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The Eurozone’s Minsky Conundrum
The Eurozone’s Minsky Conundrum
BRUSSELS – Stubbornly low inflation has the European Central Bank worried. But its response – essentially just more quantitative easing – could backfire, exacerbating imbalances and generating serious financial instability.
As it stands, the headline consumer price index in the eurozone hovers around zero, and even core inflation remains below 1% – too far for comfort from the ECB’s target of around 2%. While a new round of weakness in global commodity prices earlier this year contributed to these figures, it does not explain the weakness in longer-term inflation expectations, which have improved little since March, when the ECB started its massive €60 billion ($66.3 billion) per month bond-buying program.
But instead of rethinking its strategy, the ECB is considering doubling down: buying even more bonds and lowering its benchmark interest rate even further into negative territory. This would be a serious mistake.
Easier credit conditions and lower interest rates are supposed to boost growth by stimulating investment and consumption demand. But in the core of the eurozone – countries like Germany and the Netherlands – credit has been plentiful, and interest rates have been close to zero for some time, so there was never much chance that bond purchases would have a significant impact there. And, indeed, the European Commission’s most recent economic forecast shows that spending in the core countries has not increased as a result of the ECB’s policies; Germany’s external surplus is actually increasing.
Of course, in the highly indebted peripheral countries, there was room for interest rates to fall and for credit supply to grow – and they have, leading governments and households to increase their spending. While the asymmetrical impact of the ECB’s policy is appropriate in principle (because unemployment is much higher in the periphery), the reality is that a recovery supported by the least solvent economies is not sustainable.
…click on the above link to read the rest of the article…
Visualizing The Demise Of The Once Mighty Euro
Visualizing The Demise Of The Once Mighty Euro
The European Union has always been primarily a political project. The idea of the union was to take peoples that had long and complicated histories, and to place them in a situation where they must work together and shed their differences in order to achieve success.
From the political angle, it can be argued that this objective has been achieved. War and conflict within Western and Central Europe has mostly been stymied. Considering the continent’s lengthy history in these areas, this is great news.
However, it’s particularly the countries that adopted the euro as common currency that put themselves into a more precarious economic position. The problem is simple: countries maintain certain political and fiscal responsibilities, but do not control the fate of their common currency.
The result is that eurozone politicians have very different fiscal policies, but don’t have the flexibility of monetary policy to help accompany them. Some countries are trying to spend their way out of trouble, while others are maintaining strict austerity. Either way, the European Central Bank (ECB) controls the plight of the currency and can make unilateral decisions that have a big impact on every country. For example, in the beginning of June 2015, the ECB announced the minimum of a $1.14 trillion quantitative easing program that will add new currency units that together are larger than the economies of Ireland, Greece, Portugal, Finland, Luxembourg, and Slovenia combined.
There has been an array of other problems plaguing the eurozone as well. The most notable of these was that Greece was admitted into the monetary union in the first place after fudging numbers on the Greek economy. Even though Greece makes up about 2% of the overall eurozone, the country has been in constant trouble that has threatened to undermine the entire union. (For a primer on this, read The Origin of the Greek Crisis)
…click on the above link to read the rest of the article…
The Endgame Takes Shape: “Banning Capitalism And Bypassing Capital Markets”
The Endgame Takes Shape: “Banning Capitalism And Bypassing Capital Markets”
One month ago we presented to readers that in the first official “serious” mention of “Helicopter Money” as the next (and final) form of monetary stimulus, Australia’s Macquarie Bank said that there is now about 12-18 months before this “unorthodox” policy is implemented. We also predicted that now that the seal has been broken, other banks would quickly jump on board with an idea that is the only possible endgame to 8 years of monetary lunacy, and sure enough, both Citigroup and Deutsche Bank within days brought up the Fed’s monetary paradrop as the up and coming form of monetary policy.
So while the rest of the street is undergoing revulsion therapy, as it cracks its “the Fed will hike rates any minute” cognitive dissonance and is finally asking, as Morgan Stanley did last week, whether the Fed will first do QE4 or NIRP (something we have said since January), here is what is really coming down the line, with the heretic thought experiment of the endgame once again coming from an unexpected, if increasingly credibly source, Australia’s Macquarie bank.
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Would more QE make a difference? Have to move to different types of QE or allow nature to take its course
It seems that over the last week investor consensus swung from expecting Fed tightening and some form of normalization of monetary policy to delaying expectation of any tightening until 2016 and possibly beyond whilst discussion of a possibility of QE4 has gone mainstream.
Although “QE forever” and no tightening has been our base case for at least the last 12-18 months, we also tend to emphasize the diminishing impact of conventional QE policies. As the latest Fed paper (San Francisco) highlighted, “There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed-inflation and real economic activity. Indeed, casual evidence suggests that QE has been ineffective in increasing inflation”.
…click on the above link to read the rest of the article…
“We Should Have Known Something Was Wrong”
“We Should Have Known Something Was Wrong”
Remember when stuff such as the following was written exclusively on “conspiracy” tin-foil blogs by deranged lunatics who could not appreciate the brilliance of the neo-Keynesian system and central-planning by academics, in all its glory? Good times.
Here is Bank of America’s Athanasios Vamvakidis channeling Tyler Durden circa 2009
The real cost of QE
QE was not a free lunch after all
If only it was that easy to print our way out of a global crisis. Eight years after the crisis, we are still debating about whether the recovery has gained enough of a momentum to allow exit from crisis-driven policies and start hiking rates from zero. The world economy has actually lost momentum this year (Chart 1), deflation risks have increased (Chart 2), and EM indicators and overall market volatility have reached crisis levels (see Chart 3). All this is despite unprecedented expansion of central bank balance sheets (Chart 4). Things may have been worse otherwise, but in hindsight we believe relying too much on unconventional monetary policies was not a free lunch after all.
We should have known something was wrong
The Fed “taper tantrum” could have been the first warning that QE had gone too far. The Fed’s announcement in June 2013 that they would consider tapering QE, contingent upon continued positive data, triggered a sharp market sell-off, particularly in EM. The aggressive search for yield, which intensified after the Fed announced QE3—or QE infinity as markets called it—came to a sudden stop. QE was not for infinity after all. The Fed tried to reassure markets that QE tapering was still policy easing and that its end would not imply rate hikes immediately, but the markets apparently thought otherwise. A key takeaway was not that QE had already gone too far, but that announcing its tapering may have been a mistake. The Fed waited until December to start tapering, although the market had already priced its beginning in September.
…click on the above link to read the rest of the article…
Spain Leaps Toward Political Breakdown
Spain Leaps Toward Political Breakdown
Desperately needed international investors dread it
The dust is not even close to settling after Catalonia’s latest experimental flirtation with nation building. The pro-independence coalition fell tantalizingly short of gaining a majority of seats (62 out of 135). Now it needs the support of the anti-capitalist separatist party Popular Unity Candidacy (CUP) to secure a pro-independence majority in the regional parliament.
The problem is that CUP, which advocates a Catalonian exit (Cat-exit) from the EU, the Eurozone, and NATO, as well as unilateral default on the region’s debt, seems determined to play hard ball. After picking up 10 seats in the election – a seven-point increase on 2011’s total — its lead candidate Antonio Baños has refused to endorse the reappointment of the region’s pro-business president Artur Mas, who Baños described as “tainted” by corruption and the long shadow of austerity.
Kingmaker or Kingslayer?
In his role as Catalonia’s new kingmaker-turned-kingslayer, Baños also dismissed the possibility of CUP supporting a unilateral declaration of independence from Spain. Before the elections CUP had pledged that it would only support a unilateral declaration of independence if the pro-independence parties received a majority of the vote. It won 47%.
As for Mas, his post-electoral hangover has only just begun. Back in 2012, The Economist’s Giles Tremlett presciently warned that by nailing his colors to Catalonia’s independence movement in a last-ditch effort to salvage his own political career, Mas had jumped on a tiger he could not fully control. Now the tiger, it seems, is in the process of unseating its rider. And the rider could soon find himself barred from public office altogether.
As El País reports, the Catalan premier and two other political officials from his party are an official target in a probe (or in the vernacular of Catalonia’s pro-independence supporters, “political trial”) opened by prosecutors over last year’s symbolic referendum:
…click on the above link to read the rest of the article…
Spanish Banks Warn of Financial Meltdown if Catalonia Votes for Independence
Spanish Banks Warn of Financial Meltdown if Catalonia Votes for Independence
In Spain’s north eastern region of Catalonia, the fear-mongering and doom-saying is reaching a deafening crescendo. If voters return a majority of pro-independence politicians in next Sunday’s regional elections, all manner of economic disaster will befall the region — according to the defenders of Spain’s established political and economic order.
The doomsayers include the Spanish government, the main opposition party, PSOE, Angela Merkel, David Cameron, Barack Obama, John Kerry, the spokesperson of the president of the European Commission, Margaritis Schinas, and just about every business lobby representative in Spain. Some Catalan business leaders have even urged their employees to vote against independence, warning that a yes-vote on Sunday could lead to them losing their jobs — a major threat in a nation with over 20% official unemployment!
Warning of a Crisis
The latest chorus of doom and gloom came from Spain’s two biggest banking associations AEB and CECA, whose members include Banco Santander, BBVA, Banco Popular, and Bankia. They warn that the exclusion of Catalonia from the Eurozone will trigger “serious problems of legal insecurity” for banks based in the region. Those banks include Caixabank and Banc de Sabadell, Spain’s third and fifth largest banks respectively, both of whom are also members of AEB and CECA.
In their joint communiqué the two lobbying groups urge the people of Catalonia to honor Spain’s current constitutional order and safeguard the region’s membership of the Eurozone. Failure to do so, they warn, could jeopardize the ability of local financial entities to “protect depositors” (ha!) and “maintain the flow of funds to families, SMEs, and to the country’s productive sectors and job creators” (ha ha!):
The expulsion of Catalonia from the euro zone, resulting from a unilateral breakup of the prevailing constitutional framework (of Spain), would mean that banks based in Catalonia could face serious problems of legal insecurity.
…click on the above link to read the rest of the article…
Buiter: Only “Helicopter Money” Can Save The World From The Next Recession
Buiter: Only “Helicopter Money” Can Save The World From The Next Recession
It is to be expected that economists – even economists working for the same team – have different views about the likelihood of different future outcomes. Economics isn’t rocket science, and even rockets frequently land in the wrong place or explode in mid-air.
That rather hilarious characterization of the pseudoscience that is economics comes from the desk of Citi’s Chief Economist Willem Buiter and it’s apparently evidence that even if you don’t think too much of his views on “pet rocks” (gold is a 6,000 year-old bubble) or on the efficacy and/or utility of physical banknotes (ban cash), you’d be hard pressed to disagree with him when it comes to critiquing his profession. Of course we don’t want to give Buiter too much credit here because the quote shown above could simply be an attempt to stamp a caveat emptor on his latest prediction in case, like his predictions on when Greece would ultimately leave the euro, it turns out to be wrong.
As tipped by comments made at the Council of Foreign Relations in New York late last month, Buiter is out with a damning look at the global economy which he says will be drug kicking and screaming into a recession by the turmoil in China and the unfolding chaos in EM. Here’s the call:
In the Global Economics team, however, we believe that a moderate global recession scenario has become the most likely global macroeconomic scenario for the next two years or so. To clarify further, the most likely scenario, in our view, for the next few years is that global real GDP growth at market exchange rates will decline steadily from here on and reach or fall below 2%.
More specifically, Buiter says the odds of some kind of recession (either mild or terrifying) are 55%. Not 54%, or 56% mind you, but exactly 55%, because as indicated by the introductory excerpt above, economic outcomes are very amenable to precise forecasting:
…click on the above link to read the rest of the article…
The IMF Just Confirmed The Nightmare Scenario For Central Banks Is Now In Play
The IMF Just Confirmed The Nightmare Scenario For Central Banks Is Now In Play
The most important piece of news announced today was also, as usually happens, the most underreported: it had nothing to do with US jobs, with the Fed’s hiking intentions, with China, or even the ongoing “1998-style” carnage in emerging markets. Instead, it was the admission by ECB governing council member Ewald Nowotny that what we said about the ECB hitting a supply brick wall, was right. Specifically, earlier today Bloomberg quoted the Austrian central banker that the ECB asset-backed securities purchasing program “hasn’t been as successful as we’d hoped.”
Why? “It’s simply because they are running out. There are simply too few of these structured products out there.”
So six months later, the ECB begrudgingly admitted what we said in March 2015, in “A Complete Preview Of Q€ — And Why It Will Fail“, was correct. Namely this:
… the ECB is monetizing over half of gross issuance (and more than twice net issuance) and a cool 12% of eurozone GDP. The latter figure there could easily rise if GDP contracts and Q€ is expanded, a scenario which should certainly not be ruled out given Europe’s fragile economic situation and expectations for the ECB to remain accommodative for the foreseeable future. In fact, the market is already talking about the likelihood that the program will be expanded/extended.… while we hate to beat a dead horse, the sheer lunacy of a bond buying program that is only constrained by the fact that there simply aren’t enough bonds to buy, cannot possibly be overstated.
Among the program’s many inherent absurdities are the glaring disparity between the size of the program and the amount of net euro fixed income issuance and the more nuanced fact that the effects of previous ECB easing efforts virtually ensure that Q€ cannot succeed.
(Actually, we said all of the above first all the way back in 2012, but that’s irrelevant.)
…click on the above link to read the rest of the article…
German Newspaper Accuses Spain’s Central Bank of Hiding Collateral Risks from ECB
German Newspaper Accuses Spain’s Central Bank of Hiding Collateral Risks from ECB
Shoddy collateral labeled “ECB-eligible” is a great deal for banks.
Since the financial sectors of Southern Europe and Ireland hit the rocks during the height of Europe’s sovereign debt crisis, many of their respective banks have grown dependent on the generosity of the ECB – a generosity that, as Greece recently learned to its great cost, has its limits.
In the last three years, the banks of Europe’s biggest bailed out economy, Spain, have received ultra-low interest loans from the ECB worth some €140 billion. To obtain that liquidity, the banks are required by law to deposit collateral with the ECB. However, Germany’s leading business and financial newspaper Handelsblatt now reveals that some Spanish banks have received special treatment from Spain’s central bank, the Banco de España, some of whose officials have shown no qualms about bending the rules:
Handelsblatt has learned that the Spanish central bank repeatedly stretched the ECB rules recently. It approved securities as collateral that were not sufficiently creditworthy. In addition, other bonds were “ECB-eligible,” but the discount on those bonds should have been higher than it was and the amount of money received in return lower.
This Spanish laissez-faire attitude has consequences for the rest of Europe. On the one hand, it exposes the ECB to the risk of being left with low-quality securities in the event of a bank failure. This would ultimately become a burden for European taxpayers.
On the other hand, it is advantageous for banks if their securities are unjustifiably classified as “ECB-eligible,” because such bonds are easier to sell and at good prices.
…click on the above link to read the rest of the article…
The Crisis Is Spreading: China, Australia, Brazil, Canada, Sweden…
The Crisis Is Spreading: China, Australia, Brazil, Canada, Sweden…
Earlier today, we posted an excerpt from IceCap Asset Management’s latest letter to investors focusing on the farce that is the Greek bailout #3, which can be summarized simply by the following table…
… and Keith Dicker’s assessment which was that “for Greece, it’s mathematically impossible to repay its debt” and that the Greek “economy continues to plummet to deeper depths and is now -33% less than where it was in 2008.”
But the truth is that for all the endless drama, Dicker continues, “the Greek debt crisis isn’t THE crisis. Rather it is simply a symptom of a much larger global debt crisis.”
The problem is that the “larger global debt crisis” is finally metastasizing and spreading to more places, all of which are large enough that they cannot be simply swept under the rug, like Greece.
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IceCap’s Keith Dicker continues:
We’ve written before that governments all around the world have borrowed too much money and the weight of these debts are choking economic growth.
And to make matters worse – these very same governments and their central banks have implemented various plans that have only made matters worse.
Our view has not changed – the global debt crisis has escalated to a point where the government bond bubble has inflated itself to become the mother of all bubbles. It’s going to burst, and when it does it wont be pretty.
Further evidence to support our view is as follows:
Canada – the collapse in oil and commodity markets has pushed the country into recession and the Canadian Dollar to decline to levels lower than that reached during the 2008 crisis.
Oil dependent provinces Alberta and Newfoundland remain in deep denial. Since everyone in these provinces have only ever experienced a booming oil market, many naively believe things will bounce back – and quickly.
Meanwhile, both Toronto and Vancouver housing markets also remain in denial as they continue to go gangbusters. Buyers today are likely buying at all-time highs.
…click on the above link to read the rest of the article…
Euro ministers give blessing to Greek bailout, wooing IMF on debt
Euro ministers give blessing to Greek bailout, wooing IMF on debt
Euro zone finance ministers have agreed to lend Greece up to 86 billion euros ($96 billion) after Greek lawmakers accepted their stiff conditions despite a revolt by supporters of leftist Prime Minister Alexis Tsipras.
Assuming approval by the German and other parliaments, 13 billion euros should be in Athens next Thursday to pay pressing bills and a further 10 billion will be set aside at the European Stability Mechanism, earmarked to bolster Greek banks’ capital.
In all, euro zone governments will lend 26 billion euros in a first tranche of the bailout before reviewing Greece’s compliance with their conditions in October.
One remaining uncertainty – aside from Tsipras’ ability to deliver sweeping budget cuts and privatizations opposed by many of his own party – is the role of the International Monetary Fund. After backing two previous bailouts, the IMF renewed its call for the Europeans to grant Athens debt relief – a bone of contention between the Eurogroup and the Washington-based Fund.
Managing Director Christine Lagarde told the Eurogroup by telephone that she could not commit until the IMF board reviewed the situation in the autumn. Officials said the Fund needed more assurances and detail on Greek reforms, notably to pensions, and steps to persuade it that Greece’s debt burden was sustainable.
But after deadlock since January that ravaged the already weak Greek economy and ended in a dramatic U-turn a month ago by the anti-austerity leftist government to avert Athens’ expulsion from the euro, there was a cautious sense of optimism among ministers gathered in a Brussels deep in summer holiday languor.
“After six months of very difficult negotiations with lots of ups and downs, we finally have an agreement,” Greek Finance Minister Euclid Tsakalotos told reporters on Friday. His appointment by Tsipras six weeks ago in place of his abrasive predecessor has been hailed by counterparts as a mark of a new Greek “realism”.
…click on the above link to read the rest of the article…
EU Aims to Lure Greek Deposits Back to Banks With Bail-in Shield
EU Aims to Lure Greek Deposits Back to Banks With Bail-in Shield
Euro-area finance ministers shielded Greek bank depositors from any losses resulting from the restructuring of the nation’s financial system, as part of Friday’s deal on an 86 billion-euro ($96 billion) bailout.
Senior bank bondholders will be in the crosshairs if Greek lenders tap into any of the financial stability funds set aside in the new bailout. Euro-area finance ministers agreed to a deal that would next week place 10 billion euros in Greece’s bank recapitalization fund, with another 15 billion euros available if needed.
“Bail-in of depositors will be explicitly excluded” from European Union rules to make private investors share the cost of fixing troubled banks, Eurogroup President and Dutch Finance Minister Jeroen Dijsselbloem told reporters after the six-hour meeting in Brussels.
“When so much money must be invested in banks, in the first place, banks must take part of the risks,” Dijsselbloem said.
Alpha Bank AE’s 400 million euros of 3.375 percent notes due 2017 traded at 70.5 cents on the euro Friday to yield 25.4 percent. Those securities are up from a low this year of 27.5 cents in July.
Firewall Fund
At the start of the new aid program, the bank funds will be placed in a designated account at the European Stability Mechanism, the currency bloc’s firewall fund. Bank supervisors can tap the money as required once Greece’s banks have gone through stress tests and an asset-quality review.
After Greece’s lenders are recapitalized, the subsequent bank holdings will be transferred to the nation’s planned privatization fund, which will then be able to sell off the stakes and use the proceeds to pay back bailout funds.
…click on the above link to read the rest of the article…
Varoufakis: “In 1967 There Were The Tanks And In 2015 There Were The Banks”
Varoufakis: “In 1967 There Were The Tanks And In 2015 There Were The Banks”
It was back on January 31 of this year, long before the “game theoretical” approach of Greek negotiations with the Eurogroup and ECB in particular and the Troika, and now Quadriga in general was revealed, that we first forecast with absolute accuracy just what the middle, and end game, of the Greek negotiation with Europe (and vice versa) will be:
… today the ECB’s Erikki Liikanen, tired of pleasantries and dealing with what to Europe is a completely incomprehensible and illogical stance, one which is essentially a massive defection by Greece in the European “prisoner’s dilemma”, and which while leading to a Greek financial collapse and Grexit – both prerequisites to a subsequent Greek economic recovery unburdened by the shackles of the Euro – would also unleash a European depression, came out and directly threatened Greece that it now has 1 month until the end of February to reach a deal with the Troika, or else the ECB would cut off lending to Greek banks, in the process destroying the otherwise insolvent Greek banking sector.
And since only the ECB backstop has prevented a banking sector panic, the ECB is essentially betting the house, and the sanctity of the Eurozone (because after a Grexit all bets are off which peripheral leaves next) that the threat, and soon reality, of a bank run will finally force Varoufakis and Tsipras to sit at the negotiating table with the understanding that not they but the Troika has all the leverage.
…click on the above link to read the rest of the article…
