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Fri, 26th May 2017

Anirudh Sethi Report

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Archives of “jean claude trichet” Tag

Both ECB And BOJ Are Just Months Away From Running Out Of Bonds To Buy

With the Fed contemplating whether to hike again next month and start “normalizing ” its balance sheet before the end of 2017, the two other major central banks are facing far bigger problems.

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Two months after the BOJ quietly started tapering its QE program, when it also hinted it may purchase 18% less bonds than planned…

… Governor Haruhiko Kuroda admitted last week that the Bank of Japan’s bond holdings are currently growing at an annualized pace of only ¥60 trillion ($527 billion), 25% below the bottom-end of its policy range, and confirming that without making any formal announcement, the BOJ has quietly followed the ECB in aggressively tapering its bond buying program.

ECB has brought eurozone to the brink of confrontation

At least, that is what we all fervently hope. A larger programme than expected of quantitative easing gets under way shortly.

 It will amount to around €1.14 trillion or €60bn a month between March 2015 and September 2016. The Germans have by and large reacted negatively to this long-delayed announcement.

The newspaper Frankfurter Allgemeine, Germany’s equivalent of the Financial Times, went as far as to accuse the ECB of “burying the principles of currency union”, warning that the QE boost was equivalent to the total annual turnover of Germany’s well-entrenched, family-run companies.

Sabine Lautenschlager, the German representative on the ECB board, expressed concern that the decision would encourage member states to run up more debts. However, it was also reported that the head of the Berlin based DIW Institute, economist Marcel Fratzscher, approved the programme of bond purchases on the basis that it would make the euro more stable, protect Germany’s foreign investments, and give a boost to exports.

Mario Draghi’s Favorite Joke

In his latest “What Next in The Global Economy” note, Morgan Stanley economist Joachim Fels passes along the following little story about Mario Draghi:

 Who said central bankers have no sense of humour? During a recent dinner at Frankfurt’s Senckenberg Museum (the home of Germany’s most extensive collection of dinosaurs) Mario Draghi told the crowd his favourite joke:

A man needs a heart transplant. Says the doctor: “I can give you the heart of a five-year old boy.” “Too young.” “How about that of a forty-year old investment banker?” “They don’t have a heart.” “A seventy-five year old central banker?” “I’ll take it.” “But why?” “It’s never been used!”

I like the joke, and not only because I consider myself an economist working for an investment bank rather than an investment banker. Mario Draghi’s joke conveys a simple but important message: central banking is about making rational, cool-headed and unemotional decisions in often difficult circumstances. In the 15 years of its existence as the keeper of the euro, the ECB led by Mario Draghi and his predecessors Jean-Claude Trichet and Wim Duisenberg has had to make a lot of difficult decisions in difficult circumstances. A few of these decisions were questionable (though typically only with the benefit of hindsight), such as the rate cut in April 1999 or the rate hikes in July 2008 and in April and July 2011. Most of the other ECB decisions were just right or even hugely successful – just think of Mario Draghi’s announcement in July 2012 to “do whatever it takes” to safeguard the euro. Read More 

Michael Noonan: ‘ECB threat letter will be released’

Finance Minister Michael Noonan has said a secret “threatening” letter from the European Central Bank to his predecessor Brian Lenihan, which forced Ireland into the troika bailout in 2010, should now be released.

 The letter has to date remained top secret and both theDepartment of Finance and the ECB have repeatedly refused to make it public.

Now Mr Noonan has said he favours it being made available, putting him on a potential collision course with the ECB, which is adamant that it remain “strictly confidential”.

The controversial letter from the then ECB president Jean Claude Trichet to Mr Lenihan dated November 19, 2010, is said to have threatened the withdrawal of emergency liquidity assistance (ELA) to Ireland if the then government refused to accept the bailout, that included a ban on burning bondholders.

In the past two weeks, there has been growing pressure from within the Government, the opposition and leading economists to have his department release the contents of the letter.

  Read More 

Trichet Warns of “Behavioral Contagion” and Nontraditional Steps That He Personally Started

The hypocrisy of former ECB president Jean-Claude Trichet is in the spotlight today. Who put the spotlight on Trichet? Ironically, he did himself.

Please consider Trichet warns of “behavioral contagion”

Jean-Claude Trichet, the former president of the European Central Bank, said Saturday that he is worried that controversial quantitative easing and other nontraditional steps that global central banks have taken since the financial crisis could be here to stay.

The Fed has purchased $2.3 trillion of securities since it cut interest rates to zero in December 2008 in a bid to bring down long-term interest rates and boost economic growth.

These actions have led to criticism, especially during the early days of the Republican contest for the 2012 presidential nomination, that Fed Chairman Ben Bernanke was undermining the dollar and creating conditions for a sharp rise in inflation.  Read More 

Greek Bond Talks Edge Toward 68% Haircut Deal; Will the Deal Be Accepted?

Former ECB president Jean Claude Trichet said there would be no haircuts. There were. The first Greek haircut was 21% and it was insufficient. The second Greek haircut deal was 50% and that too was insufficient. On each failed attempt, the ECB and EMU poured more money into Greece. 

There is now about €200bn of Greek debt held by banks, hedge funds and other investors up from about €50bn a couple years ago.

A third renegotiation is now underway, rumored to be a 68% haircut. Clearly there would have been far fewer ramification on banks if Greece would have defaulted long ago.

Such is the stubborn arrogance of ECB, and EMU officials.

Unless another haircut is approved Greece, and still more money is poured into Greece, it will default on March 20 when a €14.5 billion bond repayment is due.

The Financial Times reports Greek bond talks edge closer to deal

Talks broke down last week with holders of close to €200bn of Greek debt after some eurozone officials called for a sharply lower coupon, or interest payment, on new bonds.

The latest proposal called for a step-up coupon starting at about 3 per cent and rising to 4.5 per cent as the bond approached maturity, one banker said. Another said the average interest paid during the life of the bond would be 4.25 per cent, a rate “that the banks would be happy with”.

The deal would amount to a 68 per cent loss for bondholders in net present value terms, according to people familiar with the talks.

Banks will be happy with a 68% loss? I rather doubt it. 

Will the Deal Be Accepted?

Peter Tchir at TF Market Advisors had some interesting comments on the likelihood of the “success” of the PSI (private sector initiative) in his post Greek PSI – Headlines And Reality

The Greek PSI is once again (still) hitting the headlines. Here is what I think the most likely scenario is (80% likelihood). Read More 

Greece to vote on bailout as deal for Ireland is ruled out

GREECE is to call a referendum on its EU/IMF bailout, in a move that could potentially unravel the deal hammered out by European leaders in Brussels last week.

Last night Prime Minister George Papandreou said the referendum would be a straight ‘yes’ or ‘no’ to adopting the €130bn package.

Such a vote would be unlikely to pass, and could send the eurozone crisis back into the tailspin seen before last week’s agreement.

“We trust citizens, we believe in their judgment, we believe in their decision,” Mr Papandreou told ruling socialist party lawmakers.

The news comes as the outgoing president of the European Central Bank warned the partial writedown of Greek sovereign debt should not be repeated for any other eurozone country. Read More 

Nicolas Sarkozy reunited with wife and daughter

The little girl was born late on Wednesday, and the 56-year-old president stopped in for a brief visit shortly afterwards after rushing back from talks in Germany on the eurozone crisis.

The Elysee Palace has made no formal statement about what it considers a private matter, so it is not clear when the first family might return home together. Sarkozy continues to have a full political schedule.

The birth marks the first time a president has had a child in modern French history and the couple’s first child together. A source close to Mrs Bruni-Sarkozy confirmed the birth went well, but did not yet know the name of the child.

Mrs Bruni-Sarkozy has a 10-year-old son from a previous relationship and thrice-married Sarkozy has three sons aged between 14 and 26. Read More 

French Government Bond Yields Widen to Record vs. Germany; Portugal Faces National Emergency; Trichet Says “ECB Will Not Be Lender of Last Resort”

Credit stress has now hit France sovereign debt. The spread between 10-year French bonds and German government bonds is at a Euro-era record 97 basis point differential.

French Bond Yields Jump Most Since 2008 

Bloomberg reports French Bond Yields Jump Most Since 2008 on Bank Concern

Ten-year French yields climbed 38 basis points this week, the most since the euro was introduced in 1999. The extra yield investors demand to hold 10-year French bonds instead of German bunds also expanded to the most since the euro started. Spain’s 10-year bonds fell for a fifth day after Standard & Poor’s cut the nation’s credit rating. Yields climbed across the euro area after European Central Bank President Jean-Claude Trichet said the ECB will not act as a “lender of last resort.”

The eight largest U.S. money-market funds reduced their lending to French banks by 44 percent last month, according to filings compiled by Bloomberg and published in today’s Bloomberg Risk newsletter. Read More 

Key Global Events In The Coming Week

The upcoming week will provide more detail on both key subjects. Firstly, we will get the latest round of PMIs, though regional US surveys and preliminary readings in Europe suggest that macro data will continue to stabilise at relatively low levels, as mentioned earlier. The second important issue is the upcoming ECB meeting.

It is rare to see an ECB meeting create that much advance focus as the upcoming one. But of course, this is not a surprise given the tricky junction at which the ECB finds itself. First, Eurozone inflation numbers have risen substantially to 3.0% yoy in the last reading published last week. Second, the funding situation for many banks with peripheral exposure remains very tense. Third, the Troika is back in Greece amid intensifying talk about a larger haircut being needed than agreed on July 21. And fourth, the upcoming meeting will be the last one for Jean Claude Trichet, who will pass on the Presidency to Mario Draghi. The focus at the upcoming meeting will be on the rate decision and on any additional measures that may aim at alleviating bank funding stress in the periphery.

Monday 3rd

  • ISM Manufacturing (consensus: 50.5 after 50.6 in Aug)
  • European Manufacturing PMIs are expected to stabilise relative to the preliminary reading.

Tuesday 4th

  • RBA (consensus: no change)
  • Trichet Speech in EU Parliament (Economics Committee)
  • Bernanke testifies before Joint Economic Committee

Wednesday 5th

  • Service PMI (consensus expects further moderate declines from August levels)
  • UK GDP (consensus: sequential slowdown in all components except for investment)

Thursday 6th

  • Last ECB meeting under Trichet
  • BOE (consensus: no change, we expect QE2)
  • US Claims (consensus: 410k after 391k)

Friday 7th

  • US Payrolls (consensus: +56k after 0k in Aug)