When 500 billion euros no longer pops eyes
There was a time when 500 billion euros in cash was truly spectacular.
But investors and speculators hoping for an even more eye-popping cash injection at the European Central Bank’s second and most likely last three-year money operation on Wednesday are likely to be disappointed, based on past Reuters polls of expectations.
Ever since the ECB started offering cheap, long-term loans to keep cash flowing through banks during the financial crisis, a clear pattern has emerged in the forecasts of money market traders attempting to gauge their size.
They have consistently underestimated the size of a given new loan tender the first time it is offered, only to overshoot on subsequent operations of the same maturity.
It is already widely understood on many trading desks that Wednesday’s sale, which the ECB is not likely to repeat, is an offer that is too good to refuse rather than a vital lifeline to keep the financial system afloat.
“Free lunch” is a common phrase that money market traders contacted by Reuters have used over the past month when providing views on how big Wednesday’s long-term refinancing offer (LTRO), currently expected to be 500 billion euros, is likely to be.
As early as the first one-year tender the ECB offered in 2009 when the credit crisis was gripping the financial system by the jugular and threatening to bring it crashing down, traders were overwhelmed by the wall of cash that hit them.
Diplomacy not needed for top ECB job, says Bundesbank boss
Axel Weber, head of Germany’s Bundesbank and a frontrunner to take over the leadership of the European Central Bank next year, thinks diplomacy is over-rated in central bankers.
Weber normally avoids all comment on the tricky subject of choosing a successor to current ECB President Jean-Claude Trichet but with just over a year to go before the plum post comes up, could not resist making an ambit claim.
Asked by a television interviewer whether he was enough of a diplomat to take over from Trichet given his public criticism of the ECB’s decision to buy government bonds in May, Weber said he thought diplomacy was an optional extra.
“I’t's important to be diplomatic for the diplomatic corps; it’s not so important for the central bank,” he said.
“I think it’s very important for central banks to have a strong view, to basically stand for that view … that sometimes requires (putting) diplomacy in the back seat.”
Weber’s main competition for the top job, Italy’s Mario Draghi, is is no stranger to diplomacy as head of the Financial Stability Board of international regulators and is seen as more moderate than the anti-inflation Weber.
Interesting that Weber’s comments came during an interview in which he backed extending the ECB’s ultra-generous liquidity supplies into the start of next year, surprising many observers who had expected him to take a hard-line stance.
ECB stuck feeding southern Europe’s cash addiction
Commercial banks in southern Europe are increasingly addicted to cheap central bank money after dealers shut them out of money markets. Due to this dependency, the European Central Bank will have little option but to keep offering banks cold hard cash for almost nothing – currently it prices its loans at 1.0 percent.
Economic growth in the euro-zone core has been robust lately, but southern Europe has been hit hard on several fronts recently and is falling badly behind. First, the sovereign debt crisis hit Greece and other southern periphery countries, then bank stress tests showed 6 out of 7 failing banks were in Spain or Greece, and then the region posted only tepid economic growth.
Bank borrowing from the ECB shows increasing strains in southern euro-zone’s financial sector while banks elsewhere are getting back on their feet, but the fear of contagion from country to country will keep the ECB on its toes. Banks in Greece borrowed twice as much last month as they did in July 2009, even though outstanding central bank lending fell 18 percent over the same time. Banks in Portugal borrowed five times as much in July 2010 as they did a year earlier, and borrowing also rose in Spain and Italy.
“The full-allotment fixed-rate repos will stay well into next year,” said Michala Marcussen, Societe General chief economist. “Beyond the first quarter of next year, the overall economic environment will be the key determinant in how much longer it gets carried. In all likelihood it could get carried further ahead.”
The ECB tried to reintroduce limits to borrowing in April but was forced into a U-turn by the sovereign debt crisis, returning to its full allotment policy in May. Fourth-quarter plans are due to be revealed in September, with markets expecting full allotment to continue.
Among the ECB’s 22 Governing Council members, Cyprus’s Athanasios Orphanides and Ireland’s Patrick Honohan have indicated the unlimited funding should continue, and on Friday Germany’s Axel Weber made clear exit discussions should not resume until early next year. His dovish tone got analysts’ attention.
Has it really been three years?
It is three years to the day since the European Central Bank first threw unlimited amounts of cheap cash at banks in a bid to ease liquidity logjams, and at least one of its 22 policymakers sees no reason to rush for the exit yet.
”We remain sensitive to the liquidity needs in the banking sector and, as we have been doing since the beginning of the crisis, we will continue to provide liquidity as necessary,” Cyprus central bank governor Athanasios Orphanides said in an interview with Reuters.
The ECB has promised to announce on Sept. 2 whether it will extend its open-door liquidity policy beyond September for three-month operations and beyond October for its main one-week operations.
As a result of the liquidity flood and drastic interest rate cuts, overnight euro interest rates are now just 0.3 percent , compared to as high as 4.6 percent on August 9, 2007 when subprime tensions in the United States first spilled over to European money markets.
The ECB stunned markets by lending banks a then-record sum of 95 billion euros in overnight cash, kicking off a wave of similar action by other central banks including the U.S. Federal Reserve and the Bank of Japan.
“It seems probable that the ECB will have to continue to intervene, by injecting liquidity, or otherwise, to stabilize the markets,” Barclays Capital analyst Laurent Fransolet wrote at the time. Perhaps Orphanides’ comments show the same statement still holds true today.
ECB payback as easy as ABC
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.
Still, it does not mean euro zone banks are ready to stand on their own feet just yet.
ECB offers olive branch to Greece
They’ll be smashing plates in Athens tonight and it won’t be because it’s Greek national day. Instead, Greek banks and investors will be revelling at the fact the European Central Bank came to the party with a big fat collateral present.
In December and January the ECB said it wouldn’t change its rules on what banks are allowed to swap for ECB loans, even if rating agencies downgraded Greek debt to the point of financial oblivion. However, with markets threatening to push the cradle of civilisation to the brink of ruin, they have decided that it wouldn’t be such a bad idea after all.
ECB President Jean-Claude Trichet said the ECB would extend looser collateral rules, accepting assets rated as low as BBB-, into next year rather than reverting to its previous A- threshold. Greece is currently rated BBB- by two of the three major credit ratings agencies.
One analyst described the move as removing the “Damocles sword” that had been hanging threateningly over Greece’s head. Another said it was the “ECB’s contribution to the resolution of the Greek crisis,” or should that be tragedy.
Despite the ECB’s generous move, Greece still faces a Herculean task to get its battered finances back in order. It is facing a refinancing marathon over the next year in order to avoid default and an eye-watering austerity plan suggests difficult times ahead for the country and its people.
While it may well have to turn to the euro zone governments and their taxpayers in the end, the ECB’s olive branch collateral offering is likely to be gratefully received. Pass Jean-Claude Trichet a plate.
from Global Investing:
It’s the exit, stupid
Anyone wondering what ghoul is most haunting investors at the moment could see it clearly on Tuesday -- it is the exit strategy from the past few years' central bank liquidity-fest.
Germany came out with a quite positive business sentiment indicator, relief was still there that Greece had managed to sell some debt a day before, and Britain formally left recession -- albeit in a limp kind of way.
But what was the main global market mover? It was China implementing a previously announced clampdown on lending.
Doesn't bode well for when the euro zone stops lending banks low-interest money, Britain stops buyng gilts and the Federal Reserve raises interest rates.
Moody’s turns Delphic on Greek debt
In downgrading the debt to A2, Moody’s ensured that Greek (and other) banks will still be able to swap Greek bonds for cheap funding from the European Central Bank, assuming that nothing has changed by this time next year when the ECB will only accept bonds rated A-/A3 or above as collateral by at least one agency.
Both Standard & Poor’s and Fitch have cut Greek bonds to BBB-plus this month, meaning if Moody’s cuts Greece to an equivalent level, Greek banks are likely to face difficulties in getting access to liquidity as analysts estimate more than half the collateral they have submitted at the central bank is in government bonds.
Yet Moody’s explained the decision as partly due to its expectation that the ECB will keep accepting Greek debt as collateral, a decision which hinges on Moody’s itself keeping Greece’s rating above the watermark.
Unless of course the ECB backflips and lowers its standards before December 2010, although ECB Vice-President Lucas Papademos has said the euro zone central bank will not bend the rules for Greece.
In the short term the Greek government requires fiscal reforms in the form of a new and rigorous taxation regime to ensure the correct flow of consolidated revenues into the government coffers. This must be done in a manner which doesn’t disadvantage the most vulnerable in society. These reforms must be coupled with transparency in all government dealings which the Papandreou government has already initiated. Additionally, in the long run Greece needs to increase its population with skilled migrants who can fortify the taxation base of the country and increase the entrepereurial opportunities for the country. In short, Greece needs somewhat of an economic miracle or the implementation of new technological processes to free it from its current economic quagmire.
ECB stumbles out the exit
The European Central Bank stumbled through the exit door on Thursday with a convoluted and complicated attempt to explain to markets exactly how it was going about it.
Granted it had a lot to explain – it was trying to cut back its banking sector support in a humane fashion, without giving a signal on future interest rate changes. Nevertheless, it baffled some observers and caused a kerfuffle in markets.
Goldman Sachs’ Erik Nielsen put it nicely. ”What a mess they made out of the communication, leaving a great deal of (intentional?) ambiguity. This ambiguity was partly rooted in their highly unusual use of the word “fixed”.
In his trademark Franglais drawl, Trichet said the rate the ECB will charges banks for one-year loans at its final handout later this month – vital to the evolution of lending costs in the real economy — will be “fixed at the average minimum bid rate of the main refinancing operations over the life of operation.”
“I stupidly thought this meant a continuation of the present regime of fixed rate full allotments (so a dovish sign), only to learn shortly afterwards that “fixed” now means “fixed to something that may vary… I no longer feel so sure that I know what “fixed” means.” admitted Nielsen
What Trichet could have said was that banks’ interest charges will go up if and when the ECB hikes rates, but central bankers rarely keep things simple.
There were other problems. Trichet didn’t say clearly that the the ECB was cutting back the number of three month loans on offer to banks and left another important bit of information for a press release that journalists got as they shuffled away from the news conference.
Walking, talking ECB leading indicator
German Bundesbank President Axel Weber is developing a reputation as a leading indicator for the European Central Bank.
In the same way as a pickup in confidence can foreshadow a pickup in the economy, Weber’s comments about the direction of ECB policy this year have tended to be borne out by events.
The ECB’s broad hint on Nov. 5 that it will drop its super-long, one-year loans to euro zone banks next year follows a similar suggestion by Weber a week earlier.
And earlier this year, the 52-year-old publicly argued (and succeeded) for the ECB not to cut its main interest rate below zero, or follow other central banks in adopting a massive asset-buying programme.
Some economists wonder whether Weber – seen along with Italy’s Mario Draghi as an heir apparent to ECB President Jean-Claude Trichet in 2011– just dares to say publicly what others are already thinking, showing little regard for the unwritten rules that make Trichet the official barometer of ECB opinion.
But others say Weber’s record this year shows he is successful at convincing others to follow his lead. A former academic, he can talk eloquently about the nitty-gritty of economic analysis and as the representative of the euro zone’s biggest economy and banking sector, his opinion carries weight.
“When Weber speaks, the market does tend to listen,” says Societe Generale economist James Nixon, a former ECB staffer.
