MacroScope

A question of liquidity

The Federal Reserve’s decision to keep printing dollars at an unchanged rate, mirrored by the Bank of Japan sticking with its massive stimulus programme, should have surprised nobody.

But markets seem marginally discomfited, interpreting the Fed’s statement as sounding a little less alarmed about the state of the U.S. recovery than some had expected and maybe hastening Taper Day. European stocks are expected to pull back from a five-year high but this is really the financial equivalent of “How many angels can dance on the head of a pin”. The Fed’s message was little changed bar removing a reference to tighter financing conditions.

However, the top central banks have sent a signal that they think all is not yet well with the world – the Fed, BOJ, European Central Bank, Bank of England, Bank of Canada and Swiss National Bank have just announced they will make permanent their array of currency swap arrangements to provide a “prudent liquidity backstop” indefinitely.

On the liquidity front, ECB policymaker Ewald Nowotny has stated that more will be made available to euro zone banks as the more than 1 trillion euros of cheap long-term loans issued late in 2011 and 2012 expire. He didn’t specify what that would entail. ECB board members Carlos Costa and Erkki Liikanen are speaking later.

We reported earlier this week that there are three trains of thought within the ECB about what policy move, if any, to make next. Some policymakers want to consider an interest rate cut, some to keep the option open of another long-term liquidity splurge for the banks a la last year’s LTRO and others in  the “core” euro zone don’t want any policy shift at all. Nowotny has said there is not much that can be done to curb a resurgent euro.

Time to taper the taper talk?

It’s been three months since the Federal Reserve first hinted that it’s going to have to ease off on its extraordinary monetary stimulus, but financial markets are still not settled on the matter.

But while volatility is on the rise – surely partly a result of thinned trading volumes during the peak summer vacation season – the consensus around when the Fed will start cutting back hasn’t budged.

That makes endless daily reports from traders linking that to the latest falls in asset prices, particularly U.S. Treasuries and non-U.S. share prices, not terribly convincing.

Battening down the hatches

There’s a high degree of battening down the hatches going on before the Greek election by policymakers and market in case a hurricane results.

G20 sources told us last night that the major central banks would be prepared to take coordinated action to stabilize markets if necessary –- which I guess is always the case –  the Bank of England said it would  flood Britain’s banks with more than 100 billion pounds to try and get them to lend into the real economy and we broke news that the euro zone finance ministers will hold a conference call on Sunday evening to discuss the election results – all this as the world’s leaders gather in Mexico for a G20 summit starting on Monday.
Bank of England Governor Mervyn King said the euro zone malaise was creating a broader crisis of confidence.

The central banks acted in concert after the collapse of Lehmans in 2008, pumping vast amounts of liquidity into the world economy and slashing interest rates. There is much less scope on the latter now. The biggest onus may fall on the European Central Bank which may have to act to prop up Greek banks and maybe banks in other “periphery” countries too although the structures to do so through the Greek central bank are in place and functioning daily. In extremis, we can expect Japan and Switzerland to act to keep a cap on their currencies too. As a euro zone official said last night, a bank run might not even be that visible and start on Sunday night over the internet rather than with queues of people outside their local bank on Monday morning.

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.

"Here, have some cash"

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.

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.

TrichetWeberWeber 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.

ECB stuck feeding southern Europe’s cash addiction

Spain ECB borrowing

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.

Has it really been three years?

European Central Bank Governing Council member and Cyprus Central Bank Governor Athanasios Orphanides addresses parliament in Nicosia, November 27, 2009. REUTERS/Andreas Manolis

European Central Bank Governing Council member and Cyprus Central Bank Governor Athanasios Orphanides addresses parliament in Nicosia, November 27, 2009. REUTERS/Andreas Manolis

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.

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.

ECB offers olive branch to Greece

Athens reacts to news of ECB collateral rule changes

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.

from Global Investing:

It’s the exit, stupid

Ghoul

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.