserve told CNBC:

We have a little over two weeks before we make a decision. We have time to wait and see the incoming data. If a decision is close it will be influenced by data that’s come in recently.

European Central Bank

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ECB’s July meeting minutes: key extracts

The minutes of the July meeting of the European Central Bank’s top rate setters has just been released. fastFT has sifted through them for some key extracts.

The full minutes of the July 15-16 meeting of the ECB’s Governing Council are here.

On the outlook for growth

The balance of risks to the economic outlook for the euro area was seen to remain on the downside.

The outlook for net exports, while benefiting from lower energy prices and improved price competitiveness, remained subject to downside risks related to a possible reversal of recent energy price and exchange rate developments, as well as lower than expected global trade growth. In particular, financial developments in China could have a larger than expected adverse impact, given this country’s prominent role in global trade.

On the need for structural economic reforms

It was recalled that a sustained improvement in the outlook for economic growth, beyond a cyclical recovery, was not in the hands of monetary policy but required determined contributions from other policy areas, including fiscal policy and structural reforms.

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ECB: Inflation turning point ‘might’ be in reach

The European Central Bank is becoming increasingly confident that its aggressive monetary easing has warded off the threat of falling prices, saying that a “turning point” on the low inflation that has troubled the eurozone’s economy for years had finally been reached.

However, in minutes of its governing council meeting published on Thursday, the ECB’s top markets official also warned that the region’s central bankers were struggling to buy some of the assets earmarked for purchase under the eurozone’s landmark €1.1trn quantitative easing passage

In a cautiously optimistic set of accounts for the meeting which took place in mid July, the ECB said:

Overall, there appeared to be a growing number of indications that a turning point [on inflation] might well have been reached, even if it was premature to draw a firm conclusion, and additional observations would be needed.

Peter Praet, the central bank’s chief economist, pointed to data from the purchasing managers’ indices, a closely-watched poll seen as a bellwether for economic developments, which showed input prices and expectations about selling prices were up. Mr Praet also flagged a slight rise in inflation expectations.

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Indian Financial Code: Draft dilutes RBI Guv’s power; can’t veto on policy rate

In a major revamp of the financial sector architecture, the finance ministry on Thursday issued a fresh draft of the Indian Financial Code (IFC) that proposed a monetary policy committee headed by the “chairperson” of the Reserve Bank of India to decide on key interest rates by a majority vote. “Inflation target for each financial year will be determined in terms of the consumer price index by the Central government in consultation with the Reserve Bank every three years,” said the revised draft of the IFC. 

Apart from the RBI chairperson, the monetary policy committee (MPC) would consist of five members — one executive member of the Reserve Bank Board nominated by the Reserve Bank Board; one employee of the Reserve Bank nominated by the Reserve Bank chairperson; and four persons appointed by the Central government. The original draft, too, had proposed the MPC, but the RBI chairperson had power to “supersede the decision” of the committee in “exceptional and unusual circumstances” though decisions normally would be taken by the majority vote. In the revised draft, the chairperson does not enjoy any such power but will have the casting vote in case of tie. The RBI and the finance ministry have signed a monetary policy framework agreement earlier this year that would include targeting retail inflation for policy rates and an MPC is expected to be set up — possibly during the course of this year.

At present, the RBI Governor consults a Technical Advisory Committee on policy rates but he can choose to take an independent decision. The revised code has also proposed that the Centre can nominate one representative to attend all the meetings of the MPC and take part in deliberations but will not have a casting vote. Further, the MPC must meet once every two months. The central bank would also be expected to publish a report every two months on the sources of inflation and the forecast for inflation. Further, in case, the inflation target is not met, the RBI would be expected to submit a report to the Central government on the reasons. The revised IFC has been put out by the finance ministry for public comments until August 8.

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ALERT :ECB said to consider ‘humanitarian’ aid to Greece

Eurozone officials have informally discussed a liquidity for loan guarantee arrangement, according to Bloomberg.

  • Finance ministries have exchanged views on the need for keeping or increasing liquidity to respond to humanitarian situation
  • Arrangement would help Greek banks keep operating
  • Prospect of using ESM for guarantee has been discussed
  • No specific proposal under formal discussion

The ECB’s ELA lending program is frozen at 88.6B euros but on Monday the ECB raised the haircut for Greek debt, effectively tightening the program. That eventually set off yesterday’s rout in the euro and European stocks.

ALERT- Debt funding costs in Asia creep to 1997 levels

Central banks around the region look to be in an easing cycle for the foreseeable future. Thank God, says HSBC.

Base rate cuts have been a pretty common feature across the region (excluding Japan) with central banks in China, India, South Korea and Thailand all doing so at least once this year to stimulate economic growth. Yet debt service costs have increased, notes economist Frederic Neumann, as credit has climbed to record highs.

In the short-term this isn’t too problematic, but as Mr Neumann argues, low funding costs are only a temporary solution. Interest rates won’t remain low forever.

Here’s the scary part: having crunched the numbers, he says that the ratio of debt servicing costs to GDP is nearing a level comparable of that to just before the Asian Financial Crisis of 1997. The chart below illustrates how this will rise under three scenarios: interest rate increases of 1, 2 or 3 per cent – and where the line heads under each is worrying. As Mr Neumann concludes:

Assuming the latter, the average debt service ratio in emerging Asia would rise by a full percentage point of GDP to 5.8%. That’s roughly equivalent where it was at the height of the Asian Financial Crisis. Let’s hope inflation stays subdued for a while longer, obviating the need for central banks to slam the brakes. Please.

The Nightmare Is Just Beginning For Greeks : Here Come The Depositor Haircuts

With capital controls already imposed on Greece, some have wondered if this is as bad as it gets. Unfortunately, as the Cyprus “template” has already shown us, for Greece thenightmare on Eurozone street is just beginning.

As a reminder, over the past few months there have been recurring rumors that as part of its strong-arming tactics the ECB may eventually move to raise the haircuts the Bank of Greece is required to apply to assets pledged by Greek banks as collateral for ELA. The idea is to ensure the haircuts are representative of both the deteriorating condition of Greece’s banking sector and the decreased likelihood that Athens will reach a deal with its creditors.

Flashback to April when, on the heels of a decree by the Greek government that mandated the sweep of “excess” cash balances from local governments to the Bank of Greece’s coffers, Bloomberg reported that the ECB was considering three options for haircuts on ELA collateral posted by Greek banks. “Haircuts could be returned to the level of late last year, before the ECB eased its Greek collateral requirements; set at 75 percent; or set at 90 percent,” Bloomberg wrote, adding that “the latter two options could be applied if Greece is in an ‘orderly default’ under a formal ECB program or a ‘disorderly default.’” 

While it’s too early to say just how “orderly” Greece’s default will ultimately be, default they just did if only to the IMF (for now), in the process ending their eligibility under the bailout program and ending any obligation by the European Central Bank to maintain its ELA or its current haircut on Greek collateral, meaning the ECB will once again reconsider their treatment of assets pledged for ELA and as FT reported earlier todayMario Draghi may look to tighten the screws as early as tomorrow:

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What Would Happen In Case Of Grexit? 4 Points

In order to “help” Greece, since 2010, we’ve seen fiscal transfers and foreign intervention into its domestic economic policies. Greece’s debt to GDP ratio is now around 180% to GDP, while a lot of the bailout cash has merely served to bail out banks, as Open Europe alreadywarned in 2012.

A number of policy makers now wants to try something new: a Greek exit from the Eurozone. One of them is Christian von Stetten, a Member of Germany’s Parliament and of Angela Merkel’s CDU. He states what a majority of Germans believe should happen: “The experiment with the Greeks in the eurozone, who are unwilling to implement reforms, has failed and must be ended”. He adds that he’s in favour of providing “many billions” in support so Greece can make the transition onto its own currency.

Hereunder I explore what would happen if Greece were to leave the Eurozone, through a legal fudge.

1.    Default

If Greece wouldn’t have already defaulted before it would introduce a new currency, Grexit would  make it virtually certain that the country would default. It’s not wise to take out a considerable loan in a foreign currency, but that’s what Greece has done since 2001, when it entered the Eurozone. If Greece would introduce a new currency, which then likely would lose value against the euro, it would still need to pay back its debt in euro, which woud appreciate in value as compared to the new Drachma, making this task even harder.

If Greece would only pay back what it owes in a new, devalued currency, this would be considered a default.  As a result, the Greek government would face higher borrowing rates in the future. In theory, the fact that it wouldn’t be burdened by an excessive 180% debt to GDP may serve as a factor countering this, giving that the financial situation of the government would look more rosy. But this ignores the second aspect of Grexit, which I’ll discuss next.

2.    The Greek banking system would be cut off from the ECB’s cheap money canal, with real austerity to follow

A default would only relieve Greece from its excessive external public debt burden, not from the exposure it has to its banking system. Almost half the “capital” in the four largest Greek banks really consists of “deferred tax assets” or discounts on future tax bills. When banks make no profit, they won’t enjoy such discounts.

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ALERT -Bank of Greece neglects to ask for more funds

Tickety boo, then? The Bank of Greece did not request any increase in the amount of emergency loans it can offer its troubled lenders, according to two people familiar with the matter.

It is the third day in a row that the Greek central bank has not asked for the limit to be raised — a signal that the jog on deposits has slowed.

The emergency loans, which the Greek central bank provides but which the European Central Bank’s governing council must approve, have kept the country’s lenders afloat since February as tensions between Athens and its creditors have risen

The governing council has held daily conference calls on emergency liquidity assistance, or ELA, this week following a spate of withdrawals earlier in the week and last week. The council granted a total of just under EUR3bn in liquidity on Monday and Tuesday.

The Bank of Greece can provide just short of EUR89bn-worth of emergency loans to protect its lenders against withdrawals by savers.

“The Collateral Has Run Out” – JPM Warns ECB Will Use Greek “Nuclear Option” If No Monday Deal

In Athens on Friday, the ATM lines began to form in earnest.

(via Corriere)

Although estimates vary, Kathimerini, citing Greek banking officials, puts Friday’s deposit outflow at €1.7 billion. If true, that would mark a serious step up from the estimated €1.2 billion that left the banking system on Thursday and serves to underscore just how critical the ECB’s emergency decision to lift the ELA cap by €1.8 billion truly was. “Banks expressed relief following Frankfurt’s reaction, acknowledging that Friday could have ended very differently without a new cash injection,” the Greek daily said, adding that the ECB’s expectation of “a positive outcome in Monday’s meeting”, suggests ELA could be frozen if the stalemate remains after leaders convene the ad hoc summit. Bloomberg has more on the summit:

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