ECB numbers game

December 11, 2014

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European Central Bank President Mario Draghi pushed the envelope as far as he could last week, saying a review early next year would decide whether money-printing to buy government bonds was needed. He said he didn’t need unanimity within the ECB to force it through.

Today, the ECB has its last throw of the dice for this year when it offers a second round of cheap four-year loans to banks on the proviso that they lend the money on.

The ECB has set itself the goal of expanding its balance sheet – that is buying stuff from banks and others in return for cash, thereby pumping it into the economy – by up to 1 trillion euros back to 2012 levels. With interest rates essentially at zero that has become the monetary policy target.

Today’s second round of loans is a central part of that plan which, if it falls short, is likely to lead to a full-on government bond-buying programme early next year.

The first “TLTRO” was taken up only to the tune of 83 billion euros. Hopes are higher for this time but forecasts hover around the 130 billion mark, leaving the ECB well short of the 400 billion it was prepared to offer banks in total. Separate schemes to buy up covered bonds and asset-backed securities (bundled up loans) are in their infancy.

So the ECB will likely end the year having succeeded in expanding the euro zone’s monetary base by about 250 billion euros. With proceeds from a previous LTRO operation being paid back early next year, the net result is that the balance sheet could even shrink.

Given that, it’s hard to see the ECB failing to take the ultimate leap now. Whether it happens in January or March (there is no policy meeting in February under a new six-weekly schedule) remains to be seen.

As many as seven of the ECB’s 24 policymakers may have opposed a firming up of the language on the expansion of the bank’s balance sheet that Draghi got through, making it an intention rather than an expectation. That still means a strong majority backs Draghi.

The big remaining question is whether Bundesbank chief Jens Weidmann and co. can circumscribe any QE programme. Most economists think only an open-ended commitment to buy whatever it takes for as long as it takes would be a game-changer.

Russia’s central bank meets having whacked up interest rates in October in a vain attempt to prop up the rouble which has dropped nearly 40 percent against the dollar in the second half of the year. What is more, the economy is sliding into recession and inflation remains well above target at over 9 percent. That’s about as nasty a mix as any policymaker could wish for.

Some expect capital controls to be imposed though the government denies this. The alternative is for the central bank to continue burning through reserves defending the rouble from freefall and/or jack up interest rates, the last thing a struggling economy needs. Neither policy has done the trick so far.

A Reuters poll of economists found a consensus that interest rates will be pushed up by a full percentage point to 10.5 percent today.

The Swiss have the opposite problem with the franc bumping up against the cap set by the Swiss National Bank three years ago to prevent it appreciating too far. The prospect of the ECB taking the leap into full QE should push the euro lower still.

Expect, at the very least, implacable rhetoric at the bank’s quarterly policy meeting today about how the cap will be upheld. There is also speculation that the SNB could follow the ECB’s example and charge banks for depositing Swiss francs with it by imposing negative interest rates.

Norway’s central bank also meets with the lower oil price having an impact but growth still well above euro zone levels. Norges Bank is likely to lower its rate path and economic growth forecasts, and raise the prospect of a cut to the 1.5 percent interest next year.

Greek Deputy Prime Minister Evangelos Venizelos meets German Economy Minister Sigmar Gabriel and Foreign Minister Frank-Walter Steinmeier in Berlin with the first round of a Greek presidential vote only a week away.

If the coalition government loses the final vote on Dec. 29 it will trigger snap elections which polls suggest anti-bailout, anti-austerity Syriza would win. That gives Germany and others in the euro zone a powerful incentive to shore up the coalition which is still at odds with its EU/IMF lenders over its budget figures and how to exit its deeply unpopular bailout programme.

Angela Merkel will hold a news conference this afternoon after meeting the premiers of Germany’s 16 states. In Athens, the parliamentary group of New Democracy, the dominant partner in the country’s ruling coalition, is meeting to discuss strategy.

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