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from Breakingviews:

Euro crisis 2.0 will need a new shock absorber

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By Neil Unmack and George Hay

The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

Future euro zone crises will need a different shock absorber. European banks kept yields down during 2010-13 by buying sovereign debt. New capital rules make this an altogether dicier affair.

In the years following Greece’s near-death moment in 2010, banks stopped being just intermediaries and became ailing euro zone governments’ buyers of last resort. Dirt-cheap liquidity extended to them by the European Central Bank allowed euro zone bank debt holdings to grow by 430 billion euros in the five years to January 2013.

The neatest thing, aside from helping banks make a nice spread and control soaring borrowing costs, was that they could do all this without hurting their capital positions. Banks could dump all their sovereign holdings in a so-called “available for sale” bucket in their accounts. This allowed them to avoid taking a hit to regulatory capital when bond prices fell.

from Breakingviews:

Central bankers live in silent fear

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By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

It’s scary to think what higher policy interest rates might do to a financial system habituated to virtually free money. Central bankers, though, profess not to be too worried about this risk. They are either overconfident - or living in silent fear.

from Breakingviews:

The question ECB hasn’t answered: why wait?

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By  Pierre Briançon

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

There is only one question worth asking Mario Draghi right now: what does he intend to do to boost inflation? The European Central Bank of which he is president is failing at its only mandate – maintaining price stability in the euro zone, defined as a rate of inflation “below but close” to 2 percent. The most recent numbers - inflation last month was at an annual rate of 0.5 percent, and prices  have risen 1.2 percent in the last 12 months - is nowhere near the target. And judging by the ECB’s own forecast, the rate won’t get much nearer by 2016. Real deflation remains, so far, a low-risk scenario. But economies like Spain or Greece are suffering from the ECB’s inaction. And is even a small risk of dangerous deflation worth taking? Acting now could spare the ECB more aggressive policies later. What’s the upside of playing with fire?

from MacroScope:

Is it time for the ECB to do more?

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From financial forecasters to the International Monetary Fund, calls for the European Central Bank to do more to support the euro zone recovery are growing louder.

With inflation well below the ECB’s 2 percent target ceiling and continuing to fall, 20 of 53 economists in a Reuters Poll conducted last week said the bank was wrong to leave policy unchanged at recent meetings and should do more when it meets on Thursday.

from Counterparties:

MORNING BID – Pitfalls and switchbacks

This week profiles as one that contains a bunch of potential minefields that could challenge the market's prevailing view on what's to happen with major market-moving events.

The ECB meeting is one of the more obvious ones, what with investors expecting for some time that the euro would push higher and higher on the expectation of an improved outlook in the economic situation there.

from Global Investing:

And best central banking twitter of the year goes to…

Congratulations to Bank of Spain, which won the best central bank website of the year award given by Central Banking Publications, as the specialist news provider for central bankers hosted its inaugural central banking awards  last night in London. (The flagship Central Banker of the Year award was won by ECB's Draghi, no surprise there)

Central banks around the world are looking for ways to improve their communication strategies and the website is one area they are focusing on (Quantity is not everything, yet the Bank of Spain's website features 7,000 pages of information and 24,700 separate files).

from Breakingviews:

ECB needs cunning plan to join currency wars

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By Swaha Pattanaik

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

The euro is at two-and-a-half-year highs. Its strength risks driving ultra-low inflation even lower. The European Central Bank may be squeamish about blatantly targeting a weaker euro. But it need have no qualms about picking monetary policy tools that maximise damage to the single currency.

from Breakingviews:

Just ditch forward guidance

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By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Central banks’ forward guidance provides modest gains with significant risks. That judgment, already common among economists, has just received an authoritative endorsement from the Bank for International Settlements. The implication is that this policy experiment should be abandoned.

from MacroScope:

Marathon banking union talks

Shots were fired at an international team of monitors in Crimea over the weekend, violence flared in Sevastopol as thousands staged rallies and Angela Merkel, who perhaps has the most receptive western ear to Vladimir Putin, rebuked him for supporting a referendum on Ukraine’s southern region joining Russia. But in truth we’re not much further forward or backwards in this crisis.

The West from Barack Obama on down has said the referendum vote next Sunday is illegal under international law but it’s hard to put the genie back in the bottle if Ukraine’s southern region chooses to break away. The best guess – but it is only a guess – is that barring an accidental sparking of hostilities, there is not much percentage in Russia putting its forces in Crimea onto a more aggressive footing in advance of the vote.

from Hugo Dixon:

ECB faces severest stress test

A lot is riding on the cleanup of euro zone lenders being overseen by the European Central Bank. The progress so far is encouraging. But clarity is needed on a few points to ensure that lenders really do get a good scrubbing and are therefore able to support the zone’s fragile economic recovery.

The ECB is in the midst of a so-called comprehensive assessment of euro zone banks. This has two elements: an “asset quality review” (AQR) to determine whether the loans and other assets held on their balance sheets are valued properly; and a “stress test” to check whether they could withstand a severe economic downturn.

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