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The New World Ordoliberalism Part 4: Meet the New Plan. Same as the Old Plan. Deregulated.

There have been quite a few developments in the eurozone recently with major possible policy changes announced in recent weeks. But perhaps the most significant development is that the world has finally discovered what it takes to open Bundesbank chief Jens Weidmann’s mind up to the possibility of allowing the European Central Bank (ECB) to do what other central banks around the world normally do during an emergency. Things like buying bonds to shore up markets and stimulate the economy (“quantitative easing”). Quantitative easing is normal central bank stuff that has been effectively shoved off the table of ECB policy options by the Bundesbank’s unorthodox economic theories this entire time. At least up until now.

Something changed in the eurozone that ended up changing the Bundesbank’s mind too: The inevitable happened. That deep dark deflationary abyss that’s been threatening to gobble up the eurozone ‘periphery’ nations like Greece and Spain is starting to threaten the eurozone ‘core’:

The Telegraph
Monks recant: Bundesbank opens the door to QE blitz

By Ambrose Evans-Pritchard Economics Last updated: March 25th, 2014

The last bastion is tumbling. Even the venerable Bundesbank is edging crablike towards quantitative easing.

It seems that tumbling inflation in Germany itself has at last shaken the monetary priesthood out of its ideological certainties.

Or put another way, the Pfennig has dropped that euroland is just one Chinese shock away from a deflation trap, an outcome that would play havoc with the debt dynamics of southern Europe, render the euro unworkable, and ultimately inflict massive damage on Germany.

Bundesbank chief Jens Weidmann was not exactly panting for QE in comments to Market News published this morning, it has to be said, but the tone marks a clear shift in policy.

“The unconventional measures under consideration are largely uncharted territory. This means that we need a discussion about their effectiveness and also about their costs and sideeffects”, he said.

Notice that Jens Weidmann was not “exactly panting for QE”. The Bundesbank is signalling that it’s considering quantitative easing (QE). It’s like promising to try to try.


“This does not mean that a QE programme is generally out of the question. But we have to ensure that the prohibition of monetary financing is respected”.

At least we can put to rest the bogus argument that EU Treaty law (Article 123) prohibits QE by the European Central Bank. This claim was always a smokescreen.

Bond purchases are what used to be known as open market operations, a tool of central banks dating back into the mist of monetary history. Purchasing bonds across the board (not just the bonds of insolvent states) is a plain vanilla liquidity management tool.

When Ambrose Evans-Pritchard says “At least we can put to rest the bogus argument that EU Treaty law (Article 123) prohibits QE by the European Central Bank. This claim was always a smokescreen“, keep in mind that this apparently EU Treaty law that prohibits the ECB from engaging in QE is due to the argument that the EU treaty prevents the ECB from ever helping to finance a member nation’s government. So if the ECB bought Spanish bonds directly from the government in very large amounts over an extended period (which could be necessary for a real stimulus program for a large country like Spain), that could be seen as helping Spain finance itself and the Bundesbank has consistently argue that this would violate the EU treaty. That’s a central argument that’s consistently been used to explaining why “QE” can never be used even when deflation threatens the the region. Although now that the ‘core’ nations are threatened with outright deflation that opposition is changing. Maybe.


Mr Weidmann says he prefers negative interest rates as the first resort. This is an admission that the ECB is alarmed by the strength of the euro as it hovers near the pain barrier of $1.40, since negative rates are a sure-fire way to drive down the currency.

If you wanted to counter the consequences of a strong appreciation of the euro for the inflation outlook, negative rates would, however, appear to be a more appropriate measure than others“, he said. Quite so.

Make a mental note of this last statement by Weidmann:
If you wanted to counter the consequences of a strong appreciation of the euro for the inflation outlook, negative rates would, however, appear to be a more appropriate measure than others.

He’s not referring to the normal ECB “refi” rate going negative. That rate is being held at 0.25%. Weidmann was referring to the ‘overnight’ rate, or how much the ECB pays banks to park cash at the bank overnight. When central banks want more lending they tend to lower the ‘overnight’ rate to encourage banks to park less at the central bank and vice versa when credit conditions needs to be tightened. Negative interest rates, however, are very different in that the banks are now paying the ECB to park assets there. This is something the ECB would only do when it really wants banks to take their assets back from the ECB and use them to instead lend to the economy.

It’s also something the ECB might do if it wants to do “something” without actually doing quantitative easing (QE). So before we see any QE from the ECB, we should probably expect a period of negative overnight rates and “let’s wait and see”. That’s what Weidmann was suggesting.


The IMF’s Christine Lagarde says the deflation risk in Europe may be as high as 20pc, which is remarkable given how much damage it would do. Indeed, as one IMF paper explains, the trouble is already enormous even at ultra-low levels of inflation.

We all know what could push Europe over the edge. China invested $5 trillion in fixed capital last year – as much as the US and Europe combined – creating a further overhang of excess capacity in the world economy. This is sending a deflationary impulse into Europe, the more so since China has devalued the yuan by 2pc this year.

It is an interesting question whether the Bundesbank can easily back QE after the German constitutional court ruled last month in imperious language that the ECB’s bond rescue plan for Italy and Spain (OMT) is probably “Ultra Vires”.

It stated that the OMT “exceeds the ECB’s monetary policy mandate, infringes the powers of the Member States, and violates the prohibition of monetary financing of the budget”.

The ruling does not prohibit ECB bond purchases as such – and is not final in any case – but it raises the political bar for quantitative easing to a near impossible level.

The irony is that the Bundesbank’s Mr Weidmann is himself responsible for the ferocity of the Court’s ruling. It was he who testified so trenchantly – though politely, as always – against the ECB’s policies at the Court hearings.

Will he now be hoisted by his own petard?

Yes, the Bundesbank is open to “QE” options now that it’s on the edge of the abyss, although before it goes down that road, negative ‘overnight’ rates should be tried first. At least that’s the course for the ECB the head of the Bundesbank was suggesting.

Still, this is pretty big news, although, as the article points out at the end, Germany’s constitutional court hinted that it thinks the use OMTs (“Outright Monetary Transactions”, i.e. bond buying for quantitative easing) is probably unconstitutional. So even if the Bundesbank really is open to the idea of QE, the German constitutional court isn’t (and the Bundesbank clearly isn’t thrilled about the idea either). So it’s good news that QE is being considered by the Bundesbank, but given all the caveats we’re hearing it’s about as bad as good news gets. When your policies involve playing ‘Chicken’ with the abyss, the ol’ “baby, we won’t be so crazy”-“two steps(back from the brink)”-“maybe” policy shuffle is a common tune to hear a central banker suddenly start whistling. It’s timeless because it keeps changing and yet always sticks to the same theme.

High Times for the eurozone. Depressingly High Exchange Rate Times
So the deflationary abyss is still threatening to consume the eurozone, but on top of that, the euro’s exchange rate has also been surging and is remaining at a consistenty unhelpfully high rate that threatens the very export-led recover that the eurozone ‘periphery’ nations need to drag themselves out of the abyss. When QE is taken off the table, exports are about the only real option left. And you can’t count on exports to stimulate the economy when the currency keeps rising:

Draghi says a stronger euro would trigger looser ECB policy

By Jan Strupczewski and Krista Hughes

WASHINGTON Sat Apr 12, 2014 4:54pm EDT

(Reuters) – The European Central Bank will ease monetary policy further if the euro keeps strengthening, President Mario Draghi said on Saturday as world finance chiefs ramped up pressure on Europe to ward off deflation.

In the clearest signal yet the ECB was prepared to launch a stimulative asset-purchase program, Draghi said the euro’s exchange rate had become increasingly important to policy and would act as a trigger.

“The strengthening of the exchange rate would require further monetary policy accommodation. If you want policy to remain as accommodative as now, a further strengthening of the exchange rate would require further stimulus,” he told a news conference.

Over the past 12 months, the euro has strengthened by nearly 5.5 percent against the dollar and by nearly 10 percent against the yen. In recent weeks, it has reached levels against the dollar not seen since late 2011. It ended last week at just below $1.39.

Draghi said on Saturday that euro appreciation over the last year was an important factor in bringing inflation in the currency bloc down to its current low levels, accounting for as much as a half percentage point of the decline in the annual rate, which stood at only 0.5 percent year-on-year in March. The ECB aims to keep inflation close to but under 2 percent.

I have always said that the exchange rate is not a policy target, but it is important for price stability and growth,” Draghi said. “What has happened over the last few months is that it has become more and more important for price stability.

Here’s a translation for this gem from ECB chief Mario Draghi:
I have always said that the exchange rate is not a policy target, but it is important for price stability and growth” =
“I recognize that an appreciating exchange rate is both increasing the risk of deflation and harming the economies that have been ravaged by austerity and need to export their way of the economic doldrums”.

And “What has happened over the last few months is that it has become more and more important for price stability.” =
“But the ECB doesn’t actually care about nations being stuck in the doldrums. What it does care about is maintaining low inflation without outright deflation(except maybe in Spain). And because there’s now a risk of deflation in the eurozone core, the ECB now cares about the euro’s rising exchange rates”.

That’s basically what he was saying in the language of Central-Banker-ese. It’s saying things that supposed to sound kind of dovish, but aren’t actually very dovish when you translate them.

Also, notice how “Over the past 12 months, the euro has strength­ened by nearly 5.5 per­cent against the dol­lar and by nearly 10 per­cent against the yen. In recent weeks, it has reached lev­els against the dol­lar not seen since late 2011. It ended last week at just below $1.39“. That’s really not helpful for country trying to pull themselves up by their exports.


The euro’s recent strength has baffled many players in the global currency market given Europe’s low interest rates, tepid growth prospects and near-zero inflation. In fact, most currency analysts expected an improving outlook for the U.S. economy and the winding down of the U.S. Federal Reserve’s massive stimulus program to drive the dollar up against the euro this year.

Some of the investment flows supporting the euro are reflected in the strong performance of sovereign debt from several of southern Europe’s bailed-out nations, which until recently had featured substantially higher yields. On Thursday, for instance, an auction for 3 billion euros of five-year bonds sold by Greece drew more than 20 billion euros in orders.


Quantitative easing was something previously considered highly undesirable by some euro zone central bankers, and only to be considered if prices were falling outright.

But policymakers in recent weeks publicly broached cutting deposit rates below zero – effectively charging banks that hold excess cash at the ECB – or embarking on bond purchases as have the United States, Japan and Britain, if the threat of deflation became more acute.

Draghi said two things would drive any decision: “One is an unwanted tightening of monetary financial conditions, and the second is deterioration of our medium term outlook.”

“I don’t want to give you a level where we will act or not. I am giving you an orientation,” he said of euro strength.

Here’s another Central-Banker-ese translation:
Draghi said two things would drive any decision: “One is an unwanted tightening of monetary financial conditions, and the second is deterioration of our medium term outlook.“=
“If we’re going to use ‘Quantitative Easing’ (bond or asset buying to shore up a market or asset-class and manipulate interest rates), it will be because some asset is collapsing and it’s an emergency or if it looks like medium term deflation is likely. Things like high unemployment don’t really factor into our decision-making”.

So in the previous Draghi quote had him indicating that ‘something’ would be done if the deflation specter arose, and then in this quote he seems to be indicating ‘medium term’ deflation is what will get the ‘quantitative easing’ going. So is short term deflation ok? Will a rate cut do the trick? Negative ‘overnight’ rates? We’ll see.


In July 2008, the currency’s rise to an all-time high of $1.60 did not trigger an ECB response, even though euro zone finance ministers tried to talk down the currency. But inflation was near an all-time high at 4 percent, serving the ECB’s need to keep price growth in check.


In a rare move for the usually soft-spoken Japanese, Finance Minister Taro Aso – drawing on Japan’s own experience of a protracted period of deflation – directly warned the euro zone about the dangers of falling prices.

“Based on our experience, once a deflationary mindset takes hold, it is easy to fall into a vicious cycle, whereby people start to postpone consumption and investment, leading to further deflationary pressures,” he told the IMF panel.

There are striking parallels between 1990s Japan and the euro zone’s plight now: weak bank lending, fragile economic growth, a rising exchange rate, and the central bank’s insistence that deflation is not on the horizon.

Ouch. When Japan is lecturing your central bankers about repeating their deflationary mistakes your central bankers have clearly already made a large number of deflationary mistake. Yes, the self-made tightrope acts that the ECB has created for itself is something to behold. By emulating Bundesbank-style policies and basically taking “quantitative easing” off the table (until now, sort of), the ECB has created an unnecessary tension between a falling euro (which is helpful for the ailing eurozone economies) and the need to shore of the sovereign bond markets of those same ailing economies. Foreign bond investors may not be enthused about a depreciating euro in a stagnant economy because that might depreciate their euro-denominated sovereign bonds and yet a lower euro is exactly what is need to stimulate exports.

A Rising Euro is Good For Low Yields. Low Yields Aren’t Necessary A Good Thing.
If the ECB was a normal major central bank it could buy sovereign bonds up itself and fight against a falling euro translating into falling bond prices. That’s what quantitative easing allows, policy flexibility like buying sovereign bonds to stabilize that critical bond markets. And when you’re a huge bank like the ECB, you have major clout to do that extensively. Not doing so is a choice. It’s not mandated by the markets. But that quantitative easing option has always been effectively off the table ever since the financial crisis started. And then we get stories like this:

Bloomberg Businessweek
Low Bond Yields in Europe Could Signal Deflation
By Peter Coy, Craig Stirling, and Mark Deen April 10, 2014

News flash: Spain is now able to borrow almost as cheaply as the U.S. Yes, Spain, a nation with 26 percent unemployment, red ink in the national budget, and an economy that has shrunk in 17 of the last 23 quarters, has five-year government bond yields of just over 1.7 percent. Italy’s borrowing cost is only un po’ più elevato. Even Portugal has a government bond yield merely a percentage point higher than that of the U.S.

Now for the asterisk, because things are never simple in Europe. It’s unquestionably good that the peripheral nations of Europe have stepped back from the brink of default, emboldening investors to accept lower yields on their government bonds. The problem is that the very austerity measures that lessened the risk of default may have contributed to a new danger in Europe: deflation. To use a metaphor from Greece, whose government borrowing costs have also plunged, Europe managed to steer clear of the rocks of Scylla only to head for the whirlpool of Charybdis.

It’s not really the case that the austerity measures “lessened the risk of default” as described above. They exacerbated the situation by sending the economies into depressions. The particulars varied by nation, but when “default” was an issue, it generally involved bailing out some big domestic banks which were typically ailing due to the impact of austerity and the plummeting value of the sovereign bonds the banks held. This bank bailouts would in turn allow them to buy sovereign bonds and keep the sovereign bond market from completely collapsing. But it came at the cost of the ‘Troika’ coming in and imposing austerity to pay for the bank bailouts. And the cycle would begin anew.

The ECB also started buying sovereign bonds on the secondary markets in order to stabilize the situation in 2010, although these have been only large enough to keep crises contained.

Another important turning point that helped avoid default in was Draghi’s introduction of the possibility of unlimited bond buying back in September 2012. This was during one of the previous periods of crisis when it looked like Spain was going to implode. Because the bond markets actually want the ECB to act like a normal central bank – and not the weird Ordoliberal experiment that it actually is – the impact of that yet-unfulfilled promise to buy bonds directly was muted by the real world impact of the austerity measures. But it helped. Promises to help (without actual help) can sometimes still help. Especially when you’re a central bank.

The rising value of the euro has also clearly helped deflate concerns over defaults because investors that bought the “periphery” bonds have been making out like bandits this year. And it’s the rising euro that’s been a big part of that rally. And, of course, market expectations that Draghi will finally be forced to do quantitative easing – because all of the policies so far have push the eurozone to the brink of deflation – have also been fueling the strong bond rally all year. The bond rally is rooted in expectation that things are only going to get worse and the ECB will be forced to act.

And then there were the three-year “LTRO” loans the ECB made to eurozone banks in 2011 and 2012 that help pump over $1 trillion euros into the financial system while austerity policies remained in place. The banks swapped collateral, like asset-backed securities, with the ECB for fresh cash. As we’ll discuss later, in June of 2012, the rules for that collateral were dramatically relaxed to allow for toxic asset-backed securities (like mortgage backed securities or auto loans or possibly corporate debt) to get swapped for cash. So that was certainly helpful, although mostly to the banks.

The austerity measures did help in the technical sense that they dramatically reduced government spending. But that successful intervention in sovereign bond markets came at the cost of bludgeoning the economies and gutting their long term potential. That’s why we have record high unemployment in the ‘periphery’ with still very high debt levels and record low sovereign bond yields.

Overall, the ECB’s toolkit for emergency responses to a crisis is simply to wait for a crisis to erupt in a country’s sovereign bond markets, which will manifest as a big domestic bank imploding or something, and then bail out the bank, intervene in the markets just enough to avoid a larger crisis, and impose austerity to pay for it. That’s basically the ECB’s policy response: be reactionary, wait for a crisis, intervene in the bonds markets and banks, and then austerity. Proactive stimulus is always off the table.

This is the kind of policy you get when you pursue the Bundesbank’s gold-standard-lite ambitions in your economic union. A bunch of bankers get rich and the golden goose gets traumatized. Mindless austerity doesn’t help.


Past a certain point, falling interest rates go from being helpful to a little scary. An extremely low interest rate can signal that investors have no faith in a country’s ability to grow on its own and that they expect central banks to keep official rates super low for a long time to gin up economic activity. One thing that continues to depress European economies is fiscal policy: the combination of spending cuts and tax increases that helped governments prove they were serious about balancing budgets and winning back investors’ confidence.

The debate over whether Europe’s austerity was too harsh may never be settled, but it’s clear that the euro zone as a whole hasn’t been able to climb out of its rut. Its inflation rate slowed to 0.5 percent in March, the lowest level in more than four years. That’s well below the European Central Bank’s inflation goal of just below 2 percent. In Japan, cycles of economywide price declines known as deflation have been endemic since 1990. When prices fall, debt burdens become heavier, and companies and consumers are afraid to borrow. Low interest rates on government bonds don’t help. “The euro zone faces a creeping danger: the risk that allowing inflation to run so far below the ECB’s own definition of price stability for so long will eventually topple the monetary union into outright deflation,” wrote Janet Henry, chief European economist of HSBC (HSBC), in a note to clients on April 7.

Regarding the statement “The debate over whether Europe’s austerity was too harsh may never be settled, but it’s clear that the euro zone as a whole hasn’t been able to climb out of its rut“, a major reason the debate over whether or not Europe’s austerity was too harsh may never be settled is because the debate over Europe’s austerity is in a rut. An undead rut. That’s why the debate never ends and why Paul Krugmans columns on the eurozone have become so timeless. The situation never seems to change!


In France, five-year government borrowing costs are 0.9 percent, which is well into dangerous territory. French President François Hollande is trying to get permission from the European Union to slow the country’s deficit-reduction effort, which he believes is partly responsible for France’s economic weakness. The country hasn’t had growth of 1 percent or better since 2011. He dispatched two ministers to seek the support of their German counterparts on April 7.

Note that France has a 0.9% borrowing cost and hasn’t grown more than 1% since 2011 and it has to go to Germany to get EU permission to engage in stimulus spending instead of just using record low borrowing rates to stimulate its economy? That’s kind of messed up.


Interest rates fall when the demand for funding is weak because of a big “output gap,” the slack between what the economy is capable of producing and what it’s actually putting out, says Angel Ubide, a senior fellow at the Peterson Institute for International Economics in Washington. Believers in austerity argue that stabilizing government finances will give businesses the confidence to expand, shrinking that output gap, but it’s a painful process, says Mauro Guillén, director of the Lauder Institute at the University of Pennsylvania in Philadelphia. Speaking mainly of Spain, he says: “Of course the austerity measures will eventually work, but it’s going to take them a long time.”

See that? Even austerity advocates acknowledge that “of course the austerity measures will eventually work, but it’s going to take them a long time.” As you can see, Europe’s Lost Generation is being lost casually. Yikes.


Speculation is a big factor in the latest decline in bond yields in Spain, Italy, Portugal, and Greece. Bond prices rose another notch—and yields fell—after ECB President Mario Draghi said on April 3 that the central bank was considering unconventional, i.e., more extreme, measures to stimulate growth and stave off deflation. He said the bank’s Governing Council was “unanimous” on exploring tools including purchases of debt, a European echo of the Federal Reserve’s quantitative easing (QE) program.

Notice the point made here: “Speculation is a big factor in the latest decline in bond yields in Spain, Italy, Portugal, and Greece. Bond prices rose another notch—and yields fell—after ECB President Mario Draghi said on April 3 that the central bank was considering unconventional, i.e., more extreme, measures to stimulate growth and stave off deflation“.

What does that say? Again, it says that the bond markets want the ECB to engage in quantitative easing. That’s what’s been driving the rally in eurozone bonds this year: expectations that the ECB has to step in and do something before deflation takes hold. That’s why there’s record low interest rates for Greece, Ireland, Italy, Portugal and Spain. Yes, Greece is issuing bonds again even though its economy is still a mess with a higher debt load than when the crisis started and 25% unemployment. Yay. But the market interest in those bonds isn’t driven by a sense that the fundamentals are getting better. It’s driven by a conviction that the ECB will eventually have to pay the piper and go down the QE path. If you’re a bond holder, QE potentially involves the ECB buying your bonds.


But quantitative easing wouldn’t be as easy for Draghi to carry out as it has been for the Fed. The ECB’s founding treaty prohibits it from financing governments, which is essentially what a central bank does when it buys government bonds. Even if it got around that rule, the ECB would have to make politically fraught decisions about which countries’ bonds to buy. To avoid that issue, it might instead buy private debt securities such as mortgage-backed bonds. “If you think the ECB is about to launch a meaningful QE operation, you’ll be disappointed,” wrote Erik Nielsen, UniCredit’s (UCG:IM) chief global economist, in a client note on April 6.

If the ECB succeeded in its mission to stimulate the European economy, interest rates would go up, not down. Stronger growth would increase the demand for loans, and inflation would pick up, both of which would raise the rates lenders and bond buyers demand to let go of their money. So when interest rates fall, it’s a sign that investors expect the ECB to do a lot more to get growth going—and, at least initially, to fail. That, in a nutshell, is why the news flash out of Madrid is not entirely good news.

Notice the key point made at the very end: “So when interest rates fall, it’s a sign that investors expect the ECB to do a lot more to get growth going—and, at least initially, to fail. That, in a nutshell, is why the news flash out of Madrid is not entirely good news“. Again: The record low interest rates we’re seeing across the eurozone and especially in the most austerity-wracked countries are not driven by confidence the the ECB is going to turn the economy around. They’re driven by the bond market’s growing confidence that the ECB has messed things up so badly that an extended period of ultra-low rates and eventual ECB bond buying will have to happen in the future. It’s an extended ‘Doomsday’ play that’s driving this rally in the bond markets. That’s not a sign of confidence.

And why, again, hasn’t the ECB engage in quantitative easing yet? Ah yes, because “the ECB’s founding treaty prohibits it from financing governments, which is essentially what a central bank does when it buys government bonds“, and there is no way that is changing with present day attitudes (in particular, the Bundesbank’s attitude). This is especially after the Germany Constitutional Court’s ruling that maintained ‘doubts’ over the ECB’s proposed unlimited bond buying proposals.

Weidmann’s loophole
Sure, last week even Bundesbank chief Jens Weidmann has suddenly opened his mind to possible future sovereign bond buying by the ECB. But, technically, he’s only open to the idea in the future if government bond buying found to not be in violation in EU law. So, in reality, Jens Weidmann and the Bundesbank are probably not very open to future sovereign bond buying:

Financial Times
March 25, 2014 6:35 pm
Bundesbank hawk signals backing for QE

By Claire Jones in Frankfurt

One of the biggest barriers to the European Central Bank buying government bonds to save the eurozone from deflation was removed on Tuesday, after the head of Germany’s Bundesbank offered his first sign of support for quantitative easing.

In a radical change of stance, Jens Weidmann, the Bundesbank president who is viewed as the ECB’s policy hawk, said a QE programme was not “generally out of the question”.

While he was clear he would prefer purchases of private-sector assets to government debt, he signalled he could back sovereign bond-buying if it conformed with EU law, which prohibits the financing of governments by its monetary authority.

It should be clear that my assessment [of whether QE violates EU law] will be a strict one,” he told the financial news service Market News International. “Buying not just peripheral bonds but German and French ones as well does not automatically solve the problem of monetary financing.”

Neither Mr Weidmann nor the bulk of the ECB’s rate-setting governing council are likely to call for buying public or private-sector bonds just yet. But the Bundesbank chief’s remarks indicate Mario Draghi, ECB president, could push through QE without alienating the eurozone’s economic powerhouse – should the risk of a bout of Japanese-style deflation heighten.

Mr Weidmann had in the past objected to the ECB buying government bonds. He was the only policy maker to vote against its “outright monetary transactions” programme, through which it can buy potentially unlimited quantities of sovereign debt.

Now, with the ECB grappling with inflation of less than half its target of just below 2 per cent, the Bundesbank president appears to have softened his position. Ken Wattret, an economist at BNP Paribas, said: “The comments sound somewhat more open-minded to the idea of additional policy action from the ECB, including unconventional measures, though with little sense of urgency.”

Notice that Weidmann was the only policy maker to vote against the “outright monetary transactions” program. That’s the pledge to engage in “unlimited bond buying” that Draghi made back in 2012 if the situation got worse. And it’s that unlimited bond buying potential (which is normal for a major central bank) which the German Constitutional Court has lingering doubts over. So even if Weidmann eventually accepts the idea of unlimited sovereign bond buying for the ECB, it might be moot if Germany’s court doesn’t agree.


Low eurozone inflation has stoked calls for the central bank to buy government bonds and embark on other unconventional policy options, such as negative rates on deposits parked in its coffers. The ECB has so far parried the calls, opting to keep policy on hold earlier this month despite unveiling forecasts showing inflation would remain well below its target the year after next at 1.5 per cent.

Mr Weidmann made clear the current policy stance was “appropriate”. And even if the risk of a bout of falling prices rose substantially, he indicated the ECB would have to buy a host of assets, including not just the bonds of governments but also private-sector securities, to win his approval.

And then there’s that last demand by the Bundesbank: In exchange for sovereign bond purchases, It also has to include other types of bond purchases. Keep in mind that there’s nothing wrong with buying a mix publicly and privately held bonds.

QE Isn’t Just About Government Bonds
But what if the plans ends up being only privately held bonds and no sovereign bonds at all? Is that possible? Yes. It’s not just possible. It’s what the eurozone’s central bankers are now calling for as the detail of their plans continue to dribble out. Asset-backed security purchases (and no government debt buys) is what the ECB really has in mind:

12:12 pm ET
Apr 11, 2014
The Wall Street Journal
central banking
ECB’s Nowotny: Additional ECB Easing Steps ‘Clearly Possible’

By Brian Blackstone

Fresh stimulus measures from the European Central Bank are “clearly possible” to guard against the risks of excessively low inflation, but the bank should wait until its June meeting to consider whether to take them, Austrian central bank governor Ewald Nowotny said in an interview.

Mr. Nowotny, who is a member of the ECB’s governing council, signaled that his preference would be for any ECB stimulus to be geared toward Europe’s asset-backed securities market, which may in turn boost the flow of credit to the economy. He said he is open to setting a negative rate on bank deposits parked at the ECB, but raised doubts about the effectiveness of such a move.

“We are preparing all the technical aspects of a range of possible interventions,” Mr. Nowotny told The Wall Street Journal on the sidelines of meetings of the International Monetary Fund.

One possibility if the central bank does act, Mr. Nowotny, said, would be for the ECB to purchase asset-backed securities in the capital markets, a move that could help kick-start this segment of the markets and help steer more credit to the private sector.

The asset-backed securities market is much smaller in Europe than it is in the U.S., making it difficult for the ECB to purchase large amounts of these securities. But the signaling effect from the central bank could be significant even if the amounts of the purchases aren’t, Mr. Nowotny said.

Even if the volumes may be not that large, I think as soon as the ECB announces that they are prepared to become active in this market, market participants would have a huge incentive to provide material for this market,” he said.

Note the statement by Austria’s central banker Ewald Nowotny, who’s preferences for asset-backed securities purchases over sovereign bond buying is what Draghi also has in mind: Even if the volumes may be not that large, I think as soon as the ECB announces that they are prepared to become active in this market, market participants would have a huge incentive to provide material for this market.

That translates to “Banks are going to be willing to sell the ECB asset backed securities despite of there not being many asset-backed securities out there because the ECB’s buy is going to jack up the prices so much banks won’t be able to resist selling”.

There’s nothing intrinsically wrong with this aspect of the plan. This is a potentially reasonable way to inject cash into banks. It’s the fact that this is the only plan the ECB apparently has in mind that’s wrong, especially since it’s unclear how much extra cash for eurozone banks is really going to help economies with record high unemployment. Maybe the governments have better used for it.

Well, ok, buying asset-backed securities (ABS) isn’t the only part of the plan. There’s also talk of negative ‘overnight’ interest rates to try to force banks to take back more of all that cash they have parked with the ECB, although Mr. Nowotny didn’t seem as confident in the idea as Weidmann.

And yet all this talk we hear about maybe allowing ‘quantitative easing’ – with the imlpicit idea that government bond purchases are coming (remember the incredibly bond rally this year) – is now turning into QE for only asset-backed securities. No government debt. In other words, stimulus through government spending is still being shunned. But stimulus by private sector debt? That’s fine!

Looser Money? Eh. Looser Credit Standards? Sure! Just as Long as No Government Debt is Involved
And then there’s the other new big development the ECB has in mind: Dramatically expanding the size of Europe’s asset-backed securities market by loosening lending and securitization standards. When the ECB loans to governments in the midst of a depression that’s very problematic. But relying on consumer debt to fuel the recovery and lowering those credit standards to achieve that goal is seen as sound policy. Will this help consumers? Maybe, if they want to take out a loan in the middle of a quasi-depression. But the banks should love it no matter what happens:

Bloomberg Businessweek
ECB Unites With BOE in Call to Ease Asset-Backed Bond Rules (1)
By Jennifer Ryan, Jana Randow and Alessandro Speciale April 11, 2014

The European Central Bank and the Bank of England said regulators must support and promote the asset-backed bond market, ensuring that rules to safeguard the financial system don’t unnecessarily impair the securities’ use.

Officials “responsible for the regulatory treatment can change incentives to participate in the ABS market,” the central banks said in a joint paper published today. “It would be important that the authorities seek to ensure that new regulations at global and EU levels do not act to the detriment of the securitization market.”

Here’s a translation for “Officials ‘responsible for the regulatory treatment can change incentives to participate in the ABS market'”.

“We’re making it more profitable for the banks to get into the asset-backed securities market because banking profits are the foundation of this economy”.


The European Union’s 1.5 trillion-euro ($2 trillion) asset-backed securities market has taken center stage as ECB President Mario Draghi considers a plan to ward off deflation through quantitative easing. Policy makers have pushed to make it easier for banks to create the debt, putting them at odds with international regulators wary of complex products because of the role they played in the global financial crisis.

Today’s paper said rules to address shortcomings in the assets revealed by the turmoil may be “unduly conservative. The statement was prepared for central bank officials and finance ministers from the Group of 20 nations gathered in Washington for an International Monetary Fund meeting. It assesses the current state of the market in the EU, and says a “longer, more substantive” joint paper will be published in May.

Wait, what? The IMF is at odds with the ECB’s new plan to save the eurozone by by deregulating the asset-backed securities market and getting rid of ‘unduly conservative’ regulations. That’s probably not a good sign.


Bigger Pool

Draghi signaled last week that ECB policy makers are discussing a QE program that may include a mix of public and private debt. That would bolster a market he once described as “dead” and help rekindle euro-area lending that has been contracting for almost two years.

“The ‘high-quality’ segment of the securitization market should aim to be more resistant to market stress, thereby providing banks with a resilient form of funding,” according to today’s statement. “But it is also important to support more junior tranches of safe and robust securitization,” and officials should improve availability of data and analytics to improve standards and broaden the investor base, it said.

Again, note that there isn’t really any indication that the ECB is seriously looking at public debt(sovereign bonds). That’s just happy talk for now. It’s all private debt via ABSs for the foreseeable future given these kinds of signals.

Also note that when the official says
But it is also important to support more junior tranches of safe and robust securitization
what he’s really saying is
“The plan is to get the banks to ‘securitize’ a lot of new asset backed securities so the riskier ‘junior’ assets need to be made easier to package and sell to the markets”. That’s why standards have to be loosened. Growing the eurozone ABS market is clearly part of the plan. Is that a good plan?


Draghi told reporters on April 3 at his monthly press conference that the ECB could access a bigger pool of securitized bank loans if only there was a more liquid market in which to do so. The total stock of outstanding loans in the euro area was 17 trillion euros at the end of 2013, according to ECB data.

Smaller Market

If we are able to have these loans being correctly priced and rated, and traded, like it would happen, like it used to happen in the ABS market before the crisis then we naturally have a very large pool of assets,” Draghi said.

ECB Vice President Vitor Constancio reiterated the idea yesterday in Washington.

“Private assets will be included in any decision that may be taken” on QE, he said. “That would make a slight difference with other policies in other central banks.”

The 1.5 trillion euros of outstanding ABSs in the EU is about one quarter of the size of the U.S. market, the document shows. Since its peak in 2009, the outstanding amount in the EU has decreased by a third, or 750 billion euros.

Sales of asset-backed securities fell to $102.5 billion in Europe last year, down from $449 billion in 2007 and less than the $174 billion of issuance in the U.S., according to data compiled by JPMorgan Chase & Co. Many of the ABSs created by euro-area lenders are pledged as collateral against central-bank liquidity, and so would be unavailable for any ECB purchase program.

When Draghi says says “If we are able to have these loans being correctly priced and rated, and traded, like it would happen, like it used to happen in the ABS market before the crisis then we naturally have a very large pool of assets“,

he’s saying

“I want to go back to rules back to the bubble era rules”.

And when Draghi says
Many of the ABSs created by euro-area lenders are pledged as collateral against central-bank liquidity, and so would be unavailable for any ECB purchase program.
this is a reference to one of the other rare instances when the ECB actually did something helpful: In June of 2012, when Spain was teetering, the ECB loosened the rules for the collateral banks could use as collateral in exchange for an emergency loan. This allowed banks to basically temporarily swap out the toxic underwater asset-backed securities sitting on their balance sheets for cash that banks can use for other purposes. This rare, helpful move was, of course, vigorously opposed by the Bundesbank.

Contrast that to the current plan, which is basically the opposite of the above scenario(and which the Bundesbank is not opposing): All those asset-backed securities still parked at the ECB as part of the $1 trillion LTRO 3-year loan program are going to mature this year or next year. So eurozone banks are going to have growing stockpiles over the next year of the ABSs that they used as collateral 2-3 years ago. That’s probably part of what this scheme is preparing far: What to do about the return of the LTRO collateral? And the answer is “fuel a consumer debt boom”. Extending another round of LTRO’s could conceivably happen but it sure look like the ECB and Bundesbank would prefer the “consumer debt boom” approach.

Again, there’s nothing inherently wrong with the ECB shoring up the ABS market. These things depend on context, and stimulating the ABS market can fuel consumer loans which the eurozone economy could certainly use. Some of these ABS purchases by the ECB for QE could be used for financing small and medium-sized business loans and that could certainly be helpful. Moving all those asset-backed securities out of the ECB, into a new growing ABS market, and then back onto the ECB’s balance sheet (via the QE) is a pretty clever way to clean up banks’ balance sheets if it works!

But, of course, the eurozone economy could also use consumer demand and in the larger context (austerity policies) the prospect for surging consumer demand (which is sort of required for this scheme to work) are not very promising. Unemployed people don’t take out consumer loans. And NOTHING in the ECB’s plan or the large EU’s plans really seem to address this. Recall how France has the crawl to Berlin to get permission to ask the EU if it can borrow at 0.9% rates to engage in government stimulus spending. THAT’s what would help demand. France borrowing and spending. And that, of course, is just not something the eurozone allows. At least not thus far.

The other way this plan could potentially (in theory, but not realistically) help the situation is if growing consumer credit in the wealthier ‘core’ nations like Germany translate into more imports from Greece or Spain or Italy? Because, at the end of the day, the eurozone ‘periphery’ needs more exports if their economies are going to heal. So that’s how a plan like this could work, but is there any reason to believe that’s going to be the case?

And what happens if there is a real credit boom that results in more consumer spending but the austerity policies are still in place? As the argument goes, the ABS market is tied more closely to the economy than other assets so if you can stimulate ABS lending your also promoting things like mortgages and auto-loans and actual consumer goods. And there’s nothing wrong with that…unless the rest of your policies promote austerity. Why? Because the same economic boost you get from ABS lending turns into a bust if those loans go sour because people go broke. That’s part of what triggered the 2008 financial crisis in the first place. The ABS markets, especially the mortgage markets in the US, imploded. Let’s hope the eurozone learned a lesson there.


Too Punitive

Andy Haldane, the BOE’s executive director for financial stability who will become chief economist from June, said earlier this month that the institution intends to “support actively” initiatives internationally for ABSs and in Europe to design securitizations that would fit in this new class.

“If successful, the prize for regulators and asset managers is a big one,” he said.

“The regulators have been particularly punitive on ABS due to the experience of the crisis, but there is a growing appreciation of the merits of securitization because it provides a direct link to the real economy,” said Ruben van Leeuwen, an analyst at Rabobank Groep in Utrecht. “It can help fund mortgages or auto loans, which is especially important now with bank funding channels blocked.

Did you see that admission by the Bank of England’s upcoming chief? This plan “If successful, the prize for regulators and asset managers is a big one“. Somehow it seems like the asset managers are going to make out better than the regulators under this deal. When the going gets tough in the eurozone, the ECB gets weird and clingy with the banks and then reality gets weird and awful. That’s what happens when your central banker puts on Ordoliberal blinders. Welcome to planned stagdeflation and enjoy the weird, awful ride. We have record high unemployment in countries with record low bond yields and the ECB’s response is to stimulate a consumer loan binge while still sticking to austerity. Amazing!

If this feels familiar, it should. And yet it keeps getting weirder. It’s almost awesome in how dysfunctional it is.

And like so much of what emanates from the ECB, it’s only sort of surprising and we should have probably expect policies like this by now. Because the one real policy of the ECB is quite simple: It’s the Field of Dreams approach. Bankster dreams. And the Bundesbank’s dreams. And Sovereign Bond Holder’s dreams, although they might be disappointed with ECB never expands it QE to those sovereign bonds. People who detest the idea that government could be of use during a time like this would also find this situation kind of dreamy. That’s seriously the ideology at work here.

That Light at the End of the Tunnel is Getting a lot Closer, and We’re Not Moving…

Wait, but what’s this? Could there be an end to austerity around the corner?

Well yes, the Netherlands, an early staunch supporter of austerity, has had enough. Austerity in the Netherlands has got to go:

The Wall Street Journal
Meeting EU Deficit Target, Netherlands Freezes Austerity
Finance Minister Jeroen Dijsselbloem Says Budget Deficit Will Stay Below 3% of GDP in 2014 and 2015

Updated April 11, 2014 2:50 p.m. ET
AMSTERDAM—Dutch Finance Minister Jeroen Dijsselbloem on Friday said he sees no need for additional austerity in the coming years as the Netherlands continues to comply with European Union budget rules.

Mr. Dijsslbloem said in a letter to Parliament that the country’s budget deficit will stay below the EU threshold of 3% of gross domestic product in 2014 and 2015. As a result, the government “won’t implement additional austerity measures,” he said.

The Netherlands, a staunch supporter of budgetary discipline throughout the crisis in the euro zone, for years struggled to comply with the budget rules due to a weak economy at home and a public backlash against austerity.

The recovering economy and recent improvement in public finances suggest that the euro zone’s fifth-largest economy is slowly drawing a line under years of unpopular belt-tightening.

In 2013, the deficit was below 3% of gross domestic, marking the first time in five years that the Netherlands was compliant with the EU rules.

Could happy days be here again? Happier days could be here for the Netherlands, but is it a sign that the ECB is and the broader EU and eurozone community is going to lay off the austerity madness? After all, if ever there was a time to end the austerity madness it would be right now when the ECB is trying to trigger a consumer debt boom. So is change in the air?

Well, that’s difficult to say because the Netherland did meet its deficit targets and therefore technically the Netherlands is able to ditch the austerity, for now, without breaking the EU deficit rules. So this wasn’t necessarily a sign that the general austerity policies are shifting. Nothing changed except the fact that the Netherlands finally eeked past the 3% deficit goalpost and immediately declared “enough!”.

Also, Angela Merkel was just in Greece doing a “victory lap” of sorts after Greece, with over 25% unemployment, successfully reentered the bonds markets for the first time since it was thrown into the eurozone’s doghouse. She had a few choice words about the austerity policies Greece should expect:

Merkel, In Athens, Praises Greek Reform Progress

by The Associated Press
April 11, 2014 2:03 PM ET

ATHENS, Greece (AP) — Greece won praise Friday from German Chancellor Angela Merkel — the lead advocate of eurozone austerity — for its painful economic turnaround and successful return to markets.

But Merkel added a polite reminder that the bailed-out country still wasn’t out of the woods.

“Greece has honored its pledges,” Merkel said at a news conference with Greek Prime Minister Antonis Samaras in Athens. “I hope that policy is continued.”

Merkel’s brief visit, her second since Europe’s debt crisis erupted in Greece more than four years ago, came amid Greek government euphoria over the country’s successful re-entry to international bond markets on Thursday. The landmark five-year issue was Greece’s first since 2010, when it was saved from bankruptcy by a massive bailout from its European partners and the International Monetary Fund.

Merkel remains a divisive figure in Greece because of her insistence on economic pain. During a visit in 2012, she was greeted by mass anti-austerity protests that turned violent, and about 5,000 police officers were deployed Friday to guard areas on Merkel’s itinerary and enforce a ban across most of central Athens on planned protests.

Security was tightened further after a powerful car bomb exploded early Thursday outside the Bank of Greece, causing damage but no injuries. No group claimed responsibility, but police suspect domestic anarchist militants.

About 1,000 people held peaceful demonstrations outside the prohibited area, but dispersed under heavy rain.

The austerity measures that have helped stabilize public finances have exacted a horrifying social toll. The economy has shrunk by about a quarter during the crisis and unemployment is near 27 percent.

I believe that after all these necessary reforms have been carried out — with more remaining — that Greece will have more opportunities than difficulties,”Merkel said at the start of her visit.

Meanwhile, Fitch ratings agency warned the successful bond issue didn’t mean an end to Greece’s financial problems. In a report Friday it said the issue showed the country’s progress but doesn’t mean it will be able to finance itself on its own when the bailout program ends later this year. It also highlighted risks that political support for reforms might wane.

Greece has honored its pledges…I hope that policy is continued.

I believe that after all these necessary reforms have been carried out — with more remaining — that Greece will have more opportunities than difficulties,”

Oh dear. So it’s a continuation of policies as they stand which means austerity for basically everyone. Except the Netherlands and Germany. Plus asset-backed securities. Oh, and there’s the one other part of the plan. The negative interest ‘overnight’ interest rates that the Bundesbank would prefer get implemented before and QE at all takes place. That’s basically the plan going forward to boost the eurozone: Eurozone banks are going to be super incentized to package and sell asset backed securities in the hopes of dramatically expanding that market in time for the return of all the asset-backed securities that will get returned as collateral for the 3-year emergency loans that expire will expire over the next year. The ECB then buys those new asset-backed securities, freeing up money for more loans. It’s a virtuous cycle. With government austerity that will maximize the likelihood that these new loans will sour.

Austerity and consumber debt. That’s the plan. Although the plan could change. There’s nothing stopping that. For instance, Mario Draghi just hedged a bit on the plan. First he acknowledged that the plan to focus on the ABS market alone in the QE really doesn’t make sense at the moment because the ABS market is just not big enough yet to be a meaningful source of stimulus for the eurozone economies, adding “We may need to consider other unconventional measures” without specify what those other measures might be.

Hmmm….what could he have in mind…


24 comments for “The New World Ordoliberalism Part 4: Meet the New Plan. Same as the Old Plan. Deregulated.”

  1. Paul Krugman stumbled onto a somewhat ironic finding about the “Confidence Fairies”: For the Confidence Fairies to work their magic no one can criticize them:

    The New York Times
    The Conscience of a Liberal
    Blaming the Messengers, Euro Edition
    Paul Krugman
    April 15, 2014, 3:27 pm

    Aha. I missed this, from Jürgen Stark, which is one of the most amazing things I’ve ever seen written by a former central banker:

    It is likely we are living in an extended period of price stability. This is good news. It boosts real disposable income and will eventually support private consumption. Inflation expectations are well anchored, and there is no evidence households and companies are delaying purchases because of negative expectations. Warnings about outright deflation and calls for ECB action are misguided and irresponsible. The longer this discussion continues, and the more intense it becomes, the more likely the risk of a self-fulfilling prophecy.

    So, Stark begins by asserting that low inflation boosts real disposable income. That’s a zero-credit answer on any undergraduate exam: yes, low inflation makes income gains higher for any given rate of increase in nominal income, but low inflation reduces the rate of nominal income growth one for one. The notion that an influential former monetary official doesn’t understand this is breathtaking.

    Now, it’s not true that low inflation has no effect; it increases the real value of debt, which is contractionary because debtors cut spending more than creditors raise it, and it raises real interest rates when nominal rates are near the zero lower bound. But these are both demand-depressing effects.

    Oh, and low overall European inflation makes the adjustment problem of debtor countries much worse, which Stark doesn’t even mention.

    But the real kicker is the claim that even talking about the possibility of deflation is irresponsible, because that can turn into a self-fulfilling prophecy. That’s right: if inadequate ECB action leads Europe into a Japan-style lost decade or two, it’s the fault of all those critics who warned that this might happen; if only everyone had kept clapping, everything would have been OK.

    I can understand why some policymakers would like to live in a world like that — a world in which, if critics say that their policies will fail, and then they do fail, it’s the critics’ fault. But it’s hard to imagine the state of mind of someone who would actually state that view in the FT.

    It’s too bad the fairies the ECB prays to aren’t filled with more self-confidence. Then again, given what an incredibly avoidable mess that the eurozone has become in recent years, some of the ECB’s preferred fairies might be swooning with pride these days. After all, no one said the ECB has to only worship the Confidence Fairies. There are others…

    Posted by Pterrafractyl | April 16, 2014, 7:54 pm
  2. Time journalist Michael Schuman wrote an great piece last year, “Karl Marx’s Revenge: Class Struggle Grows Around the World“, about the growing pressures of wealth inequality, joblessness, and globalization that are causing many around the globe to question whether or not Karl Mark’s critiques of capitalism had a point. It also discussed the growing backlash amongst the global elites against the spread of these sentiments.

    Schuman has a new article Time out today, “Here’s How You Help the Poor Without Soaking the Rich”. And it does look like a plan that could partially work. While the plan probably won’t do too much to help the poor, it will indeed avoid a soaking of the rich…although their boots might get a little moist while the rest of us are licking them:

    Here’s How You Help the Poor Without Soaking the Rich
    Michael Schuman @MichaelSchuman

    4/18/2014 11:24 AM ET

    We have to clear our minds of a fallacy about poverty alleviation: Helping the poor does not mean welfare. This isn’t to say that we don’t need welfare. Ignoring the unfortunate who can’t put enough food on the table or afford proper education or healthcare is not just cruel, it’s bad economics. The impoverished make either good consumers or productive workers.

    But government aid can only reduce the suffering of the poor; it usually can’t make them escape poverty permanently. We know that from watching what has happened in the developing world over the past half century. Those countries that have tried to use wide-scale state programs to alleviate poverty—such as India—have not achieved results as quickly as nations that did not, such as Singapore and South Korea. (See my recent piece on this subject.) Generally, the high-performance economies of East Asia didn’t fight poverty by playing Robin Hood—soaking the rich and handing out cash to the poor. There is no reason why we’d have to do that today.

    Instead we have to give the downtrodden better jobs, more opportunities, more tools to improve their incomes and fairer treatment in economic policy.

    That means we must improve the climate for investment. I’m pretty sure you didn’t expect me to write that when you started reading. There is a widespread assumption that what’s good for companies is bad for the little guy. But if Asia’s example teaches us anything, it’s that there are two ways to end poverty: (1) create jobs and (2) create more jobs. The only way to do that is to convince businessmen to invest more.

    That’s why it is imperative to make investing easier. We should press ahead with free-trade agreements like the Trans-Pacific Partnership to bring down barriers between countries and encourage exports and cross-border investment. Though CEOs complain far too much about regulation—the sub-prime mortgage disaster, the recent General Motors recall, or Beijing’s putrid air all show that we need to keep a close eye on business—we should also streamline regulatory procedures, standardize it across countries and thus make it less onerous to follow.

    Stories like this are a reminder that the EU’s bizarre new strategy of basically praying at the Altar of the Businessman for any and all economic ills is a remarkably contagious and enduring idea even when it really shouldn’t be. In today’s world, Economic Stockholm Syndrome can potentially impact any society on the globe, rich or poor.

    In related news, Stockholm really needs to do something about its Economic Stockholm Syndrome.

    Posted by Pterrafractyl | April 18, 2014, 7:27 pm
  3. Researchers at Deutsche Bank published their own predictions on what we should expect from the ECB’s quantitative easing (QE) ambitions. The verdict? No sovereign bond/public debt purchases (unless all other options have already been tried) as expected. And in terms of the asset-backed securities (ABSs) the ECB might have in mind, the researchers are expecting a focus on buying asset backed securities tied to loans to small and medium enterprises (SMEs). So, to summarize via acronym abuse: It’s going to be SME ABSs for the ECB’s QE:

    Business Insider
    Why QE Won’t Work As Well In Europe As It Does In The United States
    Matthew Boesler

    Apr. 14, 2014, 4:41 AM

    Researchers at Deutsche Bank have published a new presentation exploring the possibility that the European Central Bank will launch a program of quantitative easing (QE) later this year in a bid to provide further monetary stimulus to the beleaguered euro zone economy.

    They expect ECB President Mario Draghi to signal “private QE” — purchases of securitized loans to small and medium enterprises — at the conclusion of the ECB Governing Council’s June meeting, and launch the program at the conclusion of the September meeting.

    “The ECB could also engage in full scale ‘public QE’ (i.e., purchases of sovereign debt as in the U.S.),” write the researchers in the presentation.

    “However, this would be far less effective in Europe than in the U.S. while the political hurdles remain high. We would only expect ‘public QE’ to materialise if the inflation and growth outlook worsen considerably.”

    “In September, we expect that the ECB will commit to ‘private QE’, targeted at SME credit,” the researchers write.

    “These purchases could focus solely on securitised assets. However, because of the limited scale of this market and regulatory constraints to its future development, the ECB may also target corporate loans held directly by banks. Irrespective of the choice of asset, it is crucial that the ECB signals it will remain in the market for some time, in order to incentivise banks to underwrite new loans thus underpinning credit origination and growth.”
    [see slide]

    So is a focus on SMEs good news or bad news? As with all things ECB-related, the answer is “maybe, but even if it is helpful, it probably won’t be as helpful as it needs to be”. That’s just how things go with the ECB. But it still might be better than nothing, because with the EU’s banking “stress test” coming up the availability of corporate loans for small and medium sized businesses in the EU might get rather tight. And tighter credit conditions for business loans is the last thing the ‘periphery’ needs right now. That’s because it’s about to get ugly in the EU’s banking sector. The zombie-hunt is getting closer and closer…:

    Europe on the hunt for ‘zombie banks’
    — Feb. 3, 2014 2:19 PM EST

    FRANKFURT, Germany (AP) — In Europe, the zombie hunt is on.

    Not for undead humans, that is, but zombie banks — the walking dead among lenders, too financially troubled to loan money to an economy that desperately needs investment, growth and jobs.

    The European Central Bank, the lead crisis-fighter for the 18 countries that use the euro, is embarking on an extensive search through the books of the biggest banks. It’s an arcane exercise — but one whose results will impact people’s jobs, businesses and lives. The idea is to restore the system’s ability to lend by weeding out lame banks.

    Together with national regulators and the European Banking Authority, the ECB will first go through thousands of files from 128 of Europe’s largest banks to hunt for hidden, soured loans and investments. That will be followed by stress tests that simulate how a bank would fare in a recession or crisis.

    Once the verdict is delivered in October, national bank regulators will be asked to push problem banks to raise capital by selling new shares to investors, restricting dividends — or even by being restructured or bailed out. That should help the economy in the long run.

    But it’s tricky. Forcing banks to fix their problems could temporarily destabilize financial markets and cost investors and governments more money.


    This is Europe’s latest try at sorting out the problems in its banking system left over by the global financial crisis and Europe’s ensuing turmoil over government debt. The United States tackled its banking troubles earlier, in 2008-09, pushing banks to take new capital from the government. That helped the U.S. recover from the recession.

    At the height of their debt crisis in 2012, European leaders decided to create a centralized supervisor to oversee banks. The idea was to take regulation away from national officials, who can be overly protective of their domestic financial institutions. They gave the job to the ECB, which now needs a clean slate in the banking industry before its supervisory board takes over the function in November.


    Because so many banks are still in financial trouble, they are not able to lend much to businesses and households. That’s preventing the economy from growing and reducing unemployment from a painful 12 percent.

    For instance, a bank that has made loans that aren’t being repaid may extend the loan or otherwise take it easy on a struggling borrower in hopes they’ll eventually pay. But that practice means the bank may not have money to make new loans.

    In particular, it is small- and medium-sized companies that can’t get the credit they need. Yet it’s those companies that provide some 80 percent of the jobs.

    Bad loans are a particular target. The ECB and EBA say anything that’s more than 90 days overdue will be considered a bad loan, whether the bank has declared it in default or not.


    ECB President Mario Draghi has said banks “do need to fail” to underline the exercise’s credibility.

    If a bank can’t find more capital from its shareholders, it might have to turn to its government for taxpayers’ money. Or, the government itself could turn to the eurozone’s taxpayer-backed bailout fund — though political opposition to that is high. The 2011 stress test of 90 banks found eight needed to raise 2.5 billion euros in capital, but noted that banks had scrambled to raise 50 billion euros just ahead of the test.

    Analyst Nicolas Veron, who splits his time between Brussels think tank Bruegel and the Peterson Institute for International Economics in Washington, says it’s difficult to tell how much capital is needed or how many banks might fail. Some banks have already started raising capital ahead of time.

    The ECB test — formally called the asset quality review, or AQR — “is about killing the zombie banks,” he said.

    “The AQR is there to identify them — and to kill them.”

    Zombie hunts don’t always involve a catch-22, but central banking and catch-22s are like peas in a pod since economic systems, in general, are filled with catch-22’s. It’s why central banks are potentially so useful and why treating an economy like some exquisite self-correcting machine is such a hopeless cause: Central banks get to pick a winning side in these inevitable catch-22 situations that would otherwise take “the long run” to resolve on their own. In this case, the catch-22 is the situation where “a bank that has made loans that aren’t being repaid may extend the loan or otherwise take it easy on a struggling borrower in hopes they’ll eventually pay. But that practice means the bank may not have money to make new loans“. In other words, the “zombie banks” are upholding the “zombie businesses” in the hopes that the business will find a cure for zombiiism and thus cure the banks too. And, in doing so, the zombie banks are preventing a further meltdown in the business sector (by forestalling cutting on the loans needed to keep the business alive), but at the cost of restricting credit to non-zombie businesses. That’s the catch-22.

    There are different ways to resolve this catch-22, but the tried and true methods almost all involve the kind of government actions the ECB (and especially the Bundesbank) are ideologically opposed to. Government stimulus spending, for instance, could break this catch-22 by providing the cure for the zombie businesses. Sure, some business may not be viable even in a recovered economy, but many others are simply going to need a better economy to cure themselves of their zombie-status and government stimulus can be that outside force for triggering the healing process.

    But, again, government stimulus spending is not an ideological option for the ECB. So, instead, we’re seeing a different kind of catch-22 resolution strategy. It’s the partial-catch-22 resolution: By buying up asset-backed securities targeted at the SME ABS market (or possible buying corporate loans directly off of banks’ balance sheets) the ECB is helping to decouple the fates of the zombie businesses and zombie banks under the hopes that the loosened credit conditions will cure both business and banks of their zombification. And with the EU’s banking stress-test coming up, this decoupling of the fates between banks and business will also allow for the shuttering of “bad banks” with that bleeding into the credit markets.

    So the big plan now appears to be using the bank stress tests for a big “zombie-hunt”/cleansing in the banking sector involving the weakest banks getting shut down, with the ECB hoping to offload some of the inevitable credit stresses on the EU’s businesses resulting from the banking cleanup onto itself. The ECB will act as a kind of lifeline to the SMEs credit markets while the zombie banks are hunted down and killed and the ECB attempts to permanently expand the ABS sector for SME credit to larger ‘shadow banking’ market. Oh yeah, and the austerity policies continue. That’s the plan. Kill off the weakest banks. Strengthen the survivors. Keep business on a lifeline if possible. And continue the austerity that is preventing any real healing.

    Will it work? Well, that will probably depend on the particulars of each economy. The relatively healthy German economy would probably benefit. But how about in a country like Ireland, where a large number of business are still saddled with large debts that they’ve never really been able to pay off? Will the ECB’s SME credit lifeline be enough to heal the zombie business or will it end up killing them too? As with all things involving the ECB, it remains unclear what to expect, but there will be blood. That’s all we get to know for sure.

    Posted by Pterrafractyl | April 19, 2014, 6:09 pm
  4. It’s time for another ride on the ECB’s not-very-merry-go-round of unrealized action

    Draghi, worried by strong euro, says ECB poised to act as soon as June

    By Jan Strupczewski and John O’Donnell

    BRUSSELS Thu May 8, 2014 12:00pm EDT

    (Reuters) – The European Central Bank is ready to take action next month to boost the euro zone economy if updated inflation forecasts merit it, its president said on Thursday, warning outsiders not to pressure the bank into action.

    Stressing that the euro’s strength was “a serious concern”, ECB chief Mario Draghi said the exchange rate would have to be addressed, adding that the bank’s policymakers held a discussion about “all instruments” at their meeting in Brussels.

    Euro zone inflation ticked up to 0.7 percent in April from March’s 0.5 percent, but remains far below the ECB’s target of just under 2 percent, and Draghi said: “There is consensus about being dissatisfied with the projected path of inflation.”

    “The governing council is comfortable with acting next time but before we want to see the staff projections that will come out in early June,” he told a news conference after the ECB left interest rates on hold, as expected.

    Draghi did not specify what policy action the ECB could take beyond saying Thursday’s council discussion touched on the policy instruments the central bank has mentioned previously.

    These have included interest rate cuts, liquidity measures and even quantitative easing – central-bank speak for money printing to buy assets, a policy already pursued by the U.S. Federal Reserve, the Bank of Japan and the Bank of England.

    “With today’s press conference it will be hard for the ECB to take a ‘mañana mañana’ attitude,” ING economist Carsten Brzeski said.

    “With his comments on the exchange rate and hints at possible June action, Draghi has pushed the ECB into a corner from which it will be very hard to escape,” Brzeski added.

    The euro hit a 2-1/2 year high against the dollar while Draghi spoke before falling when he said the ECB was comfortable with taking action in June.

    The ECB governing council met in Brussels against the backdrop of a Franco-German spat over ECB policy regarding the strength of the euro – one factor Draghi has identified as a potential trigger for policy action.

    “The strengthening of the euro in the context of low inflation and still low levels of economic activity, is a cause for serious concern in the view of the Governing Council,” he said.

    But Draghi pushed back against the countries – led by France – and institutions that have been urging the ECB to take action to boost the economy and counter low inflation.

    “We have received plenty of advice,” he said. “We are independent, so people should be aware that if this might be seen as a threat to our independence it could cause long-term damage to our credibility.”


    Thursday’s strong signal that the ECB is ready to act in June will heighten speculation about just what the ECB could do.

    Draghi raised the idea in an April 24 speech of a “broad-based asset purchase programme” if the inflation outlook worsens. But just a few days later – at a meeting with German lawmakers – he played down the prospect of QE any time soon.

    The ECB chief did see “a problem of ongoing low inflation rates, which could lead to measures”, a source who attended the meeting said, adding: “He mentioned quantitative easing in this context but made clear that we’re still some way off QE.”

    Did you catch that? Draghi openly chided countries, France in particular, for trying to influence the ECB’s thinking by pointing out that the rising euro, currently at a 2 1/2 year high vs the dollar, is screwing up their economies. “We have received plenty of advice…We are independent, so people should be aware that if this might be seen as a threat to our independence it could cause long-term damage to our credibility.” Oh, ok, so eurozone member nations and other institutions can’t make their wishes known to the ECB because that might undermine its independence? Well isn’t that fascinating!

    Posted by Pterrafractyl | May 8, 2014, 11:41 am
  5. Every once in a while the Bundesbank has to remind the world that the years of depressed economies and mandated austerity weren’t some “oops!” accidental policy outcome. No, the Bundesbank just doesn’t think the eurozone’s near economic collapse was really all that big a deal because you can’t have “internal devaluation” without wage deflation and a general decline in incomes and living standards. Deflation is the goal:

    Bundesbank ready to support ECB action if it is needed – sources

    FRANKFURT Tue May 13, 2014 12:31pm BST

    (Reuters) – The Bundesbank is ready to support European Central Bank policy action if it is needed and this is not new, two Bundesbank sources said on Tuesday.

    Policymakers are looking at all relevant data, and inflation forecasts for 2016 are important but not the only decisive figure, the sources said.

    ECB President Mario Draghi said last Thursday the bank is ready to take action next month to boost the euro zone economy if updated inflation forecasts merit it.

    “We have always said that we are willing to act if this is really needed,” a high ranking Bundesbank source said. The second source at the German central bank confirmed this.

    Earlier, The Wall Street Journal, citing a person familiar with the matter, reported that the Bundesbank was willing to back an array of stimulus measures from the ECB next month, including a negative rate on bank deposits and purchases of packaged bank loans if needed to keep inflation from staying too low.

    And here’s a reminder that the Bundesbank isn’t the only major financial institution trying to deflate the future:

    The New York Times
    The Conscience of a Liberal
    Unbalanced in Basel
    MAY 13, 2014, 4:04 AM

    Ambrose Evans-Pritchard draws our attention to a speech by Jaime Caruana, General Manager of the Bank for International Settlements. It is indeed a quite remarkable speech — and I mean that in the worst way; it’s a perfect illustration of the way permahawks keep finding new arguments for their never-changing demand that we raise interest rates now now now.

    Some background: the BIS has spent almost the whole period since the financial crisis struck calling for tighter money. Oddly, however, it keeps changing its justifications for that call. At first it was dire warnings of inflation just around the corner. Then it was financial instability. Now, with low inflation and possible deflation a growing concern, Mr. Caruana argues that (a) deflation is not so bad(b) we’re in a balance sheet slump, and that means loose money is bad.

    On the first point, isn’t it quite remarkable how the BIS has slid from warning about inflation — and dismissing concerns about deflation — to saying that deflation is OK? Beyond that, the main case for arguing that deflation is OK is economic growth during the late 19th century. Is that really a good model? Just to take the most obvious point: the late 19th century was marked by rapid population growth in the “zones of recent settlement” (basically places where Europeans were moving in, displacing or wiping out the locals). In the United States, population grew 2 percent a year from 1880-1910, sustaining high investment demand. And the zones of recent settlement also offered an outlet for very large capital outflows from Europe. In other words, the global situation was conducive to a high natural real rate of interest, making mild deflation much more sustainable than in today’s world.

    I’ll probably want to write more about Gilded Age deflation. But for now, let me turn to the balance-sheet thing. Mr. Caruana draws a distinction between the view that we’re suffering from inadequate aggregate demand, and what he claims is a contrasting view that the problem is too much debt; and he claims that the excess debt/balance sheet approach implies that expansionary monetary policy is unhelpful and counterproductive.

    And I wonder what on earth he’s talking about.

    So how does the balance-sheet story turn into a case for tight money? I have no idea — there’s certainly no clear explanation in the Caruana speech.

    By all means let’s talk about balance-sheet effects. But is it really too much to demand a model, or at least a carefully spelled-out mechanism? Right now it looks as if the BIS is claiming that balance sheets make the case for tight money because in Basel everything makes the case for tight money.

    Gilded Age deflation: Again, that’s the goal. And how do we get there? By doing everything we can to keep doing nothing:

    Insight – ECB hardliner Weidmann comes in from the cold as deflation threatens

    By Paul Carrel

    FRANKFURT Thu Apr 17, 2014 12:24pm BST

    (Reuters) – As recently as last November, Jens Weidmann steadfastly opposed any move by the European Central Bank to print money to buy assets and buoy the euro zone economy. No longer.

    The Bundesbank chief, known for his hardline stances at the ECB and as head of the German central bank, is now ready to support such quantitative easing (QE) if he and his ECB colleagues deem it necessary.

    What has changed is that “the situation has changed”, according to one person familiar with the German’s thinking, speaking on condition of anonymity.

    Euro zone inflation has slowed to 0.5 percent from 0.9 percent in November, falling far below the ECB’s target of just under 2 percent and stoking fears the bloc could become stuck in a prolonged period of so-called “low-flation”, or even sink into outright deflation.

    Such a scenario risks undermining the efforts of crisis-hit countries on the euro zone periphery to shape up their economies, and could ultimately hit growth across the board if households defer purchases in anticipation of lower prices in the future.

    Seeking to head off such a drop in inflation expectations, the ECB’s governing council said earlier this month it was unanimous in its commitment to use unconventional tools – central bank-speak for things like QE – to counter a protracted period of low inflation.

    The unanimity meant Weidmann was on board. This matters because as leader of the hawkish faction on the 24-member council, he can shape debates and restrict policy moves. Last May, for example, he prevailed in limiting the size of an interest rate cut.

    At the height of the euro zone crisis in 2012, Weidmann was alone in opposing a new, as-yet-unused ECB bond-buy plan, dubbed Outright Monetary Transactions (OMT), that targets specific euro zone countries in trouble and comes with reform strings.

    It can’t be pointed out enough: Notice how Jens Weidmann has wielded sole veto power over the ECB’s decision to “do whatever it take”. And notice how that veto power is effectively still in place (which is why articles about how momentous it is for Weidmann to “come in from the cold” are written the first place)


    Some council members still lament that episode of isolation and would like to avoid a repetition.

    With the straightforward QE debate, Weidmann has softened his tone. Late last month, he said such a programme was not out of the question.

    On the face of it, this might look like an about-turn from his opposition to the OMT. But underpinning Weidmann’s position is a firm logic based both on principles and pragmatism.

    For the Bundesbank chief, the OMT bond-buy plan agreed in September 2012 represented a clear move into the fiscal arena as it required economic policy commitments from governments as a condition for ECB market intervention.

    Attaching such strings to monetary policy is anathema to the Bundesbank, which is deeply attached to “Ordnungspolitik” – the idea that the role of a totally independent central bank is solely to ensure stable prices, not to promote economic growth and employment or to help governments with fiscal problems.

    And notice how the Bundesbank doesn’t hide the fact that it is dedicated to the idea that a central bank should do NOTHING to promote economic growth and employement. NOTHING. And this is no secret.



    With the OMT, Weidmann was worried about the ECB effectively financing governments. QE, free of any conditions on countries’ economic policies, would be solely for monetary policy purposes.

    “I actually think Weidmann is quite pragmatic, as long as he is convinced the bank is absolutely focusing on monetary policy and not pursuing objectives of government financing,” said Clemens Fuest, head of Germany’s ZEW economic institute.

    “That was his concern with the OMT programme. But I think QE is another story,” added Fuest, who also advises the government in Berlin. “Of course, drawing the line is not easy. But with quantitative easing, drawing the line is not impossible either.”

    After digging in his heels as a matter of principle over the OMT, Weidmann’s more pragmatic side extends to the idea of showing qualified support for QE before low inflation becomes entrenched.

    Waiting too long before showing a readiness for resolute policy action would risk inflation expectations drifting lower – an outcome that would require more drastic ECB action.

    By acting pre-emptively, even just by talking about QE at this stage, “the action itself doesn’t need to be as large”, said Berenberg bank’s Christian Schulz, a former ECB economist.

    Notice how Weidmann’s economic views – which have been the most extreme of the eurozone’s central bankers – is charactized as “Quite Pragmatic”. Why exactly? Who knows! Just pick a reason! It’s like justifying deflation…just pick an excuse and run with it. You can alway change it later!


    Weidmann, a past economics adviser to German Chancellor Angela Merkel, can also point to a Bundesbank precedent. In the 1970s, the German central bank bought government bonds to bring down interest rates, after its standard tools stopped working.

    Despite the precedent, Weidmann’s predecessor, Axel Weber, resigned in 2011 in protest at a previous ECB bond-buying plan – the Securities Markets Programme (SMP), which he saw as financing governments. Juergen Stark, who had acted as Bundesbank president in 2004, followed Weber and quit as ECB chief economist later in 2011 – also in opposition to the SMP.

    The resignations achieved little but showed the Germans’ frustration that the ECB was morphing out of the Bundesbank cast in which it was forged: a mould based on ‘Ordnungspolitik’.


    As well as potentially posing a risk to economic growth, very low inflation or even deflation aggravates the adjustment process of debt-saddled countries on the euro zone periphery, which the Bundesbank has been pressing to shape up.

    Low inflation across the euro zone gives the countries on the periphery less scope for relative price adjustment against more competitive economies like Germany, and also makes it harder for them to reduce their debt piles.

    Greece is already running a negative inflation rate.

    But the problem is perhaps biggest for Italy, the euro zone’s third-largest economy, which is saddled with 2 trillion euros (1.64 trillion pounds) of public debt and is struggling with the competing need both to cut costs and spark growth.

    The European Commission expects Italy’s debt to hit 134 percent of gross domestic product (GDP) this year.

    Even with a solid recovery and higher inflation, Italy will take years to cut its debt to 100 percent of GDP, let alone reach an EU target of 60 percent.

    Against this backdrop, pressure is mounting on the ECB, in particular from the International Monetary Fund, to do more to stave off the threat of deflation in the euro zone.

    Ex-ECBer Stark, one such conservative voice who is still active in German media, told Reuters the ECB would have to act decisively if a significant risk of outright deflation were to materialise.

    “But in my view we are not in such a scenario,” Stark said.

    We are in a period of benign disinflation and price stability rather than entering a period of bad deflation. Assuming the ECB does at present not have other information, it would be wrong to give in to the calls for action,” he added.

    “We are in a period of benign disinflation and price stability rather than entering a period of bad deflation”. That’s the view of the guy that quit his post as the ECB’s chief economist in 2011, along with ECB chief Axel Weber, in protest over the ECB possibly doing something about the financial crisis. And here we are, three years later and a lot closer to deflation, and Stark is still saying that he sees no problem and actually views this as a period of time of “benign disinflation”. And now we have the BIS pushing the idea that deflation isn’t actually all that bad because, hey, was the Gilded Age really that bad? We can’t say they didn’t warn us.

    Posted by Pterrafractyl | May 13, 2014, 9:06 am
  6. So you know how the ECB’s mini-QE strategy is to focus on encouraging banks to lend to consumers and businesses by facilitating the growth and sale of asset-backed securities (some of which would be purchased by the ECB)? It’s a strategy that inherently assumes that banks and the rest of the shadow banking system end up buying those loans bundled up as asset-backed securities (ABS) so it’s basically an approach that focuses on credit creation to fuel a recover using two key steps: 1. Banks issue the loans to the to private sector. And 2. Other banks and financial institutions then buy those loans as an ABS.

    In other words, the whole ECB scheme centers around encouraging robust private sector lending to sectors to individuals and businesses that are currently lacking affordable credit or credit at all. And this is as opposed to public sector government spending in order to avoid the possibility of the ECB’s QE actually ending up financing governments and irking the Bundesbank. So the growth of private sector debt is a major component of the ECB’s whole gameplan going forward.

    With that in mind, check out the ECB’s recent utterings on the banks and their willingness to purchase private sector debt:

    ECB Says Search for Yield May Harm Financial Stability in Europe
    By Alessandro Speciale May 28, 2014 8:00 AM CT

    The European Central Bank said that financial stability in the euro area is at risk as investors step up their search for higher returns and weak economic growth weighs on banks’ balance sheets.

    While “legacy” risks from the global financial crisis persist for both banks and sovereigns, new threats are emerging from “a continued global search for yield, which has left the financial system more vulnerable to an abrupt reversal of risk premia,” the ECB said in its semi-annual Financial Stability Review published today. Even so, “financial stress indicators have remained low and stable” over the past half year, it said.

    Central banks across the world have kept interest rates at record lows to rekindle growth after the financial crisis, depressing bond yields and leaving investors searching for more attractive assets. At the same time, regulators have tightened rules and the ECB is conducting a bank balance-sheet assessment to identify weaknesses before assuming supervisory powers in November.

    Euro-area countries have attracted capital from emerging markets, with U.S. exchange-traded funds recording net inflows to Spain of more than 1.3 billion euros ($1.8 billion) since the beginning of the year.

    “Such flows might prove to be fickle, absent prospects of strong absolute returns differentiated by underlying country and bank-specific macroeconomic prospects,” the ECB said. “Continued action by sovereigns is needed to address public debt sustainability challenges -– notably progress in restoring the soundness of public finances while working to boost macroeconomic growth prospects.”

    Slow Recovery

    The euro-area economy is struggling to turn what ECB President Mario Draghi described this week as “a slowly consolidating recovery” into solid growth strong enough to boost inflation to the ECB’s goal of just under 2 percent. Annual consumer-price gains in the single-currency bloc have remained below 1 percent since October. Officials will take their next policy decision on June 5.

    The ECB said that while euro-area banks continue to operate in a “low profitability or loss-making environment,” they must continue to work to “mitigate” investors’ skepticism while at the same time ensuring that the deleveraging process doesn’t “unduly” lead to a reduction in credit to the economy.

    Although some tentative signs of a leveling-off in the pace of non-performing loan formation have emerged in some countries, the turning point does not appear to have been reached yet,” the ECB said. “Amid continued downside risks to a fragile euro-area economic recovery, high private-sector indebtedness in many countries, coupled with only slowly improving income and earnings prospects, may weigh on borrowers’ debt servicing capabilities.

    So let’s see. According to the ECB:
    1. A “continued global search for yield…has left the financial system more vulnerable to an abrupt reversal of risk premia” = if bond investors decide to move their money out the eurozone there could be problems in that sector. It’s the threat of the international “bond vigilantes”.

    2. “Financial stress indicators have remained low and stable” = but we don’t actually see the threat of the bond vigilantes.

    3. “Such flows might prove to be fickle, absent prospects of strong absolute returns differentiated by underlying country and bank-specific macroeconomic prospects” = One of the catalysts for the bond vigilante threat could be ongoing underlying problems in individual countries based on “country and bank-specific macroeconomic prospects” (i.e. how their economies are doing and the health of the financial sector).

    4. “Continued action by sovereigns is needed to address public debt sustainability challenges -– notably progress in restoring the soundness of public finances while working to boost macroeconomic growth prospects.” = But governments need to continue the very austerity policies that are negatively impacting the “country and bank-specific macroeconomic prospects” anyways because that’s just how the eurozone rolls.

    5. The ECB said that while euro-area banks continue to operate in a “low profitability or loss-making environment,” they must continue to work to “mitigate” investors’ skepticism while at the same time ensuring that the deleveraging process doesn’t “unduly” lead to a reduction in credit to the economy. = Low interest rates are hurting bank profitability, so bank had better deal with this although they also shouldn’t shink their portfolios too much because that remove needed credit for the economy to recover. Good luck trying to balance this to all the banks facing stress tests that will be forced to deleverage all summer long.

    6. “Although some tentative signs of a leveling-off in the pace of non-performing loan formation have emerged in some countries, the turning point does not appear to have been reached yet” = BTW, the private sector loans in some countries are still getting worse.

    7. “Amid continued downside risks to a fragile euro-area economic recovery, high private-sector indebtedness in many countries, coupled with only slowly improving income and earnings prospects, may weigh on borrowers’ debt servicing capabilities.” = If things continue as they are, borrowers might go broke.

    In other words, what the ECB is telling us is that there could be a bond vigilante problem. Also, there are no observed problems. But there could be problems if negative underlying trends continue. Also, the austerity policies that are causing the negative underlying trends (and the chase for yield by the banks since other asset classes do poorly in a recession) must also continue. And the bank deleveraging must also continue too although banks should strive not to hurt their profits or restrict credit too much while doing so. And if things don’t change and these trends continue, all those bonds banks are buying might go sour which, obviously, would be really bad.

    That’s basically what the ECB is saying.

    Posted by Pterrafractyl | May 28, 2014, 12:30 pm
  7. With Germany’s economy barely showing any growth and the ECB lowering their medium term inflation outlook (with inflation now expected to reach 1.4% in 2016, well below the 2% target) the ECB finally pulled the trigger. No, not the Quantitative Easing trigger. The smaller Rate Cut trigger and, later this year, cheap loans to banks, but only to banks that can prove they are using the loans for lending to the public(so the weakest banks in the weakest economies may not benefit). We still might see QE, but not this year according to ECB officials because they’ll need to wait and see how well this current rate cut does at turning the eurozone economies around. So the big banking stress test is still on the way this year along with some rate cuts and loans later this year, but no QE:

    ECB will know by year-end if latest measures have worked: Constancio

    By Marc Jones and Francesco Canepa

    LONDON Fri Jun 6, 2014 2:02pm EDT
    (Reuters) – The European Central Bank will probably not know until the end of the year, after banks have had the chance to take up its cheap loans, whether its latest actions have been effective, its vice-president said on Friday.

    The ECB cut interest rates to record lows on Thursday, launched measures to pump money into the sluggish euro zone economy, and pledged to do more if needed to fight off the risk of Japan-like deflation.

    Speaking in London a day after the moves, the bank’s vice president Vitor Constancio said it would now take a step back to give the changes a chance to work, but that a broad asset purchase programme like those attempted in the United States, Britain and Japan remained an option for the 18-nation euro zone if its economy failed to gain traction.

    “Only after the second tranche in December of the initial allowance of the new facility will we then gauge the impact,” he said on the sidelines of an IIF conference. “Because by then the comprehensive assessment (AQR) will be completed and banks will know what is their situation,” he added, referring to the ECB’s scrutiny of banks’ balance sheets.

    The ECB’s bold actions aroused dismay in some German media which warned that drastic loosening of policy could fuel U.S.-style asset bubbles and discourage reform in crisis-hit euro states.

    Bundesbank chief Jens Weidmann tried to cool the fears, saying there had been tough wrangling within the ECB over the decisions and that it was absurd to discuss further measures already.

    “If the inflation rate is too low for too long, a development looms that could damage the economy and harm all of us,” Weidmann said. “That’s why we acted. We wrangled long and hard about the shape of the measures. It was certainly not an easy decision.”

    He also emphasized that he remained opposed to purchasing government bonds. “The ECB cannot be allowed to become the ‘bad bank’ of the euro zone and my position on buying government debt has not changed,” he said.


    Despite the concern of Weidmann and Germany, the ECB has left the door open for further action should inflation expectations start falling or if the economy suffers a serious setback.

    “For the type of contingencies and challenges we face now, what we did, we think, is enough. If some downward shock were to create a much deteriorated situation then we will have to think about all sorts of unconventional policies,” Constancio said.

    Earlier, he had told a question and answer session: “If we see a sort of vicious circle emerge out of (low) inflation and an unanchoring of expectations and an outward shock that would create a reverse spiral, that would require a broad programme of asset purchases.”

    With financial market-derived medium-term inflation expectations still near to 2 percent, however, Constancio said any large scale bond buying was still some way away.

    Speaking at the question and answer session, the ECB vice president said interest rates would remain at current record low levels for some time as the euro zone needed inflation and growth rates to rise to help reduce a regional debt overhang.

    The bank’s main rate is now just 0.15 percent, while its deposit rate is minus 0.1 percent, meaning banks pay to keep cash with the ECB overnight.

    In Vienna, Ewald Nowotny, governor of Austria’s central bank, said the ECB had broken new ground by agreeing to provide long-term liquidity to banks that prove they are using the money for lending, not just squirreling it away.

    He said the ECB’s latest formulation of forward guidance for interest rates meant rates were on hold and that they “reached quasi the lower border,” though Constancio suggested there might be some wiggle room left with the deposit rate.

    In other news, more involuntary austerity is on the way. Much more involuntary austerity. It’s part of the new social contract. It’s a legal contract:

    Irish Independent

    Bruton: We’re facing another 10 years of austerity
    Colm Kelpie

    Published 28/05/2014|02:30

    IRELAND faces at least a decade of austerity because of strict European rules on slashing debt, former Taoiseach John Bruton has warned.

    Mr Bruton (inset), who was once Finance Minister and now speaks on behalf of Ireland’s financial services centre, said we may not even be experiencing austerity yet.

    At present we are still borrowing, adding to our already massive debt mountain. Under European Union rules, we will soon have to begin living within our means.

    The ex-European Union ambassador to Washington said the Irish people had signed up to the strict budgetary rules when we passed the Lisbon Treaty in 2009.

    Under the Lisbon Treaty, countries must reduce their debt levels to 60pc of the value of the economy. The national debt in Ireland peaked at almost 124pc of gross domestic product last year.

    Mr Bruton said Ireland would have to take in more than it spends for several years to meet the targets laid down in the rules.

    “It’s only when you’re taking in substantially more than you’re spending that you’re experiencing austerity,” he said.

    “We haven’t reached that point yet. We will be doing that for about the next 10 or 15 years in accordance with the commitment that we made under the fiscal compact,” he told the Dublin Chamber of Commerce event.

    His comments came as Finance Minister Michael Noonan said the Government would not ease back on cuts in October’s Budget.

    Mr Noonan said it was too early to know whether he would implement the €2bn in cuts agreed with our creditors. “We’ll have a better idea as the summer goes by of what the quantum of adjustment necessary is,” Mr Noonan said.

    Ok, according to the definition of austerity used by Ireland’s ex-Finance Minister, Ireland doesn’t have more austerity on the way because what Ireland has been experiencing thus far isn’t technically austerity since Ireland’s debt has been rising. So the real austerity is yet to come…!?!?

    Posted by Pterrafractyl | June 6, 2014, 1:50 pm
  8. Every once in a while an article comes along that inadvertantly summarizes a collective madness:

    ECB creating ‘dangerous’ bubbles: German think tank
    Matt Clinch | @mattclinch81

    The policy actions announced by the European Central Bank last week received major criticism on Tuesday, with the head of influential German think tank ZEW detailing his concerns about surging asset prices which he says are creating dangerous bubbles.

    Clemens Fuest, from the Mannheim-based organization best known for its widely-watched economic sentiment index – told German business daily Handelsblatt that the euro zone region could be at a “turning point.”

    “I’ve got a bad feeling about this…I am concerned by the danger that the ECB is producing new bubbles with its policy of cheap money,” he told the newspaper.

    “We have all the ingredients of a bubble: The prices of real estate and stock markets continue to rise, and on the bond markets, yields are falling despite high risks.”

    With inflation at 0.5 percent in the euro zone, unemployment at 11.7 percent and bank lending failing to trickle down to the wider economy, the ECB delivered one of its most comprehensive packages to date last week.

    The interest rate and deposit rates have been cut, preparations are beginning to purchase asset-backed securities, new cheap loans will also be made to banks and it is to cease “sterilizing” its past purchases of sovereign bonds.

    Fuest told Handelsblatt he now believes that there is a 95 percent probability that a quantitative easing program – under which government bonds are purchased – will be launched further down the road as last week’s stimulus measures will be deemed as insufficient.

    This asset purchase program, he said, would potentially be the tipping point and lead stock markets and other asset classes into dangerous territory. The purchase of government bonds would only be acceptable if the ECB explicitly claimed senior status relative to private bondholders, he said, and were exempt from any writedown in case of an asset’s devaluation.

    “To overcome the crisis, governments in Europe must act, the ECB alone cannot cope,” he added, implying that governments need to continue with structural reforms to stimulate their own economies.

    Officials from Germany, the economic powerhouse of the euro zone, have been the most vocal critics of ultra-easy monetary policy in the run-up to the ECB’s latest measures. Asset purchases and the cheap liquidity the bank provides are seen by many as having the capability of stoking inflation, especially in Germany where consumer price growth is currently higher than in most other countries in the region.

    So let’s see…this respected think tank economist, Clemens Fuest, has a “bad feeling” about the ECB’s quantitative easing program (which won’t happen this year anyways while the ECB waits to see how its other measures work) because he’s super concerned that it will result in asset bubbles because the money being lent to banks so far isn’t trickling down to the real economy. And he’s convinced that there’s a 95 percent probability that a QE program will be launched because he doesn’t see the programs launched last week (rate cuts and a new loan program for banks) as being a sufficient stimulus.

    Now, this isn’t an unreasonable analysis because it really is a giant waste to throw a bunch of a money at the banks without somehow ensuring that it actually stimulates the real economy. But what would Mr. Fuest prefer to see instead? Government stimulus programs that could immediately put that ECB money to work in the real economy? Nope. He apparently wants more “structural reforms” to “stimulate” local economies. That’s right, the widely read expert that is worried about the financial stimulus not translating into a real economic stimulus thinks that stimulus can best be achieved with more austerity. No one escapes the consensus of the damned (It’s sort of a hostage situation).

    Posted by Pterrafractyl | June 10, 2014, 8:24 am
  9. The ECB and Bank of England just took a stop closer towards “going it alone” and weakening asset backed securities (ABS) regulations below global standards (but only for “high quality” assets) as part of the planned ABS quantitative easing designed to stimulate credit for small and medium sized businesses:

    ECB may buy ‘simple and transparent’ ABS, says Mersch

    By Paul Day and Huw Jones

    BARCELONA Spain/LONDON Wed Jun 11, 2014 11:28am EDT

    (Reuters) – The European Central Bank may buy “simple and transparent” asset-backed securities (ABS) to help achieve its target of delivering price stability to the euro zone, ECB Executive Board member Yves Mersch said on Wednesday.

    Asset-backed securities are created by banks pooling loans like mortgages or car loans into an interest-bearing bond that is sold to raise funds.

    The ECB included the possibility of ABS purchases in a package of measures it announced last Thursday to pump money into the sluggish euro zone economy.In a speech entitled “Next steps for European securitisation markets”, Mersch said the ECB wanted a more holistic approach to the regulatory treatment of ABS in Europe and greater transparency of their treatment by ratings agencies.

    “There is a growing consensus that an instrument once seen as part of the problem could in fact be part of the solution,” he said of talks about ABS in European policymaking circles.

    Europe’s ABS market has not recovered from the stigma created by the global financial crisis, which was triggered by doubts about the quality of assets in supposedly rock-solid U.S. mortgage-backed securities.

    The ECB and the Bank of England aim to get European banks and investors to agree common standards for safer ABS, which could help build a stronger economy by providing credit to firms that are too small to raise investment funds direct from capital markets.

    “We have to work in tandem with the markets, see what the market reaction is,” Mersch said of ECB preparations to buy ABS.

    “Obviously we will not go into the area of buying the equity tranche. Anything else beyond has to be seen to be under discussion,” he told a conference organised by European banking lobby AFME.

    Substantial efforts were underway to improve transparency and disclosure requirements of ABS across the EU, Mersch said.

    Nomura bank has said the European securitisation market is about 650-700 billion euros, half its pre-crisis size.

    Earlier this week AFME said the ECB and BoE must turn talk of reviving the ABS market into speedy action by easing what they see as punitive capital rules planned for the sector.

    Separately on Wednesday, Andreas Dombret, the Bundesbank board member responsible for banking supervision, said it was up to the market and not public authorities to revive the sector.

    “First and foremost it’s a job for the industry itself,” Dombret told reporters during a visit to London.

    “One should not always call for the public sector to be in the forefront when it should be in the interests of the market itself to revitalise that,” Dombret said.


    The ECB and BoE are seeking to create a clearly defined category of high-quality ABS that would benefit from more lenient capital charges for banks than planned under global rules from the Basel Committee of banking regulators.

    Mersch said he did not believe that Basel would rush to define high-quality ABS any time soon.

    Should it become clear that it would take too long to improve the regulatory requirements for ABS on a global scale, Mersch said Europe could go it alone.

    “So if we see the global approach will not be conducive to helping the recovery in the European economic area, we would have to consider whether a more European approach would be helpful,” Mersch added.

    Andrea Enria, chairman of the European Banking Authority, an EU watchdog that writes rules for lenders, said Basel was in the “driving seat” when it comes to capital charges on ABS.

    “The point is not about bringing down the charges, it’s whether to distinguish between different classes of ABS and securitisation, whether this means that the capital treatment can be adjusted accordingly,” Enria told reporters in London.

    The EBA will also give the EU advice by September on capital treatment of securitisation, Enria added.

    Banks worry that once a definition of “simple and transparent” ABS is agreed then the rest of the market could be shunned by investors.

    So the plan appears to be for the ECB (and BoE) to create a “clearly defined category of high-quality ABS” and then give this class of assets a “more lenient capital charges for banks” than the Basel Committee of banking regulators (which sets the global rules for banks) has in mind. And if the Basel committee can’t “improve the regulatory requirements for ABS on a global scale” (by deregulation), the ECB and Bank of England might go ahead and take “a more European approach” by setting those lenient rules unilaterally.

    And, of course, the Bundesbank opposes the plan, but not due to questions about its efficacy. No, the opposition is just in principle. Specifically, “first and foremost [stimulating the ABS market is] a job for the industry itself…One should not always call for the public sector to be in the forefront when it should be in the interests of the market itself to revitalise that”. It’s a reminder that the ordoliberalism pushed by the Bundesbank onto the eurozone is basically synthetic neoliberalism.

    Still, there are reasons to be concerned about this plan. In addition to the inherent unknowns and catastrophic potential associated with financial deregulations, part of what makes this plan somewhat contradictory is that the whole idea behind the ABS QE plan is to make it easier for small and midsized business to access credit markets by making it easier for banks to issue ABS for small and mid sized businesses. At least that’s the claim. But at the end of the article we hear about how banks are worrying “that once a definition of ‘simple and transparent’ ABS is agreed then the rest of the market could be shunned by investors“. So you have to wonder just how much deregulating the “high-quality ABS” market will result greater credit for small and mid sized businesses since those smaller businesses are inherently riskier and their ABSs probably aren’t going to be “high quality”. For instance, last year, when the ABS market was experiencing a supply squeeze, it was the relative lack of high quality ABS products that was pushing investors into buying more of the riskier small and medium sized business ABS:

    Financial News
    Supply squeeze forces ABS investors into riskier territory
    Sarah Krouse View Social links for Sarah Krouse

    29 Apr 2013

    Investor interest in securitised credit funds has rebounded since the financial crisis as strategies investing in the asset class have posted double-digit returns in recent years.

    But as that demand builds, the European asset-backed securities market is experiencing a squeeze in supply that poses a fresh challenge to funds investing in the sector.

    European ABS volume totalled just $5.9bn in the first quarter of 2013, according to data provider Dealogic. That is the lowest first quarter total since 2010 and a 35% drop on the same period last year.

    ABS experts say that given continuing quantitative easing efforts across the UK and Europe and rule changes that lessen the appeal of ABS under the European Central Bank’s repurchase agreement, this year is not set to be a bright one for issuance in the region.

    Gareth Davies, head of ABS and covered bonds research at JP Morgan, said that given the low-growth environment, the European Central Bank’s long-term refinancing operation, and the UK’s funding for lending scheme: “I don’t think the tap is going to be turned on. I think this is going to be a quieter year.”

    More competitive

    Market experts say this means more investors will be competing for fewer products, particularly the more secure AAA-rated securities. And this will force many to take greater risks for high returns.

    Davies said: “In my mind there are three directions you can go: down the [capital] stack in terms of seniority, across the stack [in terms of the perceived stability of assets in different geographic areas] or a combination of both.”

    An investor could seek greater upside by investing in Italian or Spanish residential mortgage-backed securities, instead of UK or Dutch RMBS.

    Ben Hayward, founding partner of TwentyFour Asset Management, and manager of the firm’s new ABS-focused fund, said: “Undoubtedly it’s harder to buy product now than it was a year ago. Do we still see opportunity? Absolutely, across the capital structure the sector is still cheap to the level of fundamental risk, and we’re seeing more investor appetite currently for the less liquid parts of the market.”

    That can mean moving away from AAA-rated securities to less liquid corners of the market such as small and medium enterprise loan-backed securities, corporate loans and MBS in peripheral Europe.

    If “high quality” ABSs are get preferred regulatory treatment from the ECB and BoE, but the higher risk ABS don’t also get a similar regulatory easing, couldn’t that make the high quality ABSs relatively cheaper for investors while expanding their supply and possibly squelch the demand for the higher risk ABSs that are supplying small and medium sized businesses and achieve the exact opposite of the stated goals for ABS QE? It could work if the ECB buys more of those “high quality” ABSs as part of the QE plan than the banks end up creating, but isn’t that a pretty big “if”? This is the ECB we’re talking about.

    Posted by Pterrafractyl | June 11, 2014, 12:25 pm
  10. Remember this from back in 2011?

    The New York Times
    The Conscience of a Liberal
    Catastrophic Stability
    September 25, 2011 11:18 am
    Paul Krugman

    I look a fair bit at bond market “breakevens” — the difference in interest rates between regular bonds and inflation-protected bonds of the same maturity, which give a measure of inflation expectations. It’s not a perfect measure by any means, since there are issues of risk and liquidity, and anyway what bond investors expect isn’t necessarily reasonable. But breakevens do give a quick read on the issue, and can be helpful in thinking about where we are.

    So, let’s look at German breakevens:

    The market seems to expect price stability for Germany — an inflation rate of 1 percent or so over the next 5 years. And that has a clear message: it’s signaling catastrophe for the euro.

    Why? I tried to lay this out a while ago. A reasonable estimate would be that Spain and other peripherals need to reduce their price levels relative to Germany by around 20 percent. If Germany had 4 percent inflation, they could do that over 5 years with stable prices in the periphery — which would imply an overall eurozone inflation rate of something like 3 percent.

    But if Germany is going to have only 1 percent inflation, we’re talking about massive deflation in the periphery, which is both hard (probably impossible) as a macroeconomic proposition, and would greatly magnify the debt burden. This is a recipe for failure, and collapse.

    Another way to say this is that the euro is going to have a chance of working only if the ECB delivers much more expansionary and, yes, inflationary policies than the market now expects. If you don’t think that’s a possibility, say goodbye to the euro project.

    The worst part about catastrophic stability? Things keep changing (for the worse). It’s just the reasons for why things are getting worse that never seem to change. So it’s very painful and very frustrating:

    Financial Times
    Money Supply
    Krugman gives Draghi some advice
    Claire Jones | May 27, 2014 12:26

    The European Central Bank is not exactly renowned for stoking inflation. At 0.7 per cent, price pressures are now less than half its target of below but close to 2 per cent — something that the governing council has done nothing to correct over the past six months.

    That did not stop Paul Krugman today telling the ECB to raise its target even higher. The Princeton professor was standing only meters away from Mario Draghi, in Sintra at an event that the eurozone’s monetary authority hopes to become its own version of the US Federal Reserve’s Jackson Hole.

    As hard sells go, this is right up there.

    Krugman’s argument is based on his prognosis for “the new normal” — a term which describes what the big advanced economies will look like after the crisis is consigned to history.

    His view is that, even if 2 per cent was appropriate in the 1990s (and he is not sure it was), there’s no way that it will be in the future. Why? Because a mixture of factors, such as demographic shifts and a lack of leverage, are going to create a world where levels of aggregate demand are much lower than before the crash.

    “We’re looking at a natural austerity policy… it’s very easy to think it could push the real rate of interest to a level where it’s persistently negative,” Prof Krugman said.

    It is a view based on the idea that secular stagnation will befall Europe, permanently lowering the rate at which its economies can grow.

    A higher target would, Mr Krugman argues, enable economies that suffer from low inflation (such as the eurozone’s) to escape that trap by boosting aggregate demand. The boost would come through the policy easing that a higher target would imply. He also notes that there was little rationale for the decision by the ECB — and pretty much every advanced economy central bank — to plump for 2 per cent. Picking the figure was, in his view, arbitrary.

    The first question went to Otmar Issing, former ECB and Bundesbank board member, who was one of the most important figures in setting the central bank’s target. Unsurprisingly, he was critical, arguing that there were a lot of welfare effects associated with higher inflation.

    Agustin Carstens, governor of the Bank of Mexico, warned of the Argentine experience, where inflation has risen rapidly in recent years.

    James Bullard, from the St Louis Fed, was more supportive, saying he liked the paper but thought hitting a higher inflation target was easier said than done. He also flagged the welfare effects cited by Mr Issing, saying that throughout history inflation had hit the poorest hardest.

    Others questioned whether a central bank that cannot even hit a target of 2 per cent would be able to stoke inflation simply by raising its target.

    Update: It only took a few hours for Mario Draghi to join the list of names at Sintra saying no to Prof Krugman’s calls for a higher inflation target.

    One of the reasons for Draghi’s rejecting the Princeton economist’s idea was the large differences between inflation rates across the bloc.

    According to the ECB president, if the central bank targeted inflation of 5 per cent, price pressures would have to be sufficiently stronger than this in the bloc’s healthiest economies to tolerate below-target inflation in the weaker areas.

    “What would it mean for Germany to have a 5 per cent level? I wouldn’t want to think of that,” Mr Draghi said.

    Wow. Krugman presents a paper to a bunch of central bankers suggesting that an aging populace and the “natural austerity” that goes along with it might be leading to a “new normal” of lower aggregate demand for much of the world and that central bank inflation “targets” that are higher than 2% might be the appropriate response to this “new normal” in order to avoided persistently negative real interest rates. In other words, the “secular stagnation” facing the eurozone could lead to a catastrophically stable situation, but only if we don’t adjust our policies to the new normal. And the responses from the central bankers appeared to be:
    1. That higher inflation unfairly harms the poor (so let’s continue with the austerity in economies nearing deflation, right?)

    2. A reference to Argentina (Yep).

    3. If the ECB can’t get inflation to even 2% now, why bother raising the target higher?

    4. And, finally, Mario Draghi chimes in “What would it mean for Germany to have a 5 per cent level? I wouldn’t want to think of that”.

    Non-super low inflation as a means to address the secular stagnation associated with aging populations and demographic shifts?! NO NO NO NO NOOOOOOOOOOOOOOOOOOO! We’re all gonna die! That’s basically argument made by some of the most powerful and influential people on the planet.

    Posted by Pterrafractyl | June 11, 2014, 1:17 pm
  11. Let’s hope the “dream team” talk in this article is just nightmarish speculation:

    June 12, 2014, 3:58 a.m. EDT
    The backroom deal that took bazooka out of ECB’s hands
    Opinion: Inside story of why Bundesbank gave OK for negative interest rates

    By David Marsh, MarketWatch

    LONDON (MarketWatch) — The Bundesbank’s approval for last week’s European Central Bank package of liquidity measures and interest-rate cuts into negative territory appears to be part of a wider-ranging realignment of responsibilities on the European scene.

    A series of interlinked initiatives could consolidate the position of reform-minded leaders in key areas of European policy-making, reinforcing economic and monetary union by eventually installing a German leader at the helm of the ECB.

    Keep in mind that the term “reform-minded” is being used here in place of “pro-austerity”.


    By limiting the cut in the ECB’s main interest rates to only 0.10 percentage points, and agreeing that rates have now reached their floor in Europe, Mario Draghi and Jens Weidmann, the presidents of the ECB and the Bundesbank, have effectively ended sporadic skirmishing that erupted after they took their jobs in 2011.

    The conclusion of hostilities could pave the way for a still more dramatic rapprochement if Weidmann replaces former Banca d’Italia Gov. Draghi as ECB president in the next few years, as some observers believe is likely if Draghi takes over from 88-year-old Giorgio Napolitano as Italy’s president in Rome.

    Matteo Renzi, the new Italian prime minister, is emerging as a pivotal European figure following his more comfortable-than-expected win in last month’s European parliamentary elections. German Chancellor Angela Merkel has fastened on Renzi as a potentially reliable ally in the swirling battle for influence caused by oscillating power struggles between Berlin, Paris, London and other capitals.

    In particular, Renzi has close relations with Draghi, contrasting to the ECB chief’s habitual leaning to keep his distance to Italian politicians.

    Renzi’s support for a reform-minded president of the European Commission could prove crucial to attempts to prevent Jean-Claude Juncker, the former Luxembourg prime minister and finance minister, who has been given fluctuating backing by German Chancellor Angela Merkel, to take over the Brussels body later this year.

    There is no love lost between the ECB and Juncker, who as leader of the Euro group of finance ministers tried to usurp some of the power of Draghi’s predecessor Jean-Claude Trichet earlier in the euro’s history. In particular, Juncker tried to take over responsibility for the euro’s exchange rate, earning from Trichet the rebuke that he as ECB president was “Mr. Euro” — a remark that reverberated against Trichet once the euro crisis came to the surface from 2010 onwards.

    Renzi will be crucial in machinations for the succession to Napolitano, possibly as early as around the time of his 90th birthday in summer 2015. Draghi is the front runner to take over, probably before the end of his eight-year ECB term that runs to 2019. The timing would depend on the opening of a relatively calm period in Italian politics and the European economy, conditions that cannot be guaranteed.

    A landmark development for the Bundesbank president to lead the ECB would mark a more propitious version of the foiled move in 2010-11 for Axel Weber, then-Bundesbank president, to succeed Trichet, the ECB’s second president after Dutchman Wim Duisenberg.

    This plan was stymied by the then-Bundesbank chief’s uncompromising nature and Merkel’s reluctance fully to back the often irascible Weber in the face of political reluctance, especially from France, to see a German head the ECB.

    Weber subsequently stepped down early from the Bundesbank and now chairs Swiss bank UBS. He was replaced by Weidmann, Merkel’s former economic adviser, in May 2011, while Draghi took over from Trichet at the ECB six months later.

    Weidmann has taken a far more conciliatory course than Weber towards other members of the ECB governing council, refraining from critical statements and actions in recent months. In particular, Weidmann has made great efforts to patch up his relations with Draghi after having opposed the latter’s initiative in summer 2012 for ECB government-bond purchases under the effective but unconsummated outright monetary transactions (OMT) program.

    Also keep in mind that Axel Weber resigned as head of the Bundesbank in protest over the ECB’s willingness to buy limited amounts of government bonds in crisis hit countries to prevent a downward spiral.


    A combination of Draghi as the far-from-merely-honorific head of state of the country often seen as the euro’s biggest long-term problem, Weidmann at the ECB (he would be replaced as Bundesbank president by ECB board member Sabine Lautenschläger) and a reformist leader of the Commission could be a “dream team” for Europe.

    Last week’s ECB measures, although superficially a monetary operation, bear all the hallmarks of a carefully crafted political compromise. The ECB launched a major strike against threatened deflation through the offer of up to €400 billion in cheap, fixed-rate loans — known officially as targeted longer term refinancing operations (TLTRO).

    Draghi as president of Italy and Jens Weidmann as head of the ECB. That’s the “dream team”, but it will require Italy’s president to leave office some time between now and 2019. The 88 year old president Giorgio Napolitano. *gulp*

    Posted by Pterrafractyl | June 13, 2014, 12:46 pm
  12. And the beatings continue:

    Germany’s Weidmann rejects calls for euro devaluation – magazine

    BERLIN Sun Jun 15, 2014 3:04pm BST

    (Reuters) – The head of Germany’s Bundesbank rejected calls from some European countries for the euro to be devalued to help exporters in a magazine interview published on Sunday.

    In a pre-publication release, Germany’s Focus magazinereported Jens Weidmann as saying any move to weaken the currency could lead other central banks to follow suit, prompting a “devaluation race” that would only have losers.

    “Competitiveness cannot be brought about through a devaluation. It is generated (by) companies with attractive products that stand their ground on the markets,” Weidmann, seen as the most hawkish European Central Bank policymaker, said.

    “A strong economy can also tolerate a strong currency.”

    A strong currency makes exports more expensive.

    Yes, the guy that’s championed the notion of national “internal devaluation” – which lowers the costs of exports by slashing labor costs as the primary means of increasing “competitiveness” – just said “competitiveness cannot be brought about through a [currency] devaluation”. Apparently a “devaluation race” to the bottom can only take place with currency devaluations whereas races to devalue national living standards can never get too competitive and only creates winners.

    And, while “a strong economy can also tolerate a strong currency”, what about weak economies stuck in a currency union that results in an artificially strong currency that makes their exports more expensive? Somehow that wasn’t addressed.


    Weidmann, who on Thursday emphasised his opposition to the ECB buying government bonds, also appeared to dismiss potential purchases of other assets by the euro zone central bank.

    “In some countries – including in Germany – we see the danger of a real estate bubble. And then we as the euro system should buy Dutch real estate loans?” he said.

    The ECB decided unanimously this month to cut interest rates to record lows – taking the rate on overnight deposits below zero – and to launch measures to stimulate lending to small and medium-sized companies, the backbone of the euro zone economy.

    Weidmann said he had misgivings about the package but had agreed to it because it was justifiable given low inflation.

    He did not expect the negative deposit rate would do much to boost loans in the euro zone, however, arguing that banks provided few loans in southern regions because “many firms (there) hardly demand fresh money due to the weak economy”.

    So if Weidmann “also appeared to dismiss potential purchases of other assets by the euro zone central bank,” doesn’t that basically rule out the ECB’s proposed purchase of asset backed securities next year? Uh oh. Although he does make a valid point at the end:

    He did not expect the negative deposit rate would do much to boost loans in the euro zone, however, arguing that banks provided few loans in southern regions because “many firms (there) hardly demand fresh money due to the weak economy”.

    If banks are providing few loans in southern regions because “many firms (there) hardly demand fresh money due to the weak economy”, that would indeed raise questions about the effectiveness of the planned purchase of asset backed securities since the whole point of the plan was to make loans more accessible to small and medium sized businesses?

    But, of course, it also raises the same old question of what can societies do when government stimulus is permanently vetoed by the Weidmann-faction, and a drop in the euro (to trigger exports) is also determined to be unnecessary? Oh yeah, society can just continue “internally devaluing” itself through austerity until its products get so cheap that rest of the world just can’t help but buy its products. It should start working any year now.

    Posted by Pterrafractyl | June 18, 2014, 11:02 am
  13. This is barely news at this point, but look who just came out against the ECB’s QE plans to buy asset-backed securities:

    Bundesbank chief – do not turn ECB into Europe’s bad bank
    Reuters, 25/06 17:24 CET

    HALLE Germany (Reuters) – Germany’s top central banker has warned the European Central Bank against buying securitised debt, saying that such a move could turn it into the bad bank of Europe.

    “The revival of the securitisation market is not a primary task of monetary policy,” European Central Bank policymaker Jens Weidmann told an audience in Halle in eastern Germany.

    “The euro system must not become the bad bank of Europe by taking risks off banks and passing them onto the taxpayer.”

    Weidmann’s blunt remarks follow preparations by the ECB for possible future purchases of asset-backed securities. It is a key plank in plans to revive lending to small companies.

    Now the opposition from Germany poses an obstacle to its launch.

    The market is potentially large. Banks have lent almost 4 trillion euros in loans of under 1 million euros.

    While the QE plan is rather questionable (due in large part to ongoing austerity regimes that will neutralize its effects), this story is a reminder that the Bundesbank’s ideology basically revolves around being a central bank that refuses to do the things central banks are supposed to do. That’s the supposed magic to Germany’s economic success according to Bundesbank lore, not the fact that Germany is a giant high tech manufacturing hub that plays a key a role in the global industrial supply chain. In the minds of the Bundesbank, Germany’s economic success is heavily reliant on the Bundesbank doing nothing and that model must now be permanently exported to the ECB. Nice work if you can get it.

    Posted by Pterrafractyl | June 28, 2014, 5:01 pm
  14. FWIW, the IMF just told the ECB that not only should the ECB be engaging in QE, but it should be doing it via large scale government bond purshases. While it’s pretty much guaranteed that this suggestion will go absolutely nowhere due to Bundesbank opposition, the IMF should probably get brownie points for at least trying:

    The Wall Street Journal
    IMF Touts Quantitative Easing Benefits for ECB
    Fund Stops Short of Call for Immediate Implementation

    By Brian Blackstone
    Updated July 14, 2014 10:26 a.m. ET

    Large-scale purchases of government bonds by the European Central Bank would boost euro zone inflation and stimulate demand for bank credit, the International Monetary Fund said Monday in its latest effort to tout the potential benefits of quantitative easing in Europe.

    The IMF stopped short of calling on the ECB to immediately embark on the policy, which stirs deep skepticism in the euro zone’s largest member, Germany.

    But the comments from the Washington-based international lender—contained in a blog post addressing the question: “would the juice be worth the squeeze”—largely come down in favor of quantitative easing as a means to lift inflation rates across the 18-member euro bloc.

    Quantitative easing “can push up inflation by raising consumption and investment across the euro area, and support that trend by reviving the supply and demand for bank credit,” wrote Reza Moghadam, head of the IMF’s European department, and the department’s deputy director Ranjit Teja.

    Annual inflation in the euro zone was just 0.5% in June, far below the ECB’s target of a little under 2%. Last month, the ECB took a number of steps to raise inflation, including a negative rate on bank deposits parked at the ECB and a long-term loan program that would give banks cheap credit provided they boost lending to businesses.

    The ECB didn’t announce a broad-based asset purchase program, though officials have said it remains an option if the outlook for inflation erodes further.

    If the ECB decides to go this route, it should focus on government bonds as the “only viable option,” the IMF officials wrote, noting that the market for bundled loans and corporate bonds is small in Europe.

    The IMF rebutted arguments made by skeptics of quantitative easing: that government bond yields are already super-low in Europe, limiting the potential benefit; that the euro zone’s bank-based economy is less sensitive to QE; and that the policy could create destabilizing asset bubbles.

    “A decline in European yields of 50 basis points at mid-maturities, and more at the longer end, is entirely plausible,” the authors wrote. And European financial markets are roughly as bank-based as Japan’s, where quantitative easing has been successful since last year, they noted.

    And while reducing government bond yields may spur riskier lending, “it is also the point” of the policy, they observed. “While risk-taking and credit growth may grow excessive, this is not an immediate risk, certainly not next to that of too low inflation,” they wrote.

    Still, the bar for quantitative easing appears high in the euro zone. ECB officials have signaled they want to gauge the effect of June’s easing steps before weighing additional moves.

    A German member of the ECB’s executive board, Sabine Lautenschlaeger, said last week that while quantitative easing is an option, “such an instrument could only be considered in a true emergency, for example in the case of imminent deflation” and that these risks “are currently neither discernible nor expected.”

    Such hesitation would have to be shed in order for quantitative easing to be effecting, the IMF comments suggest.

    “It would not help if the ECB went for QE with anything less than full conviction,” the authors wrote.

    Touching on this topic, ECB Council member Ewald Nowotny recently stated that if the ECB can’t come up with a QE plan it can agree on by the end of the year it should just drop the idea of QE entirely. As Nowotny put it, “if we’re not able to come up with some kind of plan this year, the conclusion should be that, unfortunately, it is too difficult for Europe, given the material differences, and that it would make no sense…This is in Europe much more difficult than in the U.S. and the U.K. because of strong divergences, not least on the legal side.”

    In other news, the confidence fairies of the marketplace don’t appear to have very much confidence in the ECB. Imagine that.

    Posted by Pterrafractyl | July 17, 2014, 12:45 pm
  15. The good news: mainstream macroeconomists are overwhelmingly supportive of real fiscal stimulus policies when the economy needs it. The bad news: no one cares:

    The New York Times
    The Conscience of a Liberal

    Useless Expertise
    Paul Krugman
    Jul 30 2:05 pm

    Justin Wolfers calls our attention to the latest IGM survey of economic experts, which revisits the question of the efficacy of fiscal stimulus. IGM has been trying to pose regular questions to a more or less balanced panel of well-regarded economists, so as to establish where a consensus of opinion more or less exists. And when it comes to stimulus, the consensus is fairly overwhelming: by 36 to 1, those responding believe that the ARRA reduced unemployment, and by 25 to 2 they believe that it was beneficial.

    This is, if you think about it, very depressing.

    Wolfers is encouraged by the degree of consensus — economics as a discipline is not as quarrelsome as its reputation. But I think about policy and political discourse, and note that policy has been dominated by pro-austerity views while stimulus has become a dirty word in politics.

    What this says is that in practical terms the professional consensus doesn’t matter. Alberto Alesina may be literally the odd man out, the only member of the panel who doesn’t believe that the fiscal multiplier is positive — but back when key decisions were being made, it was “Alesina’s hour” in Europe and among Republicans.

    You might want to say that the professional consensus was rejected because it didn’t work. But actually it did. Mainstream macroeconomics made some predictions — deficits wouldn’t drive up interest rates in a depressed economy, “fiat money” wouldn’t be inflationary, austerity would lead to economic contraction — that drew widespread scorn; Stephen Moore at the WSJ (which was predicting soaring rates and inflation) dismissed “fancy theories” that “defy common sense.” The fancy theorists were, of course, right — but nobody who rejected the consensus has changed his mind. Oh, and Moore became the chief economist at Heritage.

    So, two thoughts. One is a point I think I’ve made before. You fairly often hear people describe the very poor track record of policy since 2008 as an indictment of economists, who clearly didn’t have the right answers. But actually mainstream macro has a pretty decent track record since 2008 — the problem was that what it said about policy was disregarded by the policymakers, who went with what they wanted to believe.

    The other is that you have to wonder what good we’re all doing. If policymakers ignore professional consensus, and if views about how the world works are completely insensitive to evidence and results, does knowledge matter. If a tree falls in the academic forest, but nobody in Brussels or Washington hears it, did it make a sound?

    If a tree falls in the academic forest, but nobody in Brussels or Washington hears it, did it make a sound? Of course it does! It makes the sound of roots getting torn out (until Paul Krugman runs out of hair).

    But even if DC or Brussels did hear a tree crying out “stimuuuuuluuussss!” as it fell, the term “stimulus” has just been redefined to include only monetary stimulus policies (i.e. loose money policies for the banks). And yes, those kinds of policies certainly have their place, but the kind of stimulus Krugman is referring to, where the government actually spends money making new investments in areas like infrastructure and research in order to stimulate the economy while doing useful things, has become completely unpersoned. The idea just isn’t discussed anymore. So whether or not policy-makers hear about the growing concensus amongst economists that the “stimulus” was helpful and needed, it’s probably not going to matter very much. Contemporary policy-makers only speak monetary-ese, and the term “stimulushas a very limited definition in monetary-ese:

    ECB Patience Test: Euro-Area Inflation Seen Sticking Low
    By Stefan Riecher and Giovanni Salzano Jul 28, 2014 6:58 AM CT

    When the European Central Bank unleashed a stimulus barrage in June, it cautioned that the economy would take some time to respond. Data due this week may test its patience.

    The inflation rate remained at 0.5 percent for a third month in July, according to the median forecast of 42 economists in a Bloomberg survey. The unemployment rate remained unchanged at 11.6 percent in June, a separate survey shows. That may fuel policy makers’ concern that annual price gains will become entrenched at a fraction of the ECB’s goal of just under 2 percent, and increase calls for further action.

    The ECB unveiled a range of measures including a negative deposit rate and targeted long-term loans last month. While the package has helped push the average yield on bonds from Europe’s most-indebted nations to a record low and bolstered manufacturing and services in a vote of confidence, it has yet to show its impact on prices, growth and lending, as geopolitical tensions threaten to undermine the recovery.

    “Speculation about an asset-purchase program from the ECB is likely to gain further traction,” said Benjamin Schroeder, an interest-rates strategist at Commerzbank AG in Frankfurt. “The crises in Ukraine and the Middle East should remain a driving factor” for the euro-area economy, he said.

    The European Union’s statistics office is due to release inflation and jobless data on July 31 at 11 a.m. in Luxembourg. These releases will be preceded on July 30 by reports on euro-area business confidence at 11 a.m. and German inflation at 2 p.m.

    Economic Destiny

    The destiny of the euro area hinges on Europe’s largest economy, which saw gross domestic product growing 0.8 percent in the first quarter, four times the currency bloc’s rate.

    The Bundesbank has warned that political uncertainty in some of the country’s export markets may weigh on business and said that the economy may have stagnated in the second quarter. Sentiment as measured by the Ifo research institute dropped more than economists predicted in July to the lowest level in nine months.

    Even so, gauges of German manufacturing and services output signal a rebound in activity to levels seen at the beginning of the year, Markit Economics said last week. Similar measures for the euro area also strengthened this month in a sign of confidence that ECB stimulus will eventually support the recovery.

    “The combination of monetary policy measures decided last month has already led to a further easing of the monetary policy stance,” Draghi said on July 3.

    The rate banks charge each other for overnight lending has averaged at 0.04 percent so far this month, compared with 0.26 percent in May, before the package was announced. The rate was at 0.043 percent on July 25.

    Fresh stimulus has also fueled a rally in bonds that cut Spanish 10-year borrowing costs to a record 2.524 percent last week and helped Italian debt of the same maturity drop for the most consecutive days since 2005.

    Bank Lending

    Lending to companies and households, which the ECB has identified as key impediment to the region’s recovery, hasn’t yet improved. Loans shrank 1.7 percent in June from a year earlier, recording the 26th consecutive contraction. The ECB’s Bank Lending Survey, to be published on July 30, will show whether supply or demand is to be blamed.

    Policy makers have placed their hopes on a targeted lending program offering banks low-cost funds for as long as four years that could, according to Draghi, inject as much as 1 trillion euros ($1.34 trillion) into the financial system.

    “Let’s focus on getting these existing, newly announced measures going” before introducing additional policy action, ECB Governing Council member Ardo Hansson said in an interview on July 16. “It’s worth preparing, it’s worth having more tools, but I don’t think quantitative easing is a tool that’s needed right now.”

    Yes, lending to companies and household, something that the ECB has identified as key impediment to the region’s recovery, shrank for the 26th consecutive month across the eurozone. So why don’t we all wait another half a year to see if the ECB should apply more monetary stimulus while also allowing the ongoing “expansionary austerity” policies work their magic too.

    Posted by Pterrafractyl | July 30, 2014, 2:45 pm
  16. Uh oh:

    Weidmann jockeying to replace Draghi at ECB
    Opinion: A German’s ascension would be controversial even in Berlin
    David Marsch
    Aug. 4, 2014, 11:45 p.m. EDT

    Jens Weidmann, president of the German Bundesbank, appears to be shaping up well as the potential next head of the European Central Bank, possibly well before the eight-year term of Mario Draghi, the incumbent, expires at the end of October 2019.

    In contrast to his predecessor, Axel Weber, who in 2011 rejected the possibility of taking the ECB helm because of what he believed would be impossible conditions for success, Weidmann has hard-to-beat credentials. But his appointment at the center of the 18-member economic and monetary union (EMU) would be deeply controversial.

    Some non-Germans would interpret it as a sign that control over the euro area was finally moving to Berlin — anathema to many traditional believers in European unity. Many euroskeptical Germans, on the other hand, would see co-opting Weidmann into the ECB role as weakening German resistance to a Franco-Italian campaign to shift EMU policies away from stability-oriented orthodoxy, marking the Bundesbank’s final loss of independence and political emasculation.

    Just as there is uncertainty about precisely what the move would mean, whether Weidmann will get the top job is mired in doubt. The appointment of the ECB’s first three presidents, Wim Duisenberg, former president of the Dutch central bank, Jean-Claude Trichet, former head of the Banque de France, then Draghi from the Banca d’Italia, was dogged by political infighting. Weidmann’s ascent would be no different.
    What happens next depends on circumstances beyond anyone’s control, ranging from Italian political vicissitudes to whether a two-year EMU economic truce holds.

    One crucial factor is that Giorgio Napolitano, Italian president since 2006, who reluctantly agreed to stay on when his seven-year term expired in April 2013, is believed to wish to stand down around the time of his 90th birthday on June 29, 2015. Draghi is the clear favorite to succeed him.

    Whether a transition in the pivotal function of Italy’s head of state should take place before or after the inevitable next crisis in Italian politics is a moot point.

    At present, Matteo Renzi, the 39-year-old prime minister, is benefiting from a better-than-expected showing in the May European elections. Yet his wide-ranging reform program is already showing signs of running into political opposition. Difficulties are bound to grow from autumn onwards if he achieves no quick breakthrough in alleviating Italy’s 20 years of political and economic stagnation.

    Similarly, Draghi is credited with presiding over a return of EMU confidence with his so far unrequited pledge in July 2012 to use the ECB’s powers to print money to save the euro. The ECB’s unused outright monetary transactions (OMT) scheme has ushered in a long decline in borrowing costs among hard-hit peripheral countries, also reflecting and at first welcome, now worrying decline, in euro-area inflation.

    However, cheaper government financing has acted as a disincentive to thorough-going economic reform that has prolonged the euro area’s low growth. The ECB now faces the hazard of engineering a further period of cheap money at a time when U.S. rates are about to rise.

    As Chancellor Angela Merkel’s former chief economic adviser, Weidmann straddles politics and central banking. But he has made clear his primary allegiance is to the Bundesbank’s hard-money principles.

    If he became ECB leader, Weidmann would show the politicians that the bank’s sway is not unlimited. He believes that the key to solving EMU’s abiding contradictions and conundrums lies with governments, not with central bankers.

    Well isn’t that ominous.

    Note that when the article states “However, cheaper government financing has acted as a disincentive to thorough-going economic reform that has prolonged the euro area’s low growth. The ECB now faces the hazard of engineering a further period of cheap money at a time when U.S. rates are about to rise,” this is only really true if you subscribe to the sadomonetarist school of economic thought that views debt money and debt as the center of the economy (as opposed to people trying to live) with little regard to the complexities of society’s needs or how economies actually function. It’s basically a form of economic religious fundamentalism and you would have to be kind of crazy to believe in it. Much like Jens Weidmann.

    Posted by Pterrafractyl | August 5, 2014, 4:58 pm
  17. The ECB left interest rates unchanged last week and stands ready to continue doing nothing, as expected, but probably not as recommended given the circumstances:

    The Telegraph
    Germany close to recession as ECB admits recovery is weak
    Mario Draghi says the recovery remains “weak, fragile and uneven”, with a marked slowdown in recent weeks

    By Ambrose Evans-Pritchard

    8:19PM BST 07 Aug 2014

    German bonds yields plunged to a historic low and two-year rates briefly fell below zero on Thursday on fears of widening recession in the eurozone, and a flight to safety as Russian troops massed on the Ukrainian border.

    Yields on 10-year Bunds dropped to 1.06pc after a blizzard of fresh data showed that recovery has stalled across most of the currency bloc, with even Germany now uncomfortably close to recession.

    Commerzbank warned that the German economy may have contracted by 0.2pc in the second quarter and is far too weak to pull southern Europe out of the doldrums. Industrial output fell 1.5pc over the three months. The DAX index of equities in Frankfurt has dropped 10pc over the past month and is threatening to break through the psychological floor of 9,000.

    Mario Draghi, head of the European Central Bank (ECB), said the recovery remained “weak, fragile and uneven”, with a marked slowdown in recent weeks on escalating geopolitical worries over Russia and the Middle East.

    He said the ECB, which on Thursday held benchmark interest rates at 0.15pc, “stands ready” to inject money through purchases of asset-backed securities and quantitative easing if needed, but would not take further action yet even though inflation had fallen to 0.4pc.

    The debt markets are pricing in 0.5pc inflation in Germany and Italy over the next five years through so-called “break-even” rates, evidence that investors think the ECB is falling far behind the curve. Mr Draghi insisted that a string of measures unveiled in June were starting to work and should be enough to stave off deflation.

    The ECB ignored pleas from leading economists for pre-emptive action to bolster the eurozone’s defences before an external shock hit and before the US Federal Reserve tightened monetary policy, an inflection point that risks sending tremors through the global system, according to a paper by the Chicago Fed.

    Hopes for a swift rebound in Germany are fading. The economics ministry said new orders in manufacturing fell 3.2pc in June, with orders from the rest of the eurozone collapsing by 10.4pc. “What this shows is that Europe is nowhere close to recovery. Monetary policy has run out of traction,” said Steen Jakobsen from Saxo Bank.

    The euro fell to a nine-month low of $1.3347 against the dollar after Mr Draghi said the “fundamentals for a weaker exchange rate are much better than they were two or three months ago”, a clear attempt to drive down the currency by verbal means. “Mr Draghi could barely hide his enthusiasm for the weaker euro,” said Ken Wattret ,from BNP Paribas.

    A weaker euro should prove a buffer against deflation but the damage already runs deep. Italy has fallen back into a triple-dip recession, with GDP returning to levels last seen 14 years ago. The toxic mix of recession and very low inflation is a grave threat to Italy’s debt trajectory.

    The public debt ratio jumped from 130.2pc to 135.6pc of GDP in the first quarter from a year earlier and will now rise again, despite austerity measures and a primary budget surplus.

    “The picture is getting worse rather than better. We are going to get to 140pc for sure next year. Nobody knows when the markets will react,” said a senior Italian banker.

    “The public debt ratio jumped from 130.2pc to 135.6pc of GDP in the first quarter from a year earlier and will now rise again, despite austerity measures and a primary budget surplus.” This sounds like a job for more austerity.

    Posted by Pterrafractyl | August 9, 2014, 5:54 pm
  18. Here’s another article describing how investors are scooping up assets in the eurozone based on the bet that the eurozone economy will do so poorly that that the ECB will be finally forced to do much more to stimulate the eurozone economy. So it’s like a vote of confidence in ECB incompetence but an eventual return to sanity:

    German yields recall Japan “lost decade” but markets still trust ECB

    Fri Aug 15, 2014 10:26am EDT

    * Bund yields reach Japan-like territory around 1 percent

    * Pressure on the ECB to buy bonds increases

    * Markets still see inflation eventually hitting ECB target

    * Bunds seen safest place to be if ECB fails on inflation

    By Marius Zaharia

    LONDON, Aug 15 (Reuters) – German Bund yields at 1 percent are stoking fears that the euro zone faces a “lost decade” of economic stagnation and incessant struggle to lift inflation, similar to that of the only other country where borrowing costs hit such levels – Japan.

    At the same time, another indicator in the bond market shows investors expect inflation will eventually rise to the European Central Bank’s target of just below 2 percent.

    The discrepancy suggests that markets are banking on the fact that the ECB will take new monetary policy easing measures to lift price growth and explains why investors are willing to buy assets that, on the face of it, might lose them money.

    And even if the ECB, like the Bank of Japan, fails to lift price growth, investors see value in Bunds because the top-rated asset should offer them protection from any reignition of the debt crisis that the lack of inflation might trigger.

    “A break below 1.0 percent will arguably see the ongoing debate as to the possible Japanification of Europe growing substantially more voluble,” said Richard McGuire, senior rate strategist at Rabobank.

    “This, in turn, would very likely ratchet up the pressure on the ECB to do more.”

    Financial markets’ and the ECB’s preferred measure of the inflation outlook, the five-year, five-year forward breakeven rate, which measures roughly where investors see five-year inflation rates in five years’ time, stands just above 2 percent.

    After the ECB cut all its interest rates in June and promised long-term cheap loans to banks (TLTROs) from September, investors are increasingly betting the central bank will eventually buy bonds and print money – a monetary tool known as quantitative easing (QE).

    This would allow investors to profit from buying Bunds yielding 1 percent if they sell them later to the ECB at a higher price – and implicitly a lower yield.

    Ten-year German yields, the benchmark for euro zone borrowing costs, traded at 1.01 percent on Friday, having hit a record low of just below 1 percent the previous day, after data showed the euro zone economy stagnating in the second quarter and July’s final inflation figures at just 0.4 percent.

    “The market is pricing in proper QE if the TLTROs don’t work,” he said.


    Equivalent Japanese bonds yield 0.50 percent. They first hit 1 percent in 1998 and the Bank of Japan’s constant struggle to lift inflation meant that they have not moved more than roughly 1 percentage point away from that level ever since.

    Ten-year yields had never hit 1 percent in any other country before. U.S. yields troughed at 1.36 percent in 2012 at the height of the euro zone crisis when investors were seeking assets perceived as safe havens.

    That episode, in fact, offers another argument for buying Bunds for returns lower than the expected inflation. German debt is seen as one of the safest assets in the world.

    If the ECB fails to lift price growth in the medium term, the euro zone crisis might reignite and at that stage investors will be concerned about getting their money back rather than a return on their assets.

    Countries such as Spain and Italy, which were at the forefront of the crisis two years ago as they were seen as too big to bail out, badly need inflation to be able to stop their 3 trillion euro combined debts rising further.

    “Italy is at risk at some stage of restructuring its debt. It’s very hard with inflation at zero … to stabilise the debt,” said Robin Marshall, director for fixed income at Smith & Williamson.

    “Bund prices add a bit of discount for the risks in the periphery … But we’ve hit 1 percent without a true crisis in the periphery so you begin to wonder where we would go if we actually had a crisis.”

    Posted by Pterrafractyl | August 16, 2014, 2:15 pm
  19. And the eurozone continues to be boxed in by its own plans to push itself off a cliff and then wait and see what happens:

    ECB in policy limbo, boxed in by its own plans

    By Paul Carrel and Eva Taylor

    FRANKFURT Tue Aug 19, 2014 6:33am EDT

    (Reuters) – The European Central Bank is in a policy no man’s land, bombarded by news of a stagnating euro zone economy but hesitant to move forward with new stimulus until measures it loaded in June have ignited.

    After the ECB cut interest rates in June and promised banks cheap long-term loans starting in September, about all that is left is printing money to buy bonds – so-called quantitative easing (QE).

    But there are tricky practical and political barriers in the ECB’s way: it is boxed in by its own plans, and still faces strong opposition from economic power Germany to any such monetary leniency.

    Already deployed by other major central banks, QE could be used to pump money into the euro zone economy with a view to stimulating growth and staving off deflation, which has already gripped some countries in the bloc’s south.

    Yet the ECB may be in a wait-and-see mode for some time, waiting until the measures it announced in June kick in. The first tranche of long-term loans it is offering banks to stimulate lending, called TLTROs, is not available until Sept. 18, with a second shot in December.

    And as well as TLTROs, the ECB is also intensifying preparations to buy asset-backed securities (ABS), which are created by banks pooling loans into an interest-bearing bond that is sold to raise funds.

    The ABS market has not recovered following the global financial crisis, but the ECB hopes that by supporting this segment it can get credit to the smaller firms that make up the backbone of the euro zone economy.

    Any ABS plan is likely to be small, but the ECB expects take-up of 450-850 billion euros ($601 billion-$1.13 trillion) for the TLTROs, potentially more than the total annual GDP of the Netherlands.

    However, despite the queued-up stimulus, improving credit conditions and the prospect of a more robust banking sector thanks to upcoming health checks, France and governments further south want the ECB to do more to buoy their economies, which they have been unable – or unwilling – to shape up.

    “I am convinced that more can be done and I’m also convinced that the ECB is getting ready to do more,” Italian Economy Minister Pier Carlo Padoan told the BBC at the weekend.

    Indeed, a Reuters poll of euro money market traders gives a 50 percent chance that the ECB will resort to QE-style asset purchases to boost inflation in the coming year. [ECB/REFI]


    But waiting for evidence that what it has done is working is only part of the ECB’s QE dilemma. Some policymakers believe QE is inappropriate; others are not sure it would work anyway.

    Hawkish ECB policymakers are still deeply resistant to the idea. For example, ECB Executive Board member Sabine Lautenschlaeger, a former member of Germany’s Bundesbank, said last month it needed a “real emergency” for a broad asset-buying plan to be deployed.

    “Technically there are quite a few people in Frankfurt who are not absolutely sure QE would have a significantly positive impact on growth,” said Deutsche Bank economist Gilles Moec.

    Some euro zone officials argue the ECB would need to spend huge amounts on a broad asset-buying plan to have any impact, and that this would probably only be marginal as sovereign bond yields are already near historic lows.

    There is also the issue of what to buy. In the United States, where the economy is based on capital markets, Federal Reserve purchases of U.S. Treasuries and mortgage-backed bonds had an impact across asset prices, holding down borrowing costs.

    But in the euro zone, the economy is based on bank lending, so buying sovereign bonds may not be as effective. ECB Executive Board member Benoit Coeure said earlier this year any euro zone QE plan would have to be tailored to the bank-based economy.

    Buying sovereign bonds according to the ECB’s capital key – the share each euro zone country’s central bank has in the ECB’s capital, based on the size of its economy – would see large purchases of German bonds, the merits of which are questionable as their yields are already near record lows.

    Padoan, the Italian economy minister, acknowledged this: “Quantitative easing has worked well in the U.S…. but of course the underlying economic structure of the U.S. economy is largely different from the still-fragmented euro area.”


    Policy developments across the Atlantic could actually play into the ECB’s hands. While the ECB considers how to loosen policy, the Fed has started reining in its expansive tools and is preparing to raise interest rates, perhaps in mid-2015.

    A recent Reuters poll of 74 analysts showed the Fed is not likely to raise rates until the second quarter next year, most likely in June. Interest rate futures are pricing the first rate hike in the third quarter of next year. [FED/R]

    “The ECB would jump for joy,” said Hans Redeker, global head of foreign exchange strategy at Morgan Stanley, referring to the implied dollar strength that such a step would bring with it.

    “This would also mean euro weakness and that is exactly what the ECB wants. It would ease pressure, because further steps from the ECB would be less necessary,” he said, adding exports, especially from the periphery, would become more competitive.

    An ECB pledge to keep interest rates at present levels for an extended period of time is also seen stabilizing the situation in such an event.

    A weaker exchange rate may be more effective at generating growth than ever more liquidity that struggles to find its way to companies and households as banks remain reluctant to lend while tidying up their balance sheets.

    The euro has weakened more than 4 percent since scraping by the $1.40 mark in May. But it is still too strong for some periphery countries, such as Italy.

    Morgan Stanley calculated what it called a “fair exchange rate”, at which a country would be able to maintain a sustainable trade balance and an exchange rate that would not have a long-term negative impact on growth conditions.

    Italy’s fair exchange rate would be $1.20 and Germany’s $1.53, Redeker said, showing how diverse the economies are.

    Notice how the idea of national governments using the record low borrowing costs to finance fiscal stimulus programs that could make investments in the future is still completely unpersoned.

    Posted by Pterrafractyl | August 20, 2014, 7:55 am
  20. Wolfgang Schauble once again reiterated his opposition to the suggestion by Mario Draghi last week that fiscal stimulus measure should be considered by creditor countries like Germany (and not the countries that most need it). Schauble’s argument appears to be that any additional government borrowing by member states would constitute government financing by the ECB and therefore be unconstitutional even though bond rates are at record lows without the ECB purchasing government bonds. Because that’s just how the eurozone rolls:

    UPDATE 2-Merkel unhappy with Draghi’s apparent new fiscal focus – Spiegel

    Sun Aug 31, 2014 10:37am EDT

    * Merkel, Schaeuble both called Draghi last week – Spiegel

    * Took Draghi to task about Jackson Hole comments, magazine says

    * Merkel wanted to know if ECB was changing tack – Spiegel

    * Government spokesman report does not correlate with facts (Adds finance minister’s comments)

    BERLIN, Aug 31 (Reuters) – A German news magazine reported on Sunday that Chancellor Angela Merkel is unhappy with European Central Bank chief Mario Draghi for apparently proposing a greater emphasis on fiscal stimulus over austerity in order to boost growth in Europe.

    Der Spiegel reported, without citing any sources, that she and Finance Minister Wolfgang Schaeuble had both called the ECB president last week to take him to task about comments he made in a speech at Jackson Hole, Wyoming on Aug 22.

    A German government spokesman contradicted Spiegel’s version of events, however, saying that “the assertion that the chancellor took President Draghi to task does not correlate to the facts in any way”. The spokesman would give no further details of the call.

    Draghi told a conference of central bankers that it would be “helpful for the overall stance of policy” if fiscal policy could play a greater role alongside the ECB’s monetary policy.

    The magazine said Merkel wanted to know if the ECB had decided to change tack away from fiscal austerity in the euro zone, as championed by Germany, among others.

    Der Spiegel said Draghi had defended his Jackson Hole speech, which was interpreted as meaning that the ECB, having cut interest rates to record lows and injected money into the economy to support a recovery, was now looking at fiscal stimulus as a way of fomenting growth and facilitating reform.

    Schaeuble said last week that he believed Draghi’s comments had been “over-interpreted”.

    “The ECB has a clear mandate to ensure currency stability. It doesn’t have a mandate to finance states,” the minister told reporters on Sunday. “All those who can’t manage within their budget want to cross that boundary. They would like to get (financing) from the ECB.

    Notice how Wolfgang Schauble is arguing that eurozone members can’t engage in fiscal stimulus measures because that would violate the rule that the ECB can’t finance states even though governments can currently borrow at record lows rates without the ECB buying their sovereign bonds. It’s one of the unexplained quirks of the endless drive to send the eurozone into near deflation: borrowing costs are going to be low even for the ailing economies you send economies into a deflationary death spiral and the central bank is promising to “do whatever it takes”, and yet Berlin seems to always have one reason or another for why those low borrowing costs can never be used to by member states. It’s as if Schauble just assumes that all government spending is just guaranteed to be a giant waste of money that will become an ECB liability if the money to finance that government spending was borrowed as opposed to raised through taxes. It’s just a bizarre stance divorced from reality but it is what it is.

    So, given Schauble’s interpretation of the eurozone’s rules, will eurozone member states will ever be allowed to engage in their own stimulus programs? Well, yes and no (with a lot less ‘yes’ than ‘no’). Yes, Schauble has in the past described a scenario where governments could potentially borrow from a shared pool of “eurobonds” that all nations are jointly backing. But, no, the individual governments themselves won’t actually get to make these fiscal stimulus decisions on their own, unless the individual governments happen to be powerful enough to effectively run the entire the EU. Because the system Schauble had in mind(as of July 2012) involved a tradeoff: governments can receive jointly-backed eurozone financing, but Brussels decides how much they get to borrow with veto powers over how they choose to spend it:

    Der Spiegel
    SPIEGEL Interview with Finance Minister Schäuble: ‘We Certainly Don’t Want to Divide Europe’

    German Finance Minister Wolfgang Schäuble believes that only further EU integration can save the euro. SPIEGEL spoke with him about how the currency can be strengthened, the hurdles presented by Germany’s constitution and what the 27-member club might look like in five years.

    June 25, 2012 – 12:09 PM

    SPIEGEL: Minister Schäuble, the European Union is mired the worst crisis in its history with the euro y. What is at stake?

    Schäuble: Our prosperity. The world, with its globalized economy, is changing at a rapid pace. Those who want to keep up cannot go it alone. It only works in collaboration with other European countries and with a European currency. Otherwise we would fall far behind, and that would lead to a substantial loss of prosperity and societal security.

    SPIEGEL: Would the EU survive the collapse of the monetary union?

    Schäuble: There is certainly the risk that, in the event of a collapse of the euro — which, by the way, I don’t believe is going to happen — much of what we have achieved and become fond of would be called into question, from the common domestic market to freedom of travel in Europe. But a collapse of the EU would be absurd. The world is moving closer together, and we’re talking about the possibility of each country in Europe going its own way? This cannot, must not and will not happen!

    SPIEGEL: Was it a mistake to introduce the euro?

    Schäuble: No. The monetary union was the logical consequence of the advancing economic integration of Europe.

    SPIEGEL: Nevertheless, the euro is a miscarriage. The necessary political union was absent.

    Schäuble: To call it a miscarriage is nonsense. But it’s clear that we wanted a political union at the time, but it wasn’t possible. Germany would have been prepared to relinquish powers to Brussels, because it was only through Europe that we received a new chance after World War II. But other countries had trouble with the concept, because of special traditions, for example, or because they had only recently regained their national autonomy after the fall of the Iron Curtain. As such, we faced a fundamental question: Do we introduce the euro without having the necessary political union, and do we assume that the euro will bring us closer together, or do we abandon the idea?

    SPIEGEL: And in that situation you preferred to take the risk.

    Schäuble: If we had always said we would only take steps toward integration if they would immediately work 100 percent, we would never have advanced by so much as a meter. That’s why we wanted to introduce the euro first and then quickly make the decisions needed for a political union. Luxembourg Prime Minister Jean-Claude Juncker was right when he said, at the time, that the euro would prove to be the father of future European developments.

    SPIEGEL: In the meantime, however, the common currency has, above all, powers of destruction.

    Schäuble: Now you’re exaggerating. Europe has always worked on the basis of two principles: What isn’t possible at first will happen over time, and what doesn’t work will be corrected over time. That’s why perfect solutions take so long in Europe. And that’s why we are now improving the architecture of the monetary union.

    SPIEGEL: It almost sounds as if you had longed for the crisis so that you could finally correct the birth defects of the euro.

    Schäuble: Well, it isn’t quite that bad, especially since I don’t have a propensity for despair or even resignation. But the more people see what’s at stake, the more they are willing to draw the right consequences.

    SPIEGEL: What are the consequences that Europe now has to draw?

    Schäuble: We need more and not less Europe.

    SPIEGEL: You are clearly an advocate of the bicycle theory: Those who don’t move fall over.

    Schäuble: Yes, of course.

    SPIEGEL: But you also seem to suggest that the design is unstable.

    Schäuble: Excuse me, but the desire for improvement is a basic condition of human existence. In “Faust,” Goethe writes: “If the swift moment I entreat: Tarry a while! You are so fair! Then forge the shackles to my feet, Then I will gladly perish there!” That’s how it is.

    SPIEGEL: The call for more Europe has become almost as much a classic as “Faust.”

    Schäuble: Perhaps, but that doesn’t mean it’s wrong. Unfortunately, Europe is complicated, and its structures are such that they inspire only limited confidence in citizens and the financial markets.

    SPIEGEL: How do you intend to correct this deficit?

    Schäuble: So far, member states have almost always had the final say in Europe. This cannot continue. In key political areas, we have to transfer more powers to Brussels, so that each nation state cannot block decisions.

    SPIEGEL: You want nothing less than a United States of Europe.

    Schäuble: Even though the term is used repeatedly, it doesn’t make it any better. No, the Europe of the future will not be a federal state based on the model of the United States of America or the Federal Republic of Germany. It will have its own structure. It’s an extremely exciting venture.

    SPIEGEL: It sounds more like a new experiment, not unlike the introduction of the euro. And yet you want to transfer as much power as possible to Europe?

    Schäuble: No, we must not and cannot ever make decisions in Europe that apply uniformly to all. Europe’s strength is precisely its diversity. But there are things in a monetary union that are done more effectively at the European level.

    SPIEGEL: What, for example?

    Schäuble: The most important thing is that we create a fiscal union, one in which the nation states give up their jurisdiction in terms of fiscal policy. In addition, the problems of the Spanish financial institutions reveal, once again, that Europe would better off with a bank union. We need a European supervisory authority, at least over the major lenders, which can then influence the banks directly. Then we can also save them with joint funds.

    SPIEGEL: For months, Germany has been under pressure to agree to joint government bonds, the so-called euro bonds. It would certainly be seen as a confidence-building measure if you complied with the wishes of the other European countries.

    Schäuble: As long as we don’t have a fiscal union, we cannot assume joint liability for debts.

    SPIEGEL: Why are you so uncompromising on this issue?

    Schäuble: Because you can’t separate the responsibility for decisions and the liability. This applies to almost all areas, but especially to money. Someone who has the ability to spend money at someone else’s expense will do so. You do it, and so do I. The markets know that. And that’s why they too would not find euro bonds convincing in the end.

    SPIEGEL: What would a fiscal union have to look like so that Germany could accept euro bonds?

    Schäuble: In an optimal scenario, there would be a European finance minister, who would have a veto against national budgets and would have to approve levels of new borrowing. It would be up the individual countries to decide how to spend the approved funds, that is, how to answer the question: “Should we spend more money on families or on road construction?”

    SPIEGEL: And you seriously believe that this could work?

    Schäuble: It’s been working for a long time in competition policy. When the current Italian prime minister, Mario Monti, was the EU competition commissioner, he successfully tangled with major international corporations like Microsoft. A European finance minister would, should it become necessary, be forced to take on Italy, for example.

    SPIEGEL: Or with Germany. Let’s assume the finance minister in Brussels rejected your budget. People here would be incredibly outraged.

    Schäuble: There is certainly the risk that there would be national reactions, and that’s why all of this requires intensive discussion. But one thing is also clear: Those who want a strong Europe also have to be willing to surrender decisions to Brussels. But even then parliamentary responsibilities are needed.

    “But one thing is also clear: Those who want a strong Europe also have to be willing to surrender decisions to Brussels”. Yep! Well, ok, maybe not exactly Brussels…

    Posted by Pterrafractyl | August 31, 2014, 10:12 pm
  21. The ECB made a splash today in the markets: a surprise rate cut and a declaration that it was the last rate cut, with the ECB’s quantitative easing plans (buying asset-backed securities) scheduled to commence at some point in the future. Germany opposed the rate cut and still opposes any QE and the details of the plan are to be released following the ECB’s October rate-setting meeting, so there are still a number of open questions about the scope of the monetary stimulus and the Bundesbank has plenty of time to water the thing down. Still, it’s better than nothing:

    ECB Readying Asset-Backed Purchases After Rate Cut, Draghi Says
    By Jeff Black and Catherine Bosley
    Sep 4, 2014 10:53 AM CT

    The European Central Bank cut interest rates and will start buying assets, in a bid to boost the flow of funding for the euro-area economy while stopping short of broad-based quantitative easing.

    ECB President Mario Draghi’s plan to buy asset-backed securities and covered bonds pushed the euro below $1.30 for the first time since July 2013 as he said the inflation outlook had worsened. Germany’s Jens Weidmann opposed the rate cut and ABS plan, according to two officials.

    The ECB “will purchase a broad portfolio of simple and transparent securities,” Draghi said at a press conference in Frankfurt today. “Some of our council were in favor of doing more than presented.”

    In committing cash to the market for asset-backed securities, Draghi is making good on his pledge to rekindle an asset class that can funnel loans to the real economy. Even so, it probably doesn’t represent the kind of large-scale bond purchases that some economists say are needed to stave off deflation.

    “The ECB stepped up to the plate, again,” said Christian Schulz, senior economist at Berenberg Bank in London. “One way of reading the ECB rate cut is that, due to continued serious resistance against sovereign-bond purchases, the ECB has decided to first exhaust all other options.”

    Weaker Outlook

    Euro-area inflation languished at 0.3 percent last month, far below the ECB’s 2 percent target. The ECB today cut its macroeconomic forecasts for this year from its previous assessment in June.

    Gross domestic product is now predicted to expand by 0.9 percent this year and 1.6 percent in 2015, instead of the previous 1 percent and 1.7 percent. Inflation is seen at 0.6 percent this year instead of 0.7 percent previously. The inflation outlook for 2015 is unchanged at 1.1 percent.

    “We took into account the overall subdued outlook for inflation, the weakening in the growth momentum in the recent past,” Draghi said. “The Governing Council sees the risks around the economic outlook on the downside.”

    The ECB earlier reduced all three of its main interest rates by 10 basis points. The benchmark rate was lowered to 0.05 percent, the deposit rate is now minus 0.2 percent, and the marginal lending facility is 0.3 percent.

    The euro fell to as low as $1.2952 and traded at $1.2932 at 5:50 p.m. Frankfurt time.

    Lower Bound

    The dissent from Bundesbank President Weidmann highlights the resistance in Germany, the region’s largest economy. In July, he called ABS purchases “problematic” and warned against supporting bank profits while socializing the losses.

    The officials who confirmed Weidmann’s opposition today asked not to be identified because the discussions are private, and a Bundesbank spokesman declined to comment. Draghi said he secured a “comfortable majority” for the decisions.

    Credit Easing

    Today he said the central bank is now done with conventional rate cuts. The ECB wants to “make sure there’s no misunderstandings on whether we’ve reached the lower bound,” he said. “Now we are at the lower bound.”

    He said details of the ABS program will be announced after the October rate-setting meeting. The securities are backed by underlying instruments such as mortgages or credit-card debt, and are packaged into products containing slices with different risk profiles. Draghi said on Aug. 7 this process in the future has to be “simple, transparent and real,” and not “a sausage full of derivatives.”

    The European Commission is considering allowing banks to hold a wider range of asset-backed securities to meet liquidity requirements than foreseen by global regulators, according to an EU document obtained by Bloomberg News. Banks will be allowed to use securitizations backed by assets from car loans to small business and consumer debt under the EU rule, whereas the Basel Committee on Banking Supervision sought to limit securitizations to those backed by residential mortgage debt.

    Balance Sheet

    He did say that the aim of all the ECB measures combined is to return the central bank’s balance sheet to the level of the start of 2012. The ECB had about 2.7 trillion euros of assets in January 2012, compared with 2 trillion euros now.

    There are further hurdles to clear for officials wanting a decisive restart in the ABS market, including a thicket of regulatory initiatives from Basel to Brussels. European Union and international standard-setters are working on as many as 19 measures that could affect demand for ABS, including a standard definition for what constitutes a high-quality securitized product.

    Draghi also reiterated that monetary easing must be combined with structural reforms. Countries including France and Italy have pushed for greater flexibility within EU fiscal rules.

    “There’s no fiscal or monetary stimulus that will produce any effect without ambitious and important and strong structural reforms,” the ECB president said, reprising comments from his speech last month at a symposium for central bankers in Jackson Hole, Wyoming.

    Note that when Draghi “reiterated that monetary easing must be combined with structural reforms”, that means the austerity is expected to continue. Also note that any real fiscal stimulus is completely absent from the plan. And when the article points out that “”the ECB had about 2.7 trillion euros of assets in January 2012, compared with 2 trillion euros now”, it’s a reminder that the ECB’s timid actions thus far (timid relative to the scope of the crisis) have been effectively sucking credit out of the eurozone economy for the past two years.

    But at least it’s a start. The era of “don’t fight the ECB” might finally be around the corner. Unless, of course, the ECB completely blunders the entire QE plans by declaring in advance how much it will spend on assets. Especially if it’s not really enough money to significantly impact the markets. That would be unfortunate:

    Exclusive: ECB debating ABS, covered bond purchase plan

    Thu Sep 4, 2014 7:25am EDT

    (Reuters) – Plans to launch an asset-backed securities (ABS) and covered bond purchase programme worth up to 500 billion euros are on the table at Thursday’s European Central Bank policy meeting, people familiar with the discussions say.

    ECB President Mario Draghi will likely announce such a programme at his news conference unless it comes up against strong opposition at the Governing Council’s policy meeting.

    The programme would have a duration of three years and comprise both ABS and covered bond purchases. The ECB could begin buying the assets this year, the people familiar with the discussions told Reuters.

    The ECB declined to comment.

    The ECB has been developing such a programme with a view to stimulating the ABS market and offering smaller businesses an alternative source of funding.

    Bankers and regulators have cast doubt on reviving Europe’s repackaged debt market to fund economic recovery, saying it will take years and hinge on a re-invention of the sector rather than quick regulatory tweaks.

    However, the market for covered bonds in issuance, such as Pfandbriefe in Germany, is more substantial.

    Asset-backed securities are created by banks pooling mortgages and corporate, auto or credit card loans and selling them to insurers, pension funds or even the ECB.

    Covered bonds are similar instruments but the underlying assets are ringfenced on the issuer’s balance sheet so if the bank goes bust, the assets are still there. That makes them safer than ABS where the underlying loans are not ringfenced.

    ECB Executive Board member Benoit Coeure said last month that European governments may have to support Europe’s market for securitised debt by issuing guarantees to make it a successful alternative source of funding to bank loans.

    Well that was unfortunate. Still, 500 billion euros is better than nothing, even when the market knows the cap in advance,although hopefully some actual fiscal stimulus plans will get underway one of these years. Hopefully…

    Posted by Pterrafractyl | September 4, 2014, 10:22 am
  22. This is one of those “did some really have to do a study to figure this out” studies:

    The Wall Street Journal
    Unemployment Hurts Happiness More Than Modest Inflation, New Paper Says
    11:27 am ET
    Oct 1, 2014

    By Pedro Nicolaci da Costa

    Unemployment is much more damaging to society than moderate levels of inflation, making central bankers’ disproportionate focus on the level of consumer price growth misguided, a former Bank of England rate-setter now at Dartmouth College writes in a new paper.

    Along with three co-authors, David Blanchflower, known for his view that policy makers should make aggressive efforts to bring down unemployment, tries an unusual statistical tack for macroeconomist – he tries to break down happiness surveys of European individuals to see just how deeply, and differently, they are affected by unemployment and inflation, respectively.

    While “both higher unemployment and higher inflation lower well-being,” the authors write, “we also discover that unemployment depresses well-being more than inflation.”

    In fact, Mr. Blanchflower argues, the pain suffered by joblessness is many times greater than that caused by higher inflation of similar proportions. “Our estimates with European data imply that a one percentage point increase in the unemployment rate lowers well-being by more than five times as much as one percentage point increase in the inflation rate.”

    In a telephone interview, Mr. Blanchflower acknowledged that equation might change once inflation exceeds a certain level, say in the double-digits. At that point, the tradeoffs may shift. But with most advanced economies struggling to keep inflation from slipping further below official targets, that’s simply not a problem that should be concerning policy makers at the moment, he says.

    Mr. Blanchflower said many current central bank officials, having lived through the inflationary 1970s, are overly sensitive to possible inflation threats.

    “Essentially when you have an inflation problem you put weight on inflation. When you have an unemployment problem you put weight on unemployment,” he said.

    The Federal Reserve has said it will take a “balanced approach” to meeting its dual goals of price stability and maximum sustainable employment. U.S. inflation continues to undershoot the central bank’s target and unemployment, at 6.1%, remains elevated.

    The European Central Bank has a single mandate to keep inflation just below 2%. Annual inflation in the eurozone fell to 0.3% in August, a five-year low.

    “In the Great Recession, unemployment has been a much bigger problem than inflation for ordinary people,” Mr. Blanchflower says. “Unemployment hurts more than inflation does.”

    And, sadly, yes, someone really did need to do this study. Why? Because of influential figures like former ECB and Bundesbank official Jürgen Stark that still clearly feel otherwise:

    The ECB’s Leap into the Unknown
    Jürgen Stark
    OCT 1, 2014

    Jürgen Stark is a former Member of the Executive Board of the European Central Bank and former Deputy Governor of the Deutsche Bundesbank.

    FRANKFURT – The European Central Bank is in the middle of a big, risky experiment. Key interest rates have remained close to zero for six years now. Financial markets are flooded with liquidity. Crisis management has resulted in major market distortions, with some segments’ performance no longer explainable by fundamental economic data. The unintended consequences of this policy are increasingly visible – and will become increasingly tangible with the US Federal Reserve’s exit from post-2008 ultra-loose monetary policy.

    The expansion of the ECB’s balance sheet and the targeted depreciation of the euro should help to bring the eurozone’s short-term inflation rate close to 2% and thus reduce deflationary risks. For the first time in its history, the ECB appears to be pursuing an exchange-rate target. As was the case for the Bank of Japan, the external value of the currency will become an important instrument in the framework of a new strategic approach.

    Financial markets have applauded the ECB’s recent decisions. Moreover, having “effectively thrown off all of the Maastricht Treaty restrictions that bound the bank to the model of the Deutsche Bundesbank,” as former Fed Chair Alan Greenspan put it, the ECB is prepared to break further taboos.

    But for what purpose? Particularly by guaranteeing highly indebted countries’ sovereign bonds, the ECB has actually weakened the willingness to reform, particularly in the larger European Union countries, whose decrepit economic structures are an obstacle to potential growth, and where more room must be given to private initiative.

    The ECB’s willingness to buy ABSs is especially risky and creates a new element of joint liability in the eurozone, with European taxpayers on the hook in the event of a loss. The ECB lacks the democratic legitimacy to take such far-reaching decisions, with potentially substantial redistributive effects, which implies an even greater risk to monetary-policy independence.

    Indeed, the ECB already has been driven onto the defensive by the International Monetary Fund, the OECD, financial-market analysts, and Anglo-Saxon economists in the wake of feverish discussion of the risk of deflation in the eurozone. But what is the appropriate eurozone inflation rate, given de facto economic stagnation? Should higher nominal (that is, inflation-driven) growth replace debt-driven growth?

    Europe must aim for sustainable, non-inflationary growth and the creation of competitive jobs. The current inflation rate of 0.3% is due to the significant decline in commodity prices and the painful but unavoidable adjustment of costs and prices in the peripheral countries. Only Greece currently has a slightly negative inflation rate.

    In other words, price stability reigns in the eurozone. This strengthens purchasing power and ultimately private consumption. The ECB has fulfilled its mandate for the present and the foreseeable future. There is no need for policy action in the short term.

    It is, instead, the eurozone governments that must act. But any clear division of tasks and responsibilities between governments and central banks has, it seems, been jettisoned. Government action in many problem countries ultimately ends in finger pointing: “Europe,” the ECB, and Germany, with its (relatively) responsible policy, have all been scapegoats.

    Against this background, the ECB has yielded to immense political pressure, particularly from France and Italy, to loosen monetary policy further and weaken the exchange rate. But indulging the old political reflex of manipulating the exchange rate to create a competitive advantage will yield a short-term fix at best. It will not eliminate the structural weaknesses of the countries in question.

    The ECB is moving ever farther into uncharted territory. In view of the insufficient balance-sheet corrections in the private sector and inadequate structural reforms, macroeconomic demand-management tools will not work. Despite the ECB’s aggressive approach, monetary policy in the absence of structural economic reform risks being ineffective.

    Simply put, more liquidity will not lead to more active bank lending until there is more transparency regarding the extent of non-performing loans and the relevant economies have become more flexible. The ECB’s asset quality review and bank stress tests are expected to bring some clarity to the first question. Then, more lending will occur on acceptable terms – assuming that there is corresponding demand. But the uncertainty regarding the extent and pace of economic reforms remains.

    The ECB’s recent decisions, with their focus on short-term effects, indicate that monetary policy is no longer targeted at the eurozone as a whole, but at its problem members. Ad hoc decisions have replaced a feasible and principled medium-term strategy. The problems created by this approach will be compounded by the unavoidable conflicts of interest with monetary policy implied by the ECB’s assumption of its new financial-stability and banking-supervision roles. The first casualty will most likely be price stability.

    Yes, according to Stark, there’s obviously been nowhere close to enough austerity in Europe and anything that doesn’t force more austerity now will just lead to long-term misery because only export-driven growth via lower pay for workers is allowable even though it’s impossible for all of Europe to become a global export powerhouse unless Europe economically conquers the world by mimicking China’s low-wage economic model (but a more extreme version) and the world doesn’t respond in kind with a global race to the bottom. Also, near deflation isn’t anything to worry about because, as Stark put it, a 0.3% inflation rate means “price stability reigns in the eurozone. This strengthens purchasing power and ultimately private consumption. The ECB has fulfilled its mandate for the present and the foreseeable future. There is no need for policy action in the short term.” So no more help by the ECB. Just more austerity. That should do wonders for the “purchasing power and ultimately private consumption” of the eurozone which will no doubt make everyone happy, especially the global poor that are going to be forced to compete with the new Euro-poor for more of that export market. Ok, it might not be that everyone will be happier under Stark’s growth model. But everyone that actually matters in Stark’s growth model will be much, much happier.

    Posted by Pterrafractyl | October 1, 2014, 11:48 am
  23. There are reports now that Mario Draghi and Jens Weidmann are barely speaking to each other. And as the piece below points out, Mario and Jens’s tiff isn’t just an squabble between two central bankers. It’s representative of a growing divide between those that view deflation and ongoing austerity policies as a either the source of Europe’s problems or the only possible solution:

    The New York Times
    The Upshot
    The Conflict Between Germany and the E.C.B. That Threatens Europe

    OCT. 24, 2014
    Neil Irwin

    We’ve known for some time about the tension between the European Central Bank, charged with guiding the economies of the 18 countries that use the euro, and Germany, the largest and richest member of that zone. A news report sheds light on just how dysfunctional that relationship has become.

    It’s not an overstatement to say that the future of Europe depends on how this conflict is resolved.

    Mario Draghi, the E.C.B. president, is barely on speaking terms with Jens Weidmann, the president of the German Bundesbank (and a member of the E.C.B.’s policy-setting governing council), Reuters reported Thursday. When Mr. Draghi dispatched a deputy to Berlin to visit aides to Chancellor Angela Merkel, the message received was that vocal German attacks on the central bank were unlikely to end anytime soon.

    The central issue is that Mr. Draghi and the E.C.B. see Europe as being on the cusp of a triple-dip recession. Europe is also at risk of getting stuck in a cycle of very low inflation and stagnant growth. Inasmuch as it has already cut short-term interest rates to zero (below zero, even), the bank is considering doing an American-style program of quantitative easing, or buying vast sums of bonds with newly created euros, to try to avert this fate. It is also encouraging Germany and other European nations to loosen the purse strings a bit and pursue fiscal policy that is more supportive of growth.

    In Germany, by contrast, both elected leaders in Berlin and central bankers at the Bundesbank in Frankfurt view the worry over deflation as overwrought, the need for fiscal probity as critical, and any effort to print money to buy government bonds as the pathway to hyperinflationary perdition.

    It’s worth adding that most everybody on this side of the Atlantic, the International Monetary Fund and the United States government, for example, is on Team Draghi in this dispute. Indeed, the widespread view among economists in the United States and Britain is that the risks facing Europe are grave and that the need for easing both monetary and fiscal policy is urgent.

    So why will this dispute determine the future of Europe? Because Mr. Draghi is steering through Scylla and Charybdis, with radically different outcomes for Europe on either side.

    If Mr. Draghi and the E.C.B. take insufficient action and the eurozone economy indeed stagnates or falls into a long recession, it could mean a lost generation of Europeans living with high unemployment and declining living standards. We can’t know for sure whether Europeans would react to this outcome by being content to muddle through, or if they would elect radical politicians who might endanger the era of a Europe united around liberal democratic ideals. So far Europeans have been O.K. with muddling along amid high unemployment, but it’s a really bad result either way.

    If Mr. Draghi and the E.C.B. take aggressive action that alienates Germany too severely, you could see sharp challenges to the central bank from within its largest member. Already, German officials are challenging in the European Court of Justice an earlier E.C.B. program to stand ready to buy bonds. A ruling is expected next year. And that’s for a program that hasn’t actually bought a single dollar’s worth of government bonds! If the central bank begins large-scale quantitative easing, expect more legal challenges to the E.C.B.’s authority, and even calls within Germany to break off from the eurozone entirely and go back to using the German mark.

    As we can see, the hyperinflationary fear mongering coming out of the Bundesbank and Berlin is, if anything, inflating as deflation looms. And growing increasingly incoherent too. And as a result of these inflating hyperinflation fears the two paths facing the eurozone are either a lost generation or hurt feelings at the Bundesbank over people not sharing its weird hyperinflationary fear fetish. And thus far it’s very unclear which side will prevail although austerity via economic dysfunction is almost certainly going to win. Feel any fears inflating yet?

    Also note when author says:

    It’s worth adding that most everybody on this side of the Atlantic, the International Monetary Fund and the United States government, for example, is on Team Draghi in this dispute. Indeed, the widespread view among economists in the United States and Britain is that the risks facing Europe are grave and that the need for easing both monetary and fiscal policy is urgent.

    it’s important to recognize that this opposition to Bundesbank-style ideological madness only describes some of the US government. There’s no shortage of US policymakers that would love to indulge in some chronic hyperinflation fear mongering and those policymakers just might take complete control of the US Congress very soon. So while ideologically driven fears of hyperinflation may not actually be warranted, fears that fears of hyperinflation are about to inflate are very much justifiable right now. Destructive economic fear monger is a global growth industry:

    The New York Times
    Ideology and Investment

    Paul Krugman
    OCT. 26, 2014

    America used to be a country that built for the future. Sometimes the government built directly: Public projects, from the Erie Canal to the Interstate Highway System, provided the backbone for economic growth. Sometimes it provided incentives to the private sector, like land grants to spur railroad construction. Either way, there was broad support for spending that would make us richer.

    But nowadays we simply won’t invest, even when the need is obvious and the timing couldn’t be better. And don’t tell me that the problem is “political dysfunction” or some other weasel phrase that diffuses the blame. Our inability to invest doesn’t reflect something wrong with “Washington”; it reflects the destructive ideology that has taken over the Republican Party.

    Some background: More than seven years have passed since the housing bubble burst, and ever since, America has been awash in savings — or more accurately, desired savings — with nowhere to go. Borrowing to buy homes has recovered a bit, but remains low. Corporations are earning huge profits, but are reluctant to invest in the face of weak consumer demand, so they’re accumulating cash or buying back their own stock. Banks are holding almost $2.7 trillion in excess reserves — funds they could lend out, but choose instead to leave idle.

    And the mismatch between desired saving and the willingness to invest has kept the economy depressed. Remember, your spending is my income and my spending is your income, so if everyone tries to spend less at the same time, everyone’s income falls.

    There’s an obvious policy response to this situation: public investment. We have huge infrastructure needs, especially in water and transportation, and the federal government can borrow incredibly cheaply — in fact, interest rates on inflation-protected bonds have been negative much of the time (they’re currently just 0.4 percent). So borrowing to build roads, repair sewers and more seems like a no-brainer. But what has actually happened is the reverse. After briefly rising after the Obama stimulus went into effect, public construction spending has plunged. Why?

    In a direct sense, much of the fall in public investment reflects the fiscal troubles of state and local governments, which account for the great bulk of public investment.

    These governments generally must, by law, balance their budgets, but they saw revenues plunge and some expenses rise in a depressed economy. So they delayed or canceled a lot of construction to save cash.

    Yet this didn’t have to happen. The federal government could easily have provided aid to the states to help them spend — in fact, the stimulus bill included such aid, which was one main reason public investment briefly increased. But once the G.O.P. took control of the House, any chance of more money for infrastructure vanished. Once in a while Republicans would talk about wanting to spend more, but they blocked every Obama administration initiative.

    And it’s all about ideology, an overwhelming hostility to government spending of any kind. This hostility began as an attack on social programs, especially those that aid the poor, but over time it has broadened into opposition to any kind of spending, no matter how necessary and no matter what the state of the economy.

    You can get a sense of this ideology at work in some of the documents produced by House Republicans under the leadership of Paul Ryan, the chairman of the Budget Committee. For example, a 2011 manifesto titled “Spend Less, Owe Less, Grow the Economy” called for sharp spending cuts even in the face of high unemployment, and dismissed as “Keynesian” the notion that “decreasing government outlays for infrastructure lessens government investment.” (I thought that was just arithmetic, but what do I know?) Or take a Wall Street Journal editorial from the same year titled “The Great Misallocators,” asserting that any money the government spends diverts resources away from the private sector, which would always make better use of those resources.

    Never mind that the economic models underlying such assertions have failed dramatically in practice, that the people who say such things have been predicting runaway inflation and soaring interest rates year after year and keep being wrong; these aren’t the kind of people who reconsider their views in the light of evidence. Never mind the obvious point that the private sector doesn’t and won’t supply most kinds of infrastructure, from local roads to sewer systems; such distinctions have been lost amid the chants of private sector good, government bad.

    Yes, that same mindless obsession on deficits and inflation that’s creating a European lost generation is about to seize complete control of Congress and that means both Europe and the US could find themselves trying to create prosperity via spending cuts. Simultaneously. And that means the the world’s developed economies are going to be simultaneously engaging in even more vigorous “internal devaluation” that they already are. It’s one of the underappreciated risks associated with GOP taking control of the US Senate: While the GOP may not be able to fully implement its austerity agenda the austerity is undoubtedly still going to increase if the GOP takes the Senate. And the US economy is one of the few growth drivers for the entire global economy right now. That means if the eurozone’s economic zombie apocalypse austerity mind virus infects the US economy and does enough serious damage to derail the existing recovery it’s going to be econo-WWZ because there are no other sources of growth. A self-destructing US will devastate global growth for a while.

    It’s already scary enough when the Tea Party takes over branches of power in the US. But a US Tea Party takeover is even scarier when the German equivalent of the Tea Party has already indirectly seized control of most of Europe’s economic policy-making and sent the continent into a depression. The euro-Tea Party is already world-destroying enough and yet it’s looking like the US could hand over even more power to the US Tea Party which means US and German-zombie ideas are poised to go global once the GOP inevitablly hobbles the US economy and global growth sputters.

    If this all sounds bad, fear not. While Mario Draghi and Jens Weidmann may no longer be on speaking terms that’s not really important. Once a zombie apocalypse strikes the world’s halls of power policy makers no longer really need to be able to talk. General grunts and groans about deficits and inflation are more than enough. It’s not all bad.

    Posted by Pterrafractyl | October 26, 2014, 11:03 pm
  24. There was a recent piece by Ambrose Evans-Pritchard highlighting the fact that one of the biggest hurdles to the ECB’s successful execution of its quantitative easing (QE) will come to whether or not the ECB will be allowed to engage in any meaningful QE at all:

    The Telegraph
    Mario Draghi’s efforts to save EMU have hit the Berlin Wall
    If the ECB tries to press ahead with QE, Germany’s central bank chief will resign. If it does not do so, the eurozone will remain stuck in a lowflation trap and Mario Draghi will resign

    By Ambrose Evans-Pritchard

    9:22PM GMT 05 Nov 2014

    Mario Draghi has finally overplayed his hand. He tried to bounce the European Central Bank into €1 trillion of stimulus without the acquiescence of Europe’s creditor bloc or the political assent of Germany.

    The counter-attack is in full swing. The Frankfurter Allgemeine talks of a “palace coup”, the German boulevard press of a “Putsch”. I write before knowing the outcome of the ECB’s pre-meeting dinner on Wednesday night, but a blizzard of leaks points to an ugly showdown between Mr Draghi and Bundesbank chief Jens Weidmann.

    They are at daggers drawn. Mr Draghi is accused of withholding key documents from the ECB’s two German members, lest they use them in their guerrilla campaign to head off quantitative easing. This includes Sabine Lautenschlager, Germany’s enforcer on the six-man executive board, and an open foe of QE.

    The chemistry is unrecognisable from July 2012, when Mr Draghi was working hand-in-glove with Ms Lautenschlager’s predecessor, Jorg Asmussen, an Italian speaker and Left-leaning Social Democrat. Together they cooked up the “do-whatever-it-takes” rescue plan for Italy and Spain (OMT). That is why it worked.

    We now learn from a Reuters report that Mr Draghi defied an explicit order from the governing council when he seemingly promised to boost the ECB’s balance sheet by €1 trillion. He also jumped the gun with a speech in Jackson Hole, giving the very strong impression that the ECB was alarmed by the collapse of the so-called five-year/five-year swap rate and would therefore respond with overpowering force. He had no clearance for this.

    The governors of all northern and central EMU states – except Finland and Belgium – lean towards the Bundesbank view, foolishly in my view but that is irrelevant. The North-South split is out in the open, and it reflects the raw conflict of interest between the two halves.

    The North is competitive. The South is 20pc overvalued, caught in a debt-deflation vice. Data from the IMF show that Germany’s net foreign credit position (NIIP) has risen from 34pc to 48pc of GDP since 2009, Holland’s from 17pc to 46pc. The net debtors are sinking into deeper trouble, France from -9pc to -17pc, Italy from -27pc to -30pc and Spain from -94pc to -98pc. Claims that Spain is safely out of the woods ignore this festering problem.

    Note that the Reuters article lists which central bankers are in opposition to more aggressive quantitative easing: Germany, the Netherlands, Luxembourg, Estonia, Latvia, and possibly Slovakia, Slovenia and Austria, so it’s basically the same coalition of a rich creditor states (48% and 46% NIIP for Germany and the Netherlands!) and poor eurozone member states in favor of ongoing austerity that we’ve seen for years.


    David Marsh, author of a book on the Bundesbank and now chairman of the Official Monetary and Financial Institutions Forum, says the Bundesbank has been quietly seeking legal advice on whether it can block full-scale QE. It is looking at Articles 10.3 and 32 of the ECB statutes, arguably relevant given the scale of liabilities.

    The let-out clauses would make QE the sole decision of the 18 national governors – shutting out Mr Draghi – based on the shareholder weightings. Germany would have 26pc of the votes, easily enough to mount a one-third blocking minority. Mr Draghi would not even have a say.

    Mr Marsh said this has echoes of the “Emminger Letter” invoked in September 1992 to justify the Bundesbank’s refusal to uphold its obligation to defend the Italian lira in the Exchange Rate Mechanism. The lira crashed. The Italians were stunned. One of them was the director of the Italian Treasury, a young Mario Draghi.

    Lena Komileva, from G+ Economics, says the ECB is heading for a crisis of legitimacy whatever happens. If the bank tries to press ahead with a QE-blitz, Mr Weidmann will resign. If it does not do so, the eurozone will remain stuck in a lowflation trap and the ECB will go the way of the Bank of Japan in the late 1990s, in which case Mr Draghi will resign.

    Mr Draghi’s balance sheet pledge was muddled and oversold from the start. Much of it was predicated on banks taking out super-cheap loans (TLTROs) from the ECB, but they have so far spurned it. You cannot make a horse drink. These loans are not the same as QE money creation in any case. They are an exchange for collateral.

    The asset purchases are what matter and the package announced so far is modest, bordering on trivial. It is unlikely to exceed €10bn a month as currently designed. The “buyable” market for covered bonds and asset-backed securities is too small to move the macro-economic dial. If the ECB wanted to match the Bank of Japan in its latest effort to drive down the yen and export deflation, it would have to launch €130bn of asset purchases every month (1.4pc of GDP).

    Hawks claim that QE would make no difference because interest rates are already near zero, and the German 10-year Bund is already the lowest in history. This is eyewash. Central banks can print money to buy gold, land, oil for strategic reserves (why not?) or Charollais cattle. .Or they can print to build roads or windmills. They can hand the money out as cash envelopes. If they did this, even the dimmest wits would see that QE is a monetary device and can always defeat deflation as a mathematical principle. It does not have to work through interest rates, nor should it.

    The ECB’s North-South clash mirrors the political breakdown of monetary union after six years of depression and mass unemployment. France’s Front National now has twice as many Euro-MPs as the ruling Socialists. Euro defenders invariably insist that the triumph of Marine Le Pen – currently leading presidential polls at 30pc – has nothing to do with her pledge to restore the franc and take back French economic sovereignty.

    Whether or not this is true – and that smacks of presumption – she is snatching enough votes from the Socialists to threaten their survival as a political movement. If they let perma-slump drift on until 2017, they will meet the fate of Greece’s PASOK, and deserve it.

    Mr Draghi is of course right to force the issue. The ECB is missing its 2pc inflation target by a mile, with crippling effects on the crisis states. This itself is a violation of the ECB’s legal mandate. The refusal of the German-led hawks to do anything serious about this is indefensible, and remarkably stupid unless their intention is to break up EMU, a possibility one can no longer exclude.

    The European Commission’s Autumn forecast this week is a cri de coeur. It warns of a “snowball effect” as deflationary forces causes debt trajectories to accelerate upwards by mechanical effect.

    Brussels admits that something has gone horribly wrong, obliquely blaming stagnation on the “policy response to the crisis”. It halved the growth estimate for France to 0.7pc next year, and for Italy to 0.6pc, a ritual with each report.

    It says the eurozone faces a “home-grown” malaise, left behind as the US and Britain pull away. “It is becoming harder to see the dent in recovery as the result of temporary factors only. Trend growth has fallen even lower due to low investment and higher structural unemployment,” it said. Now they tell us.

    The collapse of investment is not some form of witchcraft. It is entirely due to the folly of deep cuts in public investment – pushed by the Commission itself – at a time of private sector deleveraging, all made much worse by monetary paralysis. Italy’s rate of investment fell by 7.4pc in 2012 and 5.4pc in 2013. Even Germany’s fell 0.7pc in each year.

    Tucked away in the report is a nugget that Britain alone accounted for almost all the EU’s growth in 2013, half in 2014, and will still be the biggest contributor by far in 2015. This implies that the UK’s net payments to the EU budget – already up fourfold since 2008 – will become ever more skewed. Or put another way, the more EMU makes a mess of its affairs, the more Britain must pay to prop it up.

    Europe’s leaders and officials have run monetary union into the ground. Mr Draghi has bravely tried to bring them to their senses and contain the damage. He seems to have hit the limits of European power politics.

    Yes, it certainly appeared that Mario Draghi seemed to have “hit the limits of European power politics” in his efforts to do something to drag the eurozone out of a deflationary death spiral. But that was two weeks ago. Today, somewhat stunningly, it’s all roses and sunshine:

    Draghi throws ECB door open to money printing as global prospects dim

    By John O’Donnell and Eva Taylor

    FRANKFURT Fri Nov 21, 2014 2:35pm EST

    (Reuters) – European Central Bank President Mario Draghi threw the door wide open on Friday for more drastic measures to prevent the euro zone from sliding into deflation, promising to use whatever means necessary as China also acted to boost its sagging economic growth.

    With many fearing the euro zone could be heading for a Japanese-style lost decade of deflation and recession, Draghi’s remarks were reminiscent of when he pulled the bloc back from possible disintegration in 2012 by promising to do “whatever it takes” to back the common currency.

    Painting a bleak picture of the state of the 18 countries in the euro bloc, Draghi stressed that “excessively low” inflation had to be raised quickly.

    In a blunt message, he said there was now no sign of improvement in the months ahead and the ECB would pump more money into the euro bloc if its current measures fell short.

    “We will do what we must to raise inflation and inflation expectations as fast as possible,” he told an audience of bankers in Frankfurt.

    “If … our policy is not effective enough to achieve this, or further risks to the inflation outlook materialise, we would step up the pressure and broaden even more the channels through which we intervene, by altering accordingly the size, pace and composition of our purchases,” he said.

    Annual euro zone inflation was 0.4 percent in October, far short of the ECB’s medium-term target of just below two percent.

    Draghi’s comments, which many read as inching very close to possible buying of government bonds, received a warm reception from Italian finance minister Pier Carlo Padoan, who said ECB action was welcome to revive economic growth in the euro zone.

    The ECB said on Friday it had started buying asset-backed securities. Along with purchases of covered bonds, a secure form of debt often backed by property, it is trying to encourage banks to lend and revive the economy.

    Draghi said earlier this week that if the current measures were not enough, or if inflation expectations deteriorated further, the ECB could widen its purchases to include debt of euro zone governments, a strategy which German policymakers strongly oppose.

    Economists expect bold ECB action. “Draghi all but announced that the central bank will step up monetary easing soon. Mr Maybe has become Mr Definitely,” said Nick Kounis of ABN Amro.

    But it is unclear how much such a move can help Europe as the prospects for the global economy and one of its chief engines of growth, China, grow ever more uncertain.

    China cut its benchmark interest rates for the first time in more than two years on Friday to stimulate economic growth, which is on track for its lowest annual rate in 24 years.

    Japanese Prime Minister Shinzo Abe has called snap elections, seeking a mandate for his struggling “Abenomics” revival strategy after the economy unexpectedly slipped into recession.

    The euro zone grew 0.2 percent in the third quarter, giving an annual rate of 0.8 percent, according to a flash estimate from the European statistical agency Eurostat. Of the major national economies, Italy has already fallen back into recession.


    Draghi had said further measures could involve large-scale purchases of government bonds – the kind of quantitative easing that the United States, Japan and Britain have already used. Such a step in the euro zone would, however, encounter stiff resistance from the bloc’s largest economy, Germany.

    Bundesbank President Jens Weidmann, speaking shortly after Draghi at the same event, avoided talking about the issue entirely. The two have clashed before on their views on the future policy path.

    “We can’t be constantly commenting on one another,” Weidmann told reporters as he left the event.

    So after Mario Draghi gives a speech that sounds remarkable close to his now famous “do whatever it takes” speech of July 2012 that’s been credited with preventing a collapse of the eurozone sovereign bond markets and hints at potential significant ECB policy shifts, we see Draghi’s rival banker, Bundesbank chief Jens Weidmann, give a speech that really says nothing about Draghi’s big “do whatever it takes II” proclamations. So what gives? Well, since it was a Weidmann speech, there were more calls for austerity/”stuctural reforms”, which is a reminder that there’s no reason the Weidmann faction on the ECB governing council isn’t planning on making ongoing austerity part of “whatever it takes” too:

    Draghi Ramps Up Stimulus Pledge on Weak Inflation Outlook
    By Paul Gordon, Jeff Black and Stefan Riecher Nov 21, 2014 9:12 AM CT

    Mario Draghi strengthened his stimulus pledge for the euro area by saying the European Central Bank can’t hold back in its fight to revive the economy.

    “We will do what we must to raise inflation and inflation expectations as fast as possible, as our price-stability mandate requires,” the ECB president said at a conference in Frankfurt today. Some inflation expectations “have been declining to levels that I would deem excessively low,” he said.

    Expanded measures may not win unanimous approval in the ECB’s Governing Council. Governing Council member Klaas Knot said this week that he’s “skeptical” about QE. Bundesbank President Jens Weidmann has argued that large-scale sovereign-debt purchases muddy the line between fiscal and monetary policy.

    While Weidmann didn’t address the question of asset purchases when he spoke at the Frankfurt conference two hours after Draghi — instead focusing on banking regulation — he did point to the limits of monetary policy.

    “Mr. Definitely”

    “More than just favorable refinancing conditions will be needed to stimulate credit growth,” he said. The euro area needs “structural reforms which bolster competitiveness and boost economies’ growth potential. A prosperous economy needs healthy banks, but the opposite is just as true: healthy banks need a prosperous economy.”

    Draghi has repeatedly expressed concern that insufficient structural adjustments by governments pose a downside risk for the euro-area economy. The ECB has signaled that it will reduce its macroeconomic forecasts for the region when it publishes a revised outlook after its Dec. 4 monetary-policy meeting.

    “Draghi all but announced that the central bank will step up monetary easing soon,” said Nick Kounis, head of macro and financial markets research at ABN Amro Bank NV in Amsterdam, who predicts the ECB will buy corporate and agency debt before sovereign bonds. “Mr. Maybe has become Mr. Definitely.”

    “More than just favorable refinancing conditions will be needed to stimulate credit growth… [The euro area needs] structural reforms which bolster competitiveness and boost economies’ growth potential. A prosperous economy needs healthy banks, but the opposite is just as true: healthy banks need a prosperous economy.” That’s the kind of pro-austerity nonsense argle-bargle we should expect from Jens Weidmann. And if you compare his words to a speech Mario Draghi gave just last month, it’s clear that Weidmann’s endless austerity sentiments are still very much shared by Mr. “Do whatever it takes” too:

    Brookings Now

    ECB President Mario Draghi: Without Reform There Can Be No Recovery
    Fred Dews | October 10, 2014 9:16am

    “We are accountable to the European people for delivering price stability, which today means lifting inflation from its excessively low level; and we will do exactly that,” said Mario Draghi, president of the European Central Bank, in a speech yesterday at an event hosted by the Hutchins Center on Fiscal and Monetary Policy at Brookings.

    President Draghi continued in his remarks that:

    The Governing Council has repeated many times, even as it was adopting new measures, it is unanimous in its commitment to take additional unconventional measures to address the risk of a too-prolonged period of low inflation. This means that we are ready to alter the size and the composition of our unconventional interventions and therefore of our balance sheet as required.

    Draghi, who was joined on stage by Senior Fellow David Wessel, director of the Hutchins Center, and Stanley Fischer, vice chairman of the Board of Governors of the Federal Reserve, began his remarks by recalling an open letter delivered by economist John Maynard Keynes to President Franklin Roosevelt in December 1933, in which the economist worried about the risk of too-fast reform impeding economic recovery. However, Draghi noted, “we [in Europe] face the opposite concern to that expressed by Keynes. Without reform, there can be no recovery.”

    Draghi then outlined what he called a “coherent strategy” of structural reform and policy initiatives to “stabilize the euro area” and to “achieve a sustained recovery.” He discussed actions on a number of fronts, including: repairing the integrity of money; repairing the financial sector and credit allocation; repairing monetary policy; repairing fiscal policy; and raising potential growth through a rising workforce and rising productivity.

    “The issue is not really whether policies to support demand should precede or follow policies to support supply,” Draghi said in conclusion. “Reform and recovery are not to be weighed against each other. The whole range of policies I have described aims simultaneously at raising output towards its potential and at raising that potential.”

    Yes, just last month Mario Draghi started off a panel discussion explicitly refuting Keynes. And then he discussed the need for more “structural reforms” that were needed to “achieve a sustained recovery. The same “structural reforms” that have sent the eurozone into a deflationary death spiral and continue to derail any nascent recoveries. Those need to be continued. “Without reform, there can be no recovery”. And that was just last month. So, really, what does Weidmann have to worry about? The situation is the same as ever: unfulfilled pledges to “do whatever it takes” and ongoing austerity. Maybe there will be QE but maybe not! The original 2012 “do whatever it takes” pledge was all about the ECB possibly buying sovereign bonds and that hasn’t happened yet, so why exactly would Weidmann worry about anything other than inadequate QE now?

    And there’s the fact that Draghi’s call for a “coherent strategy” for implementing that “structural reform” sounds an awful lot like a call Draghi made back in July for another new to feature in the eurzone’s pro-growth strategy: Change the eurozone rules to make implementation of austerity policies out of the hands of national governments. Taking away the power to implement deep changes national socioeconomic policies out of the hands of national governments. That’s what Draghi was calling for just months ago:

    Wall Street Journal
    Draghi Calls for Euro-Zone Rules for Economic Reforms
    ECB President Outlines New Proposal That Would Deepen Economic Integration

    By Paul Hannon
    July 9, 2014 2:31 p.m. ET

    European Central Bank President Mario Draghi on Wednesday called for new rules on economic reforms that the countries in the euro zone should adopt to narrow their economic differences.

    In outlining a new proposal from the ECB that would further deepen the economic integration of the euro zone, Mr. Draghi said differences in the competitiveness of its 18 member economies are as much a threat to the euro zone’s survival as differences in members’ debt loads.

    The ECB has long called for greater structural reform of euro-zone economies to narrow the differences between their economic performance. But in a speech in London Wednesday, Mr. Draghi gave the clearest outline yet of a governance structure that would help bring that about.

    Mr. Draghi didn’t elaborate on how the new rules would be framed or enforced, but the ECB hadn’t previously proposed ways in which the economic reforms could be advanced.

    “No firm or individual should be penalized by its country of residence,” he said. “The persistence of such differences creates the risk of permanent imbalances. With this in mind, I believe that structural reforms in each country are enough of a common interest to justify that they are made subject to discipline at the community level.”

    Mr. Draghi said establishing new rules that would require member governments to take “corrective action” to improve the competitiveness of their economies would strengthen the cohesion of the currency area and help boost growth and create jobs.

    Mr. Draghi didn’t detail the required actions, but they are likely to differ for each member.

    He said the existence of euro-zone rules would also help governments implement needed reforms, which would “require substantial political capital.”

    “Historical experience, for example of the IMF [International Monetary Fund], makes a convincing case that the discipline imposed by supranational bodies can make it easier to frame the debate on reforms at the national level,” he said. “In particular, the debate can be framed not in terms of whether, but in terms of how reform needs to take place.”

    In his speech, Mr. Draghi also said the rules that govern government borrowing in the euro zone must be strictly observed.

    Mr. Draghi repeated his concern about too-low inflation in the euro zone, and the ECB’s readiness to use “unconventional instruments within its mandate” should that problem persist.

    “To unwind the consolidation that has been achieved, and in doing so to divest the rules of credibility, would be self-defeating for all countries,” Mr. Draghi said.

    First off, note that when Draghi talks about “Historical experience, for example of the IMF [International Monetary Fund], makes a convincing case that the discipline imposed by supranational bodies can make it easier to frame the debate on reforms at the national level…In particular, the debate can be framed not in terms of whether, but in terms of how reform needs to take place,” the IMF actually refuted its own austerity policy a while ago, so Mario Draghi is really on agreeing with the unreformed IMF opinions on the need for endless trickle-down “structural reforms”.

    And as we can see overall, in the same speech in July where Mario Draghi calls for ‘establishing new rules that would require member governments to take “corrective action” to improve the competitiveness of their economies’ he also ‘repeated his concern about too-low inflation in the euro zone, and the ECB’s readiness to use “unconventional instruments within its mandate” should that problem persist.’ So whenever Draghi calls for “doing whatever it takes” to save the eurozone, it’s important to keep in mind that “whatever it takes” clearly involves maintaining or even increasing the insane fiscal austerity policies that have contributing to the deflationary death spiral in the first place.

    So if you’re surprised by Jens Weidmann’s casual response to Draghi’s latest “do whatever it takes” speech, don’t be. Doing “whatever it takes” is a verbal Rorschach test that the austerians rigged for themselves a while ago.

    Posted by Pterrafractyl | November 22, 2014, 8:56 pm

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