MacroScope

ECB payback as easy as ABC

Trichet

Trichet

The European Central Bank is breathing a sigh of relief as it managed to take back 442 billion euros in emergency loans lent to banks a year ago without blowing a hole in money markets.

Banks borrowed modestly from two extra lending operations the ECB offered to sweeten the payment deadline, rolling over just over half the one-year loans, or 243 billion, and letting 199 billion euros flow out of the financial system.

The ECB has been keen to get money markets back on a more normal footing and to avoid banks becoming hooked on central bank money, but was wary of shocking markets with a sudden liquidity shortage.

So far, so good. Although longer-dated interbank interest rates continued rising on Thursday to new 9-1/2 month highs,  overnight rates were little changed and markets showed few signs of tension.

Analysts said it was a Goldilocks scenario all round.

“After today’s result the excess liquidity remains relatively abundant (over 100bn), and in the range that we had indicated as neither too high (which would have sent worrying signals on the health of European banks) nor too small (which would have put tremendous pressure on money market rates),” UniCredit analyst Luca Cazzulani said.

The ECB’s half-trillion euro question

ReutersEuropean banks must pay back almost half a trillion euros to the European Central Bank on July 1 as the ECB’s first-ever one-year loans fall due, potentially putting pressure on banks’ ability to refinance and on money market interest rates.

But the ECB is confident it has put the necessary crash protection in place, with offers of unlimited three-month and six-day funds on the menu next week to make sure banks are not starved for funds.

 ”We have taken all precautions,” Austrian central bank governor Ewald Nowotny assured journalists on Friday. “We are confident that this will all occur without tensions.”

A “Greed Tax” on banks

The International Monetary Fund has done what it was bid by the G20  and come up with proposals for getting banks to pay for the government help they receive when they get in trouble.  You can read the actual wording here, but it comes down to this:

Cat1) A “Financial Stability Contribution” which would be pooled into a fund that would use it to help weak banks, or just go into general government revenues.

2)  A “Financial Activities Tax” — perhaps intentionally known as FAT — to be levied on combined bank profits and remuneration (for which read “bonuses”) and paid to governments.

Scams from Abuja to Reykjavik

It suffered the collapse of its currency, economy and banking system so being invoked in a version of the notorious Nigerian email scam is one of the smaller humiliations endured by Iceland.

The confidence trick, which has roots in the 18th century, usually involves an email from someone claiming to be either a deposed African dictator or a Nigerian lawyer, promising a sum of money in return for help to access a substantial fortune.

But the latest spam email making its rounds purports to be from Iceland, one of the highest profile sovereign casualties of the global financial crisis. This version of the email is supposedly from a “devoted christian (sic)” from Iceland”, a widow seeking help to access $6 million in a Canadian bank left to her by her husband who worked for an oil giant for 19 years.

Financial headcounts stabilize in 2009

After financial firms slashed hundreds of thousands of jobs in 2007 and 2008, the bloodletting slowed in 2009 as major banks rebounded from the financial crisis. Even though firms like Goldman Sachs Group Inc and JPMorgan Chase & Co reported billions of dollars in profit, they still did not announce major hiring initiatives.

Recession layoffs Headcount (end 2008) Headcount (end 2009) Bank of America 45,000 240,202 283,717* Citigroup 75,000 323,000 265,000 Goldman Sachs 4,800 34,500 32,500 J.P. Morgan 23,700 224,961 222,316 Morgan Stanley 8,680 45,295 61,388* UBS 19,700 77,783 65,233 Credit Suisse 7,320 47,800 47,600 Barclays 9,050 152,800 144,200 Deutsche Bank 1,380 80,456 77,053 Santander 2,600 170,961 169,460

* Includes additional employees from Morgan Stanley Smith Barney merger and Bank of America’s merger with Merrill Lynch, both of which were completed in 2009 (Steve Eder and Steve Slater)

Are CDS markets the euro zone’s iceberg?

icebergIn an unfortunate turn of phrase at the height of his country’s current debt crisis, Greek Finance Minister George Papaconstantinou on Monday compared his government’s Herculean task in slashing deficits and debts as akin to changing the course of the Titanic. Sadly, we all know where the great “unsinkable” ended up almost a century ago and I’m sure,  given the chance, Mr Papaconstantinou would have chosen another metaphor. But if the Greek economy (or perhaps the euro zone at large?) is to be cast as the Titanic, then what is its potential iceberg?

For some euro politicians, look no further than the sovereign Credit Default Swaps market. France’s finance chief Christine Lagarde said as much last week when she questioned “the validity, solidity of CDSs on sovereign risk” and warned speculators to be careful as regulators took a “second look” at the market and European governments closed ranks. Lagarde, of course, is not alone.  You can be sure CDS are being examined long and hard by Spanish intelligence services investigating the “murky manoeuvres” in the debt markets.  But what is the exact charge against CDS?

CDS are ways to buy or sell insurance on the risk of debt defaults without needing to own the underlying bonds in the first place. It’s a way of hedging your debts, if you like, without having to go through the often more complicated game of selling securities short (or selling borrowed paper). In essence, it allows you to take a bet on default without having to go to the trouble of owning the bonds you’re insuring against.  Some critics, not unreasonably, would view this as the epitome of the casino capitalism that has elicited so much public outrage over the past three years . The fear is this market has become the tail wagging the dog.

ECB to cash junkies: Get into rehab

European Central Bank President Jean-Claude Trichet  signalled on Thursday that the days of 12-month loans to banks will come to an end soon and that will be the start of a gradual exit from unlimited liquidity injections.***”The market, as far as I see, it is not expecting that we will prolong (our) one-year operation, I will say nothing to dispel this present sentiment of the market,” Trichet said in a news conference after the 16-country bloc’s central bank kept rates at 1 percent. “The enhanced credit support … was not for eternity,” he added.******The ECB started the 12-month cash injections to help the ailing banking sector back into form, and banks reacted with joy, snapping up nearly half a trillion euros of cheap money in the first such operation in June.******But Trichet also had soothing words for banks addicted to cheap money. The ECB would keep interbank interest rates well below the main refinancing rate, he said.  But it seems banks will have to learn to play again with each other rather than relying only on the ECB’s largesse.******And before signing off, Trichet also had words of advice for the media.  “This is exactly the same language as we always have utilised. Everybody knows that, so no news there.”******That advice seemed fall on deaf ears, as most media, including Reuters, would make a lot of hay out of his words on 12-month liquidity injections and keep it the centrepiece of their coverage.

“Normal” bank lending is no longer realistic

MacroScope is pleased to post the following from guest blogger James Carrick.  Carrick is economist at UK fund firm Legal & General Investment Management. He says here old patterns of lending are unlikely to return and that this means slow growth in developed countries.

“Despite £175 billion of quantitative easing, bank lending in the UK remains weak, threatening to restrain the economic recovery and equity market rally. 

Policy makers in the developed world have been working overtime to encourage banks to lend at the ‘normal’ levels experienced during the past decade. However, these “normal” levels are no longer realistic. The factors which contributed to the secular rise in debt over the past decade are now reversing. Populations are ageing, interest rates can’t go any lower and sub-prime lending is over.

from The Great Debate UK:

It’s all over: The banks have won

Laurence Copeland- Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. -

There is so much talk of a new regulatory framework for the financial sector, anyone would think it was an important issue.

Unfortunately, it is almost irrelevant, for the simple reason that, however sophisticated the new regime, experience shows it will be bypassed and/or captured by banks of one kind or another, possibly by novel types of institution invented specially for the purpose.

Central bankers come out on top in cost-benefit analysis

Bankers worried about losing their bonuses might be well advised to consider a cost-benefit analysis of the contribution of their public sector colleagues.

Central bankers not only earn much less than their high-flying private sector counterparts, but over the last year have spent almost every second weekend in high-level, save-the-world meetings aimed at clearing up the mess created by Wall St and City banks.     

European Central Bank head Jean-Claude Trichet (who earns a mere 350,000 euros a year ) confessed to a group of student journalists that he spends almost every weekend working.