Peak Confidence in, Peak interventionism by Central Banks

The interventions of the past 4-5 years are really incomparable with anything in the past 70-80 years and the era of modern, fiat based, Central Banking. These John Laws of modern time have had no result to show for their massive amounts of printing except for enormous debt loads on the sovereign balance sheet of their countries.

Yet, it seems that money printing is the cure for many seemingly totally unrelated issues. Indeed, printing money:

• Creates jobs
• Creates economic growth
• Saves currencies
• Saves political unions
• Improves exports
• Put here whatever you like, money printing will do it for you.

To be honest, one must really have a critical mind to be able to see through most of these urban legends perpetrated by mainstream media and parrot journalists for decades. The still, one of these stands out as the most inept statement ever; yet people seem to believe in it, it's the one about printing an unlimited amount of Euros to save the Euro. The fact that the whole world is still buying into the ever increasing amount of lies and non-sense coming out of the mouth of lunatic central bankers is very telling about the overall sentiment of the market.

Moreover, the amount of intervention done in the past few months alone is so gigantic and its scale so much beyond imagination that it is completely unsustainable going forward, even for a short period of time. Yet, in spite of all this, "inflation", defined as the growth of overall money and credit, is not happening in those economies (namely, in the UK, the EU, the US and Japan).

We have reached what I would like to call the peak confidence in, and peak interventionism by, Central Banks from where there's only one way ahead: disappointment and reduction of interventions:

• Bernanke Options to Stimulate Growth Include Open-Ended QE Plan
• Fed Stuck at Zero Into 2015 Seen in Swaps, QE Odds Reach 99%
• Draghi Lured by Fractious EU Leaders to Build Euro 2.0
• Draghi Says Officials Agree on ECB Unlimited Bond-Buying 
• Draghi Told Lawmakers ECB Must Buy Bonds for Euro’s Survival
• Mario Draghi’s Big Moment, Continued - ECB to "do whatever it takes"
• SNB’s Franc Defense Swells Reserves to 71% of GDP
• SNB’s $380 Billion Pile Makes Jordan Wonder

All these plans will come crashing down to the earth, and most of those expecting the Fed doing QE and the ECB buying bonds will be sourly disappointed. I have already been through the reasons before; and the fact that the Central Bankers are talking the markets up without intervening will end up badly for those who believed the lies.

In addition to my previous posts here are quotes from Graham Summers who writes a great newsletter at GainsPainsCapital.com:

Super Mario's Big Bluff

The financial world has entered a new state of mania with the announcement by the ECB that it will engage in "unlimited" bond buying to maintain lower interest rates for trouble EU sovereigns.

As you no doubt know, our firm's forecast was that the ECB would not engage in any large-scale bond purchasing programs.

We maintain this view today regardless of the ECB's announcement. The reason? The ECB stated very clearly that new bond purchases would only be made under strict conditions. Those conditions involve:

1. Applying for a bailout from the EFSF
2. Meeting fiscal budget requirements
3. Implementing major spending cuts and various other austerity measures
4.  

[...] Let's cut through the BS here. The use of the word "conditions" completely negates the word "unlimited." Saying that you'll buying "unlimited" bonds as long as EU sovereigns meet certain "conditions" actually means nothing.
[...] The ECB says it will buy EU sovereign bonds if EU nations apply for bailouts from the EFSF. Spain and Italy (the very countries that need bailouts) are meant to supply 30% of the EFSF's funding.
So this new program involves Spain and Italy bailing themselves out, while simultaneously implementing austerity measures so the ECB will buy their sovereign bonds?!?!

Oh, and by the way, the EFSF only has €65 billion in funding left. That will definitely be enough to bailout Spain and Italy, seeing as Greece has received over €200 billion in bailouts is still imploding.

What's the Fed Going to Do?

Today we turn our attention to the US's Federal Reserve where the whole world expects the Fed to announce QE 3 at its FOMC meeting this Wednesday and Thursday.
There is a small problem of math with this. The Fed currently owns all but just $650 billion of the outstanding 10-30 year Treasuries. At this point, even a $200-300 billion QE program would create serious liquidity problems for the financial system. So scratch that idea off the list.

Of course, the Fed could potentially implement another agency/MBS QE program. But that would be a very political move with the Presidential election so close. This, combined with current food and energy prices, makes it unlikely the Fed would want to do this: too many consequences with too little to gain (stocks are at four year highs).
Indeed, if anything, the Fed is likely to pull a "ECB" move, namely promising something vague that it actually cannot deliver on. Why would the Fed do this? Because, like the ECB, the Fed is running out of bullets. Indeed,  St Louis Fed President James Bullard all but admitted this to the Financial Times:

"I am a little - maybe more than a little bit - worried about the future of central banking," said James Bullard, president of the Federal Reserve Bank of St Louis, in a Financial Times interview at Jackson Hole. "We've constantly felt that there would be light at the end of the tunnel and there'd be an opportunity to normalise but it's not really happening so far."

The biggest worry on display at Jackson Hole was whether these bureaucrats, sitting at the heart of every mature economy, still have the power to influence demand now that interest rates cannot fall much further. Lurking behind many debates was this question: if central bank policies are so effective, why is the global economy not growing faster?

Here's a Fed official, not only openly admitting that Fed policies aren't working, but even calling the future of Central Banking into question. Take note: underlying realities are beginning to be asserted by officials at Central Banks around the globe. They're running out of bullets.

So where does this leave us? Well, it's highly unlikely the Fed will actually implement anything major this week. What we could see is a large, but hollow promise for action, much like the ECB's promise of "unlimited" bond purchases based on certain "conditions" being met (an empty promise if ever there was one).

Finally, see for yourself some quotes from various reports listed above which I have collected over past few weeks.

Bernanke Options to Stimulate Growth Include Open-Ended QE Plan

Federal Reserve Chairman Ben S. Bernanke, who last month defended his unorthodox monetary policies, has a new tool at hand should he seek one to a revive a flagging economy and labor market: open-ended bond buying.
Barclays Plc forecasts the Federal Open Market Committee this week will announce monthly purchases of $50 billion to cut the jobless rate while holding inflation at 2 percent. Economists at Goldman Sachs Group Inc. (GS) and BNP Paribas, responding to last week’s report of slowing job growth, also say they expect an announcement of an open-ended plan on Sept. 13 after a two-day FOMC meeting.
The Fed’s practice of specifying an amount and an end-date for purchases has resulted in abrupt withdrawals of stimulus that later was renewed after the central bank failed to reach its goals. By contrast, an open-ended program would tie purchases to a sustained improvement in the economy, said Michael Gapen, senior U.S. economist at Barclays and a former member of the Fed Board’s Division of Monetary Affairs.
“As a Fed chairman, 2 percent growth isn’t doing it for you, 8 percent unemployment isn’t doing it for you -- they need a faster acceleration,” said Gapen, who is based in New York. “So, the decision is, ‘OK, let’s hit the pedal.”

Fed Stuck at Zero Into 2015 Seen in Swaps, QE Odds Reach 99%

Just six months ago, money market traders expected the Federal Reserve to raise interest rates by the end of 2013. Now, they see borrowing costs staying at record lows for about three more years as the economic outlook worsens.
Bond market measures from overnight index swaps, which indicate no rise in the federal funds rate until mid-2015, to a 62 percent decline in a measure of volatility in government bonds signal that rates will stay near zero for longer. The gap between two- and five-year Treasury yields, which decreases when traders expect benchmark rates to remain subdued, is more than 50 percent narrower than its average since 2008.
Investor expectations for sluggish growth and low inflation remain intact even though the collapse of Lehman Brothers Holdings Inc., which triggered the worst financial crisis since the Great Depression, happened four years ago. While the economy expanded in the second quarter, the unemployment rate remained above 8 percent for the 43rd-straight month in August.
“The problems have been bigger than anticipated and it will take a while to work our way through these issues,” Larry Dyer, a U.S. interest-rate strategist in New York with HSBC Holdings Plc’s securities unit, said in an interview on Sept. 6. “The bond market is pricing in pretty close to a very prolonged period of low growth,” said Dyer, whose firm is one of the 21 primary dealers that trade with the central bank.

 Draghi Lured by Fractious EU Leaders to Build Euro 2.0

The European Union’s 19th crisis summit was winding down when European Central Bank President Mario Draghi made an unusual request. He wanted some alone time with EU President Herman Van Rompuy to thank him for charting the path toward a shock-proof euro zone.
Only later did the significance of the blueprint sketched out at the June summit in Brussels emerge. The commitment to tighter bank supervision, budget coordination and a nebulous “political union” was instrumental in persuading Draghi that governments are putting the currency on a sounder footing, leading to yesterday’s ECB decision to buy bonds to help them get there.

Draghi Says Officials Agree on ECB Unlimited Bond-Buying

European Central Bank President Mario Draghi said policy makers agreed to an unlimited bond- purchase program as they try to regain control of interest rates in the euro area.
The ECB needs to be in a position to ensure the transmission of its rates in all euro-area countries, Draghi said after the ECB held its benchmark rate at a record low of 0.75 percent.
“We will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability,” Draghi said at a press conference in Frankfurt today.
Draghi has staked his credibility on the bond plan, telling lawmakers in Brussels this week that the ECB needs to intervene to wrest back control of rates in a fragmented euro-area economy and save the single currency. Now it’s up to governments such as Spain and Italy to trigger ECB bond purchases by requesting aid from Europe’s rescue fund and signing up to conditions.
“Governments must stand ready to activate” the rescue fund in bond markets when needed “with strict and effective conditionality,” Draghi said.
The ECB reserves the right to terminate bond purchases if governments don’t fulfil their part of the bargain, Draghi said.
Purchases will be fully sterilized, meaning that the overall impact on the money supply will be neutral, he said.

Draghi Told Lawmakers ECB Must Buy Bonds for Euro’s Survival

European Central Bank President Mario Draghi said the bank’s primary mandate compels it to intervene in bond markets to wrest back control of interest rates and ensure the euro’s survival.
Mounting his strongest case yet for ECB bond purchases, Draghi told lawmakers in a closed-door session at the European Parliament in Brussels yesterday that the bank has lost control of borrowing costs in the 17-nation monetary union. Bloomberg News obtained a recording of his comments, some of which were published by Italian news agency AGI yesterday.
“We cannot pursue price stability now with a fragmented euro area because changes in interest rates affect only one country, or two countries at most,” Draghi said. “They have no importance whatsoever in the rest of the euro area.” ECB bond purchases are therefore “a way to comply with our primary mandate,” he said, adding: “Frankly, all this also has to do very much with the continuing existence of the euro.”
The Frankfurt-based ECB referred to the closed-door format of the hearing and did not provide any further comment. Draghi’s comments come two days before the ECB’s Governing Council is due to decide on his bond-buying proposal, expectations for which have already driven down yields in Italy and Spain. In the testimony, Draghi rebuts arguments that bond purchases stretch the central bank’s mandate.
“Do we give up our primary mandate for maintaining price stability?” he said. “It’s exactly the opposite situation.”

Mario Draghi’s Big Moment, Continued

Europe emerges from its summer torpor with untapped disasters in waiting.
On Thursday, attention turns to Mario Draghi, the president of the European Central Bank, and the plans, if any, he will announce to help manage the European Union’s financial crisis. Next, on Sept. 12, Germany’s constitutional court will rule on the legality of the European Stability Mechanism, the euro area’s new permanent bailout fund, and the fiscal pact that curbs government deficits. If either event goes badly, watch out.
In July, Draghi aroused expectations that he has so far been unable to meet when he promised the ECB would do “whatever it takes” to defend the euro system. This was seen as a pledge of unlimited bond buying aimed at lowering the long-term interest rates that Spain, Italy and other distressed sovereign borrowers must pay.

SNB’s Franc Defense Swells Reserves to 71% of GDP

The Swiss central bank’s foreign- currency reserves surged to a record in July as the euro region’s increasing turmoil forced policy makers to step up their defense of the franc ceiling.
Switzerland’s cash pile swelled 11.3 percent in the month to 406.5 billion Swiss francs ($420 billion), the Swiss National Bank said on its website today. That pushed holdings to 71 percent of gross domestic product. Walter Meier, an SNB spokesman in Zurich, said “a large part” of the increase resulted from currency purchases to defend the minimum exchange rate.
SNB President Thomas Jordan has pledged to enforce the franc ceiling of 1.20 per euro “with unlimited purchases of foreign currencies if needed.” The central bank implemented the cap in September to fight deflation and help exporters. Its reserves have soared 44 percent since the end of that month, according to SNB data calculated to International Monetary Fund standards.
“The SNB can keep its pace of interventions for a pretty long time unless there is a massive disruption like the collapse of the euro area,” said Maxime Botteron, an economist at Credit Suisse Group AG (CSGN) in Zurich. “As they increase liquidity through their purchases, the only limiting factor is inflation. However, that is not a concern at the moment."

SNB’s $380 Billion Pile Makes Jordan Wonder

Swiss central bank President Thomas Jordan is wondering how to invest his currency reserves as euros pile up at the bank at a record pace.
“The SNB has the same problem as lots of wealth managers,” said Ursina Kubli, an economist at Bank Sarasin in Zurich. “Safe assets have become very expensive. So for the time being, they prefer cash over investing.”
With Europe’s debt crisis hurting returns on the least risky bonds, the Swiss National Bank is keeping reserves in cash after its policy to cap the franc swelled currency holdings by 50 percent in the four months through June to a record 365 billion francs ($380 billion). Money held at central banks, the International Monetary Fund and the Bank for International Settlements accounted for 72 percent of the gain.
The SNB has been piling up euro holdings to defend the franc ceiling of 1.20 versus the single currency introduced in September 2011. While the central bank previously mainly invested foreign currencies in government bonds of AAA-rated nations, the surge in cash reserves suggests policy makers are finding it more difficult to find the right investments.

Bloomberg News Sues the ECB As ECB Tells Court Releasing Greek Swap Files Would Inflame Markets

I think this one is so obvious that I won't put any more comment than cheer Bloomberg for suing all these corrupt entities and try to spread the truth.

(Bloomberg)  June 14, 2012 — The European Central Bank said it can’t release files showing how Greece may have used derivatives to hide its borrowings because disclosure could still inflame the crisis threatening the future of the single currency.

Bloomberg News is suing the ECB to provide the documents under European Union freedom-of-information rules. The papers may help show the role EU authorities played in allowing Greece to mask its deficit for almost a decade before the nation’s troubled finances necessitated a 240 billion-euro ($301 billion) bailout and the biggest debt restructuring in history.

Disclosing the files when Bloomberg News first sought them in 2010 would have “fueled negative perceptions about Greece’s ability to honor its debt,” ECB lawyer Marta Lopez Torres said at a hearing of the European Union’s General Court in Luxembourg today. “It’s the same now with Spain” which “isn’t able to borrow money,” she said. “Markets are reacting in very volatile ways. It’s affecting the euro economy.”

[...] “Markets will perform better when they have transparency,” Timothy Pitt-Payne, lawyer for Bloomberg News, told the court. “The question is who knew what; and when did they know it?” 

Bloomberg’s lawsuit, filed in December 2010, requested access to two internal papers drafted for the central bank’s six-member Executive Board. They show how Greece used swaps to hide its borrowings, according to a March 3, 2010, note attached to the papers and obtained by Bloomberg News. 

The first document is entitled “The impact on government deficit and debt from off-market swaps: the Greek case.” The second reviews Titlos Plc, a securitization that allowed National Bank of Greece SA, the country’s biggest lender, to exchange swaps on Greek government debt for funding from the ECB, the Executive Board said in the cover note.

These documents “played a role” in shaping policy and “highlighted there were issues” when the ECB undertook a review of its eligibility criteria for collateral in its funding operations, the ECB lawyer told the court.

[...] “The public has a right to know how EU authorities may have allowed Greece to hide its deficit, which helped trigger Europe’s sovereign debt crisis,” said Matthew Winkler, editor- in-chief of Bloomberg News. “Greater transparency results in more accountability, and we seek this information to understand how this debt debacle unfolded in an effort to avoid repeating it.” 

The Greek government didn’t originally disclose the swaps, designed to help it comply with the deficit and debt rules it agreed to meet when it joined the euro in 2001. The swaps allowed the country to increase borrowings by 5.3 billion euros, Eurostat, the EU’s statistics agency, said in November 2010.

In April 2009 -- seven months before the Greek crisis erupted -- ECB officials spotted “a swap operation in unusual terms,” according to the March 2010 document. [...]

Nigel Farage: The euro Titanic has now hit the iceberg

Very interesting speech from Nigel Farage earlier today at the European Parliament, available on YouTube. The interesting part is how this bailout of Spain will actually further weaken Italy, which is already on the brink of collapse and a confirmation of something we had previously discussed on this blog: a Greece default of Euro-exit would make the ECB bankrupt.

Here's the transcript, with my highlights:

"Another one bites the dust. Country number four, Spain, gets bailed out and we all of course know that it won't be the last. Though I wondered over the weekend whether perhaps I was missing something, because when the Spanish prime minister Mr Rajoy got up, he said that this bailout shows what a success the eurozone has been.

And I thought, well, having listened to him over the previous couple of weeks telling us that there would not be a bailout, I got the feeling after all his twists and turns he's just about the most incompetent leader in the whole of Europe, and that's saying something, because there is pretty stiff competition. 

Indeed, every single prediction of yours, Mr Barroso, has been wrong, and dear old Herman Van Rompuy, well he's done a runner hasn't he. Because the last time he was here, he told us we had turned the corner, that the euro crisis was over and he hasn't bothered to come back and see us. 

I remember being here ten years ago, hearing the launch of the Lisbon Agenda. We were told that with the euro, by 2010 we would have full employment and indeed that Europe would be the competitive and dynamic powerhouse of the world. By any objective criteria the Euro has failed, and in fact there is a looming, impending disaster. 

You know, this deal makes things worse not better. A hundred billion [euro] is put up for the Spanish banking system, and 20 per cent of that money has to come from Italy. And under the deal the Italians have to lend to the Spanish banks at 3 per cent but to get that money they have to borrow on the markets at 7 per cent. It's genius isn't it. It really is brilliant. 

So what we are doing with this package is we are actually driving countries like Italy towards needing to be bailed out themselves.

In addition to that, we put a further 10 per cent on Spanish national debt and I tell you, any banking analyst will tell you, 100 billion does not solve the Spanish banking problem, it would need to be more like 400 billion. 

And with Greece teetering on the edge of Euro withdrawal, the real elephant in the room is that once Greece leaves, the ECB, the European Central Bank is bust. It's gone. It has 444 billion euros worth of exposure to the bailed-out countries and to rectify that you'll need to have a cash call from Ireland, Spain, Portugal, Greece and Italy. You couldn't make it up could you! It is total and utter failure. This ship, the euro Titanic has now hit the iceberg and sadly there simply aren't enough life boats."

The Rise of the Fascist European Union

Since the markets topped back in 2007-2008, democracy has been losing ground everywhere in the Western world, but in Europe it's been probably worse than anywhere else.

Don't get me wrong, the most fascist country for now is the US, and they have been on the track since the late 1990s. But the US fascists have followed the the rule of law: law makers and government officials have embraced those ideas, and voted them through, and the Supreme Court has been basically shut down. In Europe, it's lawlessness and lies that are bringing the fascist ideas and actions, in complete disregard of the rule of law and democracy.

Here's a short list of the illegal and anti-democratic actions so far:

• Ireland: Irish people forced to bailout the European banks
• Greece: Prime Minister, democratically elected replaced by a non-elected Prime Minister
• Italy: Mario Monti, non-elected technocrat replaced the democratically elected Berlusconi as Prime Minister.
• ECB: buying sovereign bonds in complete illegality

Well, things have made another nasty and dangerous turn with the new "Greek Bailout" plan, which is nothing but a bailout of the French and German banks who are creditors to Greece, and a complete pillage of Greece:

• Greece Needs New Constitutional Provision Imposed by the Troika

Eurogroup Statement of conditions placed on Greece:

The Eurogroup also welcomes Greece's intention to put in place a mechanism that allows better tracing and monitoring of the official borrowing and internally-generated funds destined to service Greece's debt by, under monitoring of the troika, paying an amount corresponding to the coming quarter's debt service directly to a segregated account of Greece's paying agent.

Finally, the Eurogroup in this context welcomes the intention of the Greek authorities to introduce over the next two months in the Greek legal framework a provision ensuring that priority is granted to debt servicing payments. This provision will be introduced in the Greek constitution as soon as possible. ....

• Troika Demands 38 New Changes in Greek Tax, Spending and Wage Policies in Next 6 Days

 And

• Growing Air of Concern in Greece Over New Bailout.

In the fine print of the 400-plus-page document — which Parliament members had a weekend to read and sign — Greece relinquished fundamental parts of its sovereignty to its foreign lenders, the European Commission, the European Central Bank and the International Monetary Fund.

“This is the first time ever that a European and probably an O.E.C.D. state abdicates its rights of immunity over all its assets to its lenders,” said Louka Katseli, an independent member of Parliament who previously represented the Socialist Party, using the abbreviation for the Organization for Economic Cooperation and Development. She was one of several independents who joined 43 lawmakers from the two largest parties in voting against the loan agreement.

Ms. Katseli, an economist who was labor minister in the government of George Papandreou until she left in a cabinet reshuffle last June, was also upset that Greece’s lenders will have the right to seize the gold reserves in the Bank of Greece under the terms of the new deal, and that future bonds issued will be governed by English law and in Luxembourg courts, conditions more favorable to creditors.

In the meantime, the UE officials are still asking for more lawlessness:

Feb. 10 (Bloomberg) -- The European Central Bank should participate in efforts to reduce Greece’s debt, said Luxembourg’s Jean-Claude Juncker, who leads the group of euro- area finance ministers.

“The ECB must look, within the framework of its independence, what sort of contribution it can make to the debt reduction of Greece,” Juncker told reporters in Brussels today. “I hope it will find something.”

And the ECB is obliging — see also Japan and the Myth of Independent Central Banks:

Draghi’s $158 Billion Free Lunch to Boost EU Bank Profits 

Feb. 13 (Bloomberg) -- Banks are benefiting from a European Central Bank subsidy that could reach 120 billion euros ($158 billion), enough to pay every bonus at financial firms in London for the next 24 years at today’s levels. 

Royal Bank of Scotland Group Plc, BNP Paribas SA and Societe Generale SA are among more than 500 banks that took 489 billion euros of three-year loans from the Frankfurt-based ECB at a December auction. The loans currently carry a 1 percent annual interest rate, less than a quarter of the 4.3 percent average yield on euro-denominated senior unsecured bank debt of all maturities in the past year, according to Commerzbank AG. 

With borrowing estimated to hit a record 1.2 trillion euros after a second auction later this month, banks may save 120 billion euros over three years. That could boost 2012 profit by about 10 percent for lenders in Italy and Spain, according to estimates by Morgan Stanley.  

“This is very much a free lunch,” said Arnd Schaefer, an economist at WestLB AG in Dusseldorf, Germany. “Banks can get money for just 1 percent and then lend it on for much more. That’s pretty good.”          

There's much more in the report, so you can read it in it's entirety if you're interested in what the ECB is doing.

And also, this other report about the ECB changing the rules of bond, creating subordinate versus senior level bonds on the very same instrument, depending on who is holding it:

Feb. 17 (Bloomberg) -- The European Central Bank’s plan to shield its Greek bond holdings from a restructuring may hurt private investors while paving the way for debt insurance contracts to be triggered.

The ECB will exchange its Greek debt for new bonds with an identical structure and nominal value, though they’ll be exempt from so-called collective action clauses the government is reportedly planning. That implies senior status for the ECB over other investors, according to UBS AG, and the use of CACs may lead to credit-default swaps protecting $3.2 billion of Greek bonds being tripped.

“It may appear that the ECB is receiving preferential treatment, raising questions about whether the ECB is senior to private-sector bondholders,” according to Chris Walker, a foreign exchange strategist at UBS, the world’s third-biggest currency trader. “If a coercive default does indeed eventually take place then a CDS event seems very likely with all the negative consequences for risk appetite that may bring.” 

Governments and Central Banks in Panic Mode

In case some people were not sure, these below are not signs that everything is fine and that the green shots of 2009 are not producing an impressive massive harvest... quite the opposite.

Euro Central Banks Seen Providing Up to $270 Billion via IMF

(Bloomberg) — 02 Dec 2011 — A European proposal to channel central bank loans through the International Monetary Fund may deliver as much as 200 billion euros ($270 billion) to fight the debt crisis, two people familiar with the negotiations said.

At a Nov. 29 meeting attended by European Central Bank President Mario Draghi, euro-area finance ministers gave the go- ahead for work on the plan, said the people, who declined to be named because the talks are at an early stage. The need for a new crisis-containment tool emerged as the effort to boost the 440 billion-euro rescue fund to 1 trillion euros fell short.

Swiss Government May Consider Negative Interest Rate Policy 

(Bloomberg) — 01 Dec 2011 — Switzerland’s government said it may consider additional measures including negative interest rates to aid the country’s central bank in its fight against the appreciation of the Swiss franc. [...]

Stocks surge on Central Bank liquidity offering

Nov. 30 (Bloomberg) — The central banks of the U.S., the euro region, Canada, the U.K., Japan and Switzerland agreed to cut the cost of providing dollar funding via swap arrangements, the Federal Reserve said, and agreed to make other currencies available as needed.

China said earlier today it will cut the reserve requirement ratio for banks by 0.5 percentage points from Dec. 5, while data on U.S. business activity and the employment and housing markets topped economists’ estimates.

 U.K.’s Cable Urges ‘Unlimited Powers’ for ECB Amid Euro Crisis

Nov. 13 (Bloomberg) — U.K. Business Secretary Vince Cable said the European Central Bank needs unlimited powers to support the euro and the region’s debt-ridden economies.

“If a monetary deal’s going to work, the central bank has to have unlimited powers to intervene to support economies, and indeed banks, to prevent collapse,” Cable said in an interview on BBC television’s “Politics Show” today. “They need to have that clearly at a European level, and that’s one of the issues that hasn’t yet been adequately clarified.”

Jim Grant Interviewed on Bloomberg TV Discusses the ECB the EU Mess

Jim Grant was interviewed on Bloomberg TV yesterday, Nov the 11th. Unfortunately, the video on Bloomberg.com is broken. Luckily, the video is also available on YouTube, but embedding is disabled.

ZeroHedge has done a good job at summarizing the interview:
On the three thread by which the world currently hangs:

i) by the financial probity of Italy

ii) by the determination of Greece to implement austerity measures

iii) and by the responsibility of our money spinning central bankers

"These are very slender threads indeed."

On what the ECB will do:

The ECB has expanded its balance sheet mightily under Trichet. We have a new leader and we have a new imperative. I dare say Europe is going to print money.

On central bank monetization and its implications:

The Italian yields did not fall on their own. It raises questions of overall integrity of market prices. In the US the Fed has nationalized the yield curve. In Europe much the same is going on: the SNB is expanding its balance sheet at astonishing rates of speed. The world over there is seeing immense money printing and there is a huge race to debase on the behalf of the sponsors of paper money.

Central banks are insolvent:

The ECB has a ratio of non-AAA rated assets to equity of 14 to 1. What the ECB has been doing is stepping in where private money fears to tread. In the private sector we call the heading for trouble... The New York Fed is leveraged 100 to one.

And the kicker analogy which is absolutely spot on:

The ECB is now implementing the MF Global trade.

He also discusses:

• Immense money printing by the Swiss National Bank (SNB)
• The farmland price bubble in the US: everybody is chasing it, the income yield of about 2.5%, which is at the lowest of the past 40-50 years. In the late 80s, at the bottom, they were yielding 7-8% and trading for about 10% of the current value.

I would add that once must be mad to buy farmland which is such an illiquid asset and which will be prone to all the government manipulation and extortion as soon as the second leg of the Greater Depression settles in, with confiscations, price fixings etc.

The Puzzling Question: What About The Euro?

I have been puzzled by the behavior of the Euro lately, given that the Eurozone is actually collapsing under the weight of their debt, that the CDS rates are hitting all time highs, that the ECB is going through many illegal actions and printing what seems to be vast amounts of money. Sentiment and market action would dictate that the Euro should have been in free fall, right? Yet, despite the massive amount of bad news, and pessimism, such as this report titled "The Death of the Eurozone", markets seem to be oblivious and the Euro is still playing the levitation game it's been playing for the past year or so — I am  knowingly ignoring the JPY and CHF here — against most major currencies:

How much longer until the markets become rational about the Euro?

Bundesbank President Axel Weber resigned due to the lack of acceptance of his views by Eurozone leaders

This is a follow up to yesterday's post Bundesbank President Axel Weber steps down, Ruling Out ECB. It looks I was right after all: Axel Weber has been pushed into political/career suicide. Why? Very easy to guess: the ever increasing number of debt-addicted and corrupt political leaders what what Trichet (and the ECB) has illegally offered them so far, that is the monetization of their debt. Given that it seems like an Italian might be succeeding Trichet, all red flags should be on for the self-destruction of the Euro.

It's hard to understand why Merkel is not supporting Weber, given that the Euro is basically the Deutsche Mark and that the only sound economy in the Eurozone is Germany's. Merkel is destroying Germany's credit worthiness and the Eurozone currency for no obvious reason — except maybe the fear that sovereign defaults might hurt Germany's export, which would not be the case in any way, quite the opposite.

Feb. 12 (Bloomberg) -- Bundesbank President Axel Weber said a lack of “acceptance” among euro-area leaders for his views on monetary policy caused him to give up on becoming the next chief of the European Central Bank, Der Spiegel reported.

Weber, who resigned yesterday, said his decision not to aim to replace Jean-Claude Trichet as ECB president started forming last May, fueled by misgivings from “several governments” over his opposition to the ECB’s program of buying government bonds.

“The president is in an exceptional position,” Weber said in an interview with the German magazine published today. “But if he represents a minority opinion on important matters, then the credibility of his office suffers.” Bundesbank spokesman Benedikt Fehr confirmed Weber’s remarks by telephone.

The loss of the front-runner for the ECB’s top job leaves European leaders balancing whether to reward policy experience or protect national interest in picking Europe’s main monetary official. Weber said “it’s not so important” what nationality the next ECB chief has, though he called for Trichet’s successor to be “credible” and embody a “stability culture.”

The departing Bundesbank chief hailed Jens Weidmann, German Chancellor Angela Merkel’s top economic adviser and a former student of Weber’s, as an “absolute professional.” Weidmann is a leading candidate to replace Weber at the helm of the Frankfurt-based German central bank, Bild newspaper reported Feb. 9, citing unnamed government and central bank officials.
[...]
Weber said his “principal concerns” about the ECB’s bond- buying program haven’t abated, though the volume of funds the bank is lending to governments is “still controllable.” Weber said the ECB won’t let up in its fight against inflation even after he leaves the Bundesbank on April 30.
[...]

Hat Tip to blbl for sending me the link to the report.

Bundesbank President Axel Weber steps down, Ruling Out ECB

It looks like Alex Weber, one of the few heavy weight of the European Union monetary policy and opponent to Jean-Claude Trichet's not-only inflationary and coward but also illegal actions, has had enough, and has resigned from his position.

Unfortunately, this means that mad-money-printers both at the Fed and the ECB are pushing their opponents outside of the competition.

The quotes are quite long, but it's interesting for those of us who do not know the details of the ECB and it gives some useful background information.

Yesterday

Feb. 9 (Bloomberg) -- Bundesbank President Axel Weber plans to step down later this year, a decision that would rule him out of the race to succeed Jean-Claude Trichet as head of the European Central Bank, said a person who spoke to Weber today.

Weber may leave his job about a year before his Bundesbank term expires in April 2012, said the person, who spoke on condition of anonymity. The German central bank head discussed his plans with Chancellor Angela Merkel today, the person said.
[...]

Today

Feb. 10 (Bloomberg) -- The campaign for the top job at the European Central Bank was thrown open as the sudden and unexplained withdrawal of German front-runner Axel Weber cleared the way for a slew of candidates to replace Jean-Claude Trichet.

Central bankers Mario Draghi of Italy, Luxembourg’s Yves Mersch and Erkki Liikanen of Finland saw their chances of winning Europe’s top economic post rise as did Germany’s Klaus Regling, who runs the region’s bailout fund. Trichet’s non-renewable eight-year term expires in October.

“The top candidate is now out of the game,” said Marco Valli, chief euro-area economist at UniCredit Global Research in Milan. “We can now focus on alternative candidates and the political push behind appointing the next ECB president.”

Weber’s fate whipsawed the euro, forcing the debate over the world’s second-most important monetary post after U.S. Federal Reserve chairman into the open just as European leaders grapple with how to put an end to the sovereign debt crisis that has shaken the single currency’s foundations.

Unsourced media reports yesterday of a pullout by Weber, head of the Bundesbank, shattered German efforts to steer the ECB nomination behind the scenes, prompting a telephone confrontation with German Chancellor Angela Merkel and subsequent confirmation by Weber associates.

Weber, 53, plans to quit the Bundesbank in a decision that would rule him out of the ECB running, said a person who spoke with him yesterday. He will leave about a year before his term ends in April 2012. Weber, who ducked calls for a public declaration, is scheduled to speak in Vienna today.
[...]
Until his exit, leaders would have had to balance Weber’s two-decade academic record and citizenship of Europe’s largest economy with his outspokenness and opposition to the ECB’s bond- buying program, a key part of Europe’s crisis-fighting strategy.

As Merkel weighed whether to push Weber to reconsider or float another German candidate, the ECB succession looked set to come up March 11 at a special 17-nation euro-area summit on the debt crisis that European Union President Herman Van Rompuy called yesterday.

“We have time now to find a replacement at the Bundesbank because as I understand it Mr. Weber is leaving later this year, Michael Meister, the senior finance and economy spokesman for Merkel’s Christian Democratic bloc, said in an interview. “As for a successor to Mr. Trichet: no, it doesn’t have to be a German. It has to be a good person.”

Whoever succeeds Trichet, Merkel has to persuade a skeptical electorate that bailing out wayward partners in the currency union and saving the euro is worth the cost, of which Germany bears the biggest share. Greater financial support for indebted euro-area countries was opposed by 64 percent of German respondents in a Jan. 28 FG Wahlen poll.

‘What a Blow’

“What a blow. For the Chancellor. For the Euro,” says the lead editorial in Bild, Germany’s biggest-selling newspaper. “And all this at a time when Germans are losing trust in the euro, and when they feel like its mere paymasters. Against this gut feeling a German at the head of the ECB would have been very important.”

One piece in the ECB puzzle fell into place yesterday when Belgium’s Peter Praet emerged as the favorite to win an Executive Board seat that opens up in May. Praet, 62, a Belgian central bank aide, is set to be recommended Feb. 14 for the post being vacated by Austria’s Gertrude Tumpel-Gugerell, seven European officials familiar with the process said.

Weber enters the annals of EU history littered with front- runners who ultimately failed to get the top job, from flopped bids to run the European Commission by Belgium’s Jean-Luc Dehaene in 1994 and Guy Verhofstadt in 2004 to Tony Blair’s campaign to be the first EU president in 2009.

Married with two children of high school and university age, Weber took the helm of the Bundesbank in 2004 and spoke just this week about the workload of being a top central banker.

“Working days become longer, and weekends are no longer weekends,” Weber said in Tallinn on Feb. 7. “I never dreamed that I would be a policy maker myself.”

Weber’s retreat was a reminder that politics, not central banking ideology, will determine who succeeds Trichet. No deadline is set for a decision, the first time Europe has named a chief central banker since the ECB’s first two presidents were picked at a dramatic summit in May 1998, eight months before the euro’s birth.

At the time, Wim Duisenberg of the Netherlands, endorsed by Germany, faced a veto threat from France. A political deal was hatched to give him the job, as long as he stepped down early to make way for Trichet, who is set to serve the full eight-year term. Citigroup Inc. economist Juergen Michels said yesterday that this time leaders may wait until mid-October to make their choice.

Bank of Italy Governor Draghi, 63, is the only declared candidate for the top post, though the backing of Prime Minister Silvio Berlusconi may count against him in policy circles -- Italy’s leader faces a formal request to stand trial for alleged abuse of power and paying a minor for sex.

As chairman of the Financial Stability Board, Draghi has been at the core of international efforts to rewrite the rules of global finance following the credit crisis, experience that may prove valuable given Trichet now chairs Europe’s new risk watchdog.

The holder of an economics doctorate from the Massachusetts Institute of Technology, Draghi spent the early part of his career as an official in the Italian Treasury. He worked on Group of Seven meetings and led the privatization of $105 billion worth of Italian companies, including Enel Spa, Telecom Italia SpA and Banca Nazionale del Lavoro SpA.

A potential handicap is Draghi’s three-year stint as a vice chairman of Goldman Sachs Group Inc., which may open him up to sniping from leaders who blame investment banks for the credit crisis. His selection would leave two southern Europeans atop the ECB, with Portugal’s Vitor Constancio as vice president. A third, Jose Barroso of Portugal, runs the European Commission.

Luxembourg Central Bank Governor Mersch, 61, ranks as a German-style inflation hawk, with an ability to speak to Germans and French in their own language and to the financial markets in theirs, English. A lawyer by training who helped negotiate the 1991 Maastricht Treaty that created the euro, Mersch has sat on the ECB’s council since its inception.

The appointment of Mersch, who decorates his bank with art work from around Europe, might force Luxembourg Prime Minister Jean-Claude Juncker, Europe’s longest-serving government head, to give up his role as the chairman of the monthly meetings of euro-area finance ministers.

Liikanen, 60, has run Finland’s central bank since 2004. After negotiating Finland’s 1995 accession to the EU, he served as European budget and business-promotion commissioner. He made his mark in Brussels prodding governments to open their telecommunication markets to competition and for ensuring new controls on chemicals didn’t put companies such as BASF AG at a disadvantage to rivals.

As Finland’s finance minister in the late 1980s, he oversaw the boom of the Nordic economy before growth slumped. The youngest Finn ever elected to parliament at the age of 21, Liikanen has first-hand knowledge of business as a former member of the supervisory board of stainless-steel maker Outokumpu Oyj. A potential obstacle is that fellow countryman Olli Rehn is now EU commissioner for economic and monetary affairs.

A longshot contender -- and the youngest -- could be Athanasios Orphanides, 48, who heads Cyprus’s central bank and counts 17 years as a Federal Reserve economist on his resume. The first ECB official to argue in favor of zero interest rates amid the recession, he was born in communist-ruled Czechoslovakia before studying at MIT.

The ECB’s first two chiefs were drawn from the central banking community, lessening the chances of a possible German compromise candidate, Regling, now in charge of the 440 billion- euro ($604 billion) rescue fund for debt-hit states.

While lacking a central banking pedigree, Regling, 60, served in the German Finance Ministry and ran the European Commission’s economics department before taking on his role as debt-crisis firefighter. “I have a great job,” Regling told reporters in Berlin yesterday.

Julian Callow, chief European economist at Barclays Capital in London, said whoever wins the job may not much change the tone of ECB policy making, which is set by the consensus of a 23-member Governing Council.

“We would not envisage a significant change in its strategy or reaction function,” said Callow. “The lesson of the ECB’s history so far is that while the personnel may change, the institution has stuck firmly to its clearly defined mandate ‘to maintain price stability.’”

Fed and ECB: More lies, deception and illegal actions

So now, after all the speeches from Greenspan and Bernanke saying that they cannot spot asset bubbles, it seems like there's a proof of them blatantly lying — via CalculatedRisk:

From then Atlanta Fed President Jack Guynn:
[T]there is the housing situation, which we talked about for a long time yesterday afternoon. As I’ve been reporting for several meetings, some of our markets, especially those in coastal areas of South Florida and the Florida panhandle, are experiencing a level of building activity and price increases that are clearly, in my view, unsustainable. Nearly every major Florida city now has experienced increases in the double-digit range, and some, like Miami, Palm Beach, Sarasota, and West Palm, have been reporting increases in housing prices on a year-over-year basis of between 25 and 30 percent. While our discussion yesterday did not seem to indicate a consensus on a national housing bubble, based on past experience I’m reasonably comfortable characterizing the housing feeding frenzy in some of our markets as being a bubble or a near bubble.

For example, the number of major projects planned or under construction in Miami now totals 114, most of which are high-rise developments. That includes 61,000 condo units—eight times the number that were built in the last decade—and a total of 100,000 new parking spaces. I know we don’t have any process for introducing exhibits into the record, but I’d like to pass Dave Stockton this pictorial of the new projects in Miami, so that he can continue to worry a little bit along with me. [Laughter]

My supervision and regulation staff thinks this is an accident waiting to happen in our area. And while the local market excesses probably do not represent systemic national risk, the shakeouts could have serious regional consequences. My bank supervision staff points out that housing-related credit risks to our bank lenders are not so much from defaults on permanent mortgage financing that we talked about yesterday, but rather from lending for land acquisition, development, and construction. The ugly picture we have seen before—and that they think we may very likely see again before long—goes something like this: the drying up of sales of new units; the painful decision of developers to go ahead and complete the construction of additional units to make them saleable, further depressing the market; and speculators who had hoped to see big capital gains walking away or defaulting on their contracts, giving their properties back to the lender. Perhaps it’s because of where I sit, but I am less comforted than some of my colleagues about the housing situation.

CHAIRMAN GREENSPAN. Let’s take a break for coffee.

Nice dismissal from Greenspan. But he cannot say he didn't know or he didn't see it.

But the ECB is even worse than the Fed, since the ECB Allows Irish Central Bank to Counterfeit 51 Billion Euros (Mish):

Ireland central bank counterfeited 51 billion Euros out of thin air. The amount is not backed by government bonds. Nor was it a loan from the ECB or anyone else. The money is counterfeit in every sense of the word.

Please consider the facts as depicted in Central Bank steps up its cash support to Irish banks financed by institution printing own money.

The Irish Independent learnt last night that the Central Bank of Ireland is financing €51bn of an emergency loan programme by printing its own money.

The figures also provide the latest evidence that responsibility for funding Ireland's broken banks is being pushed increasingly back on to Irish taxpayers. The loans are recorded by the Irish Central Bank under the heading "other assets".

A spokesman for the ECB said the Irish Central Bank is itself creating the money it is lending to banks, not borrowing cash from the ECB to fund the payments. The ECB spokesman said the Irish Central Bank can create its own funds if it deems it appropriate, as long as the ECB is notified.

Bloomberg Sues ECB to Force Disclosure of Greece Swaps

After having sued the Fed a couple of years ago in order to obtain the details about the bailout money and the trillions of dollars the Fed printed, Bloomberg is now suing the ECB to force them to disclose the swaps arrangements relative to Greece.

Bloomberg is one of the rare freedom fighters, along with WikiLeaks. What is interesting with this case though, is that it shows how a for-profit corporation in a capitalistic system, end up actually fighting against the government (and the government entities, such as the Fed and the ECB) for business reasons (in order to sell the information regarding the Greece Swaps) ; and by doing so, Bloomberg becomes a freedom fighter. So in pure capitalistic system, corporations, driven by competition, will fight for their freedom, the freedom of information and the freedom of their (potential) customers.

For the sake of clarification, remember that the ECB is the central planner for the interest rates across all the Eurozone, and having a non-free, monopolistic fiat currency. It is born not from a capitalist but socialist system.

Dec. 22 (Bloomberg) -- Bloomberg News filed a lawsuit against the European Central Bank, seeking to make it disclose documents showing how Greece used derivatives to hide its fiscal deficit and helped trigger the region’s sovereign debt crisis.

The lawsuit asks the European Union’s General Court in Luxembourg to overturn a decision by the ECB not to disclose two internal documents drafted for the central bank’s six-member executive board in Frankfurt this year. The notes show how Greece used swaps to hide its borrowings, according to a March 3 cover page attached to the papers obtained by Bloomberg News.

ECB President Jean-Claude Trichet withheld the documents after the European Union and International Monetary Fund led a 110 billion-euro bailout ($144 billion) for Greece. The dossier should be disclosed to stop governments from using the derivatives in that way again and show how EU authorities acted on information they had on the swaps, according to the suit, filed by Bloomberg Finance LP, the parent of Bloomberg News.

The EU is dependent “on member states taking an open and transparent approach in relation to their levels of debt,” Bloomberg said in its suit. “If Greece has failed to take such an approach in the past, there is a compelling public interest in relevant information being disclosed.”

An ECB spokeswoman declined to comment on the lawsuit.

The ECB case follows a 2008 lawsuit by Bloomberg LP seeking disclosure of the U.S. Federal Reserve’s records on emergency lending under the Freedom of Information Act. A group of banks is appealing to the U.S. Supreme Court over lower-court decisions ordering the Fed to identify loan recipients.

The Greek government didn’t originally disclose the swaps, designed to help it comply with the deficit and debt rules it agreed to meet when it joined the euro in 2001.

Eurostat, the EU’s statistic’s agency, said last month the swaps added 5.3 billion euros to the country’s debt, without giving details. Repeated revisions of Greece’s national figures, beginning last year, spurred a surge in borrowing costs that pushed the country to the brink of default and triggered a region-wide debt crisis.

“The information contained in the two documents would undermine the public confidence as regards the effective conduct of economic policy,” Trichet wrote in an Oct. 21 letter, turning down Bloomberg’s request for the documents. Disclosure “bears, in the current very vulnerable market environment, the substantial and acute risk of adding to volatility and instability.”

ECB officials first spotted “a swap operation in unusual terms,” in April 2009, seven months before the Greek crisis erupted, according to the March 3 cover note.

“It is wholly unclear what (if anything) the ECB did at that time to investigate further,” Bloomberg’s suit says.

Greece entered into a “large” number of private, off- market swaps from 2001 through 2007, Luxembourg-based Eurostat said in a report on Nov. 15. The agreements, which led to higher debt, were analyzed “in detail,” Eurostat said. A follow-up report on Greek data including swaps is due in weeks, a spokesman said at the time.

“Disclosure would help prevent these situations repeating themselves,” said Michael Spence, winner of the Nobel Prize for Economics in 2001 for his research on asymmetric information in markets. “It’s a tough call. Not everything can be disclosed, but markets need to know.”

Greek, Irish, Spanish Banks are on the verge

Nothing good can come out of this messy situation that Trichet has created for himself and Europe. The good news is that the political tensions are rising among the Eurozone countries on the bailouts and pressure is also increasing on the ECB, both from insolvent countries (PIIGS, France, etc.) internally as well, between the German austerity thinking on one side, and the money printers (the others). We could reach a blockage, which would be the best possible outcome.

Oct. 29 (Bloomberg) -- Greek, Irish and Spanish banks are falling behind their counterparts across Europe in reducing their dependence on emergency central bank funding because they can’t find investors willing to buy their bonds.

Lenders from those three nations took 61 percent of the loans supplied by the European Central Bank at the end of September, up from 51 percent the previous month, data from their respective central banks show. [...]

Deutsche Bank AG, HSBC Holdings Plc and Societe Generale SA have sold new debt since regulators stress-tested 91 of the region’s lenders in a bid to rebuild confidence in their creditworthiness. By contrast, bonds of all lenders in Portugal, Ireland and Greece are trading as though junk rated, as are a third of banks in Spain, according to data compiled by Bank of America Corp. Their struggle to sell debt will make it harder for the ECB to curb loans to banks on Europe’s periphery.

“The ECB is going to have to support these smaller banks for many years to come,” said Simon Maughan, an analyst at MF Global Ltd. in London, who has tracked the industry for more than 15 years. “The ECB has to keep these banks alive and hope and pray that the local regulators force them to restructure and make them profitable again.”

The ECB doesn't have to do any of these. But they will nonetheless try, even if it's not the right thing to do, nor ethically, nor for the economy.

[...] Irish, Greek and Portuguese banks have been shut out of the corporate bond market since April. Italian banks fared better as its economy grew 0.5 percent in the second quarter, outpacing expansion in Spain and Portugal.

Spain’s two biggest banks, Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA, have been able to tap the market because they rely less on their home market for revenue than competitors. Banco Santander, Spain’s largest lender, gets 25 percent of its profit from Spain, while BBVA gets about 46 percent of its earnings from Spain and Portugal, according to third-quarter earnings reports. The two have sold about $9.8 billion of debt since July 23 after raising nothing in May and June, according to Bloomberg data. Spain’s smaller banks only sold $2.48 billion of securities in the same period.

[...]
Investors demand an average yield of 1,010 basis points more than government securities to own bonds sold by Irish banks, according to Bank of America data. That compares with 252 basis points for Spanish lenders and 190 basis points for Italian banks.

That’s making it harder for the ECB to remove the emergency measures it put in place following Lehman’s failure. The ECB, which ceased giving 12-month loans last year and intended to phase out other liquidity measures earlier, was forced to delay its exit by Greece’s debt crisis. In May, the ECB agreed to make an additional six-month loan to banks and extended its offer of unlimited three-month tenders. Banks can borrow as much as they want for periods of between a week and three months.

“There are certain banks in the euro area that have become highly dependent on the liquidity injected by the euro system,” ECB council member Mario Draghi said in Rome on Oct. 1. “These banks should be addressed by national authorities otherwise we would have so-called zombie banks for some time.”

What about addressing the problem at the root of it, Mr Draghi? Stop lending to insolvent institution seems to be the obvious thing to do?

Some more bullish news for the Euro

What seems to be my trade of the year might have more legs as I mentioned over the week-end.

On the fundamentals side, beside from being illegal, it looks like the ECB might have some difficulties implementing their bond purchase. Maybe someone (the German officials?) are acting in the background and trying to prevent it from happening?

July 19 (Reuters) - European Central Bank purchases of euro zone government bonds has slowed to a virtual halt, data showed, adding substance to suggestions from policymakers that the programme could soon be phased out.

The bank said on Monday total purchases since the scheme started on May 10 were 60 billion euros, after it spent just 302 million euros on bonds last week.
[...]
Last week marked the least amount of bonds bought and settled in a week since the programme began and compares to the roughly 800 million euros it spent the week before. The pace of buying has progressively slowed as bond markets get back on their feet -- in the first week of the programme, the ECB spent 16.5 billion.

The market had factored in 600 billion € worth of purchase, while currently, only 60€ have been printed out of thin air. The next few weeks are going to be interesting on that side of things.

Also today, I received a nice report from a friend who works in the Hedge Fund industry: the HF Monitor published weekly by BofA Merrill Lynch.

It seems that contrary to what I thought, the dollar bulls are still there massively overbidding for the US$ Index, while the shorts on the Euro have still a lot of positions to close. Here are the quotes from the report, along with the chart:

Euro
Large specs further covered their net short position in euro futures to roughly $3.4bn notional from roughly $4.9bn notional previously. Readings are out of a crowded short. The euro has seen significant technical deterioration recently on fiscal concerns over Greece and other Eurozone countries. The euro last week hit 1.30 and could move a bit further to the upside to 1.31-1.32. But we would begin to anticipate a pullback to lower levels.

US$ index
Large speculators slightly sold the US$ index to a net long of roughly $1.2bn notional from about $1.4bn notional previously. Readings remain in a crowded long. The USD has corrected but could pullback a bit more. Look to the euro for direction in the USD. Support is in the range of 82-79.50. We do expect higher highs for the USD later this year.

Denmark the next country to default?

Bloomberg has published an article summing up information found in a ECB report and the conclusions are quite scary. The UK is in very serious trouble, but it looks like Denmark is in far worst state than even the UK. All in all, I am a bit doubtful about my long EUR position against both the USD and GBP because depending on what the ECB will do following the collapse of one of the many default-candidates in the Eurozone. My position will need to be assessed but for now, I think the ECB has been able to control is destructive powers and even if I stated several times that Trichet should resign, it still seems that he's trying to avoid following the BoE and the Fed toward hyper-inflation. [Update: Just to clarify, Denmark is not in the Eurozone. But Portugal, Greece, Spain, Italy are. It will also be interesting to see what the ECB does if (when?) Denmark defaults]

June 12 (Bloomberg) -- European governments have approved $5.3 trillion of aid, more than the annual gross domestic product of Germany, to support banks during the credit crunch, according to a European Union document.

The U.K. pledged 781.2 billion euros ($1.1 trillion) to restore confidence in its lenders, the most of any of the 27 EU members, according to a May 26 document prepared by officials from the European Commission, the European Central Bank and member states and obtained by Bloomberg News. Denmark, where 13 of the country’s 140 banks were bailed out by the central bank or bought by rivals last year, committed 593.9 billion euros. [...]

[My Comment: Denmark: Population of 5.5 Million (less than Greater London) GDP of around $200 Million, 140 banks (!!!!) 13 of which were bailed out with about 600 B€ that is about 4 times the GDP of country. Denmark reminds me of Iceland...]

EU governments approved about 311.4 billion euros for capital injections, 2.92 trillion euros for bank liability guarantees, 33 billion euros for relief of impaired assets and 505.6 billion euros for liquidity and bank funding support, a total of 3.77 trillion euros, the document shows.

The U.S. government and the Federal Reserve had spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, as of March 31.

[My Comment: there still is a huge gap between the waste done by the EU and the US]

A majority of new member states including Slovakia, the Czech Republic, Estonia and Lithuania have not taken public measures to support their financial markets, the draft said. Many banks in the region are foreign-owned. More than 80 percent of bank loans in central and eastern Europe come from lenders owned by six western European EU countries, according to Moody’s Investors Service.

All together, the EU paper said that 18 member states have introduced bank liability guarantees, 15 have approved recapitalization measures, and 11 have given liquidity support.[...]

The British government this year secured promises of additional mortgage and business lending from Lloyds Banking Group Plc, Royal Bank of Scotland Group Plc and Northern Rock Plc in return for aid.[...]

Banks in Germany received the third-largest amount in aid, the document showed, for a total of 554.2 billion euros. Commerzbank AG, Germany’s second-biggest bank, was told to sell its Eurohypo commercial property unit by the Commission on May 7 to win approval for a second bailout by the German government.

Following is a table of European government’s commitments. All figures are in billions of euros and include capital injections, guarantees granted, effective asset relief and liquidity interventions.

United Kingdom 781.2
Denmark 593.9
Germany 554.2
Ireland 384.5
France 350.1
Belgium 264.5
Netherlands 246.1
Austria 165
Sweden 142
Spain 130

Here are the previous related posts:

• 2009-05-18 Trichet not as hopeless as it seems
• 2009-14-18 Trichet should resign
• 2009-03-12 ECB Stealthly Approaches Zero Rates
• 2008-10-14 R.I.P EUR
• 2008-08-08 $ up 0.05 € in 24 hours as Trichet abandons war against inflation

Trichet not as hopeless as it seems

I wrote a few weeks ago that Trichet is following Ben Bernanke and Mervyn King toward the abyss but it seems that Trichet is not as hopeless as he wants us to believe and that he might actually be trying to resist the pressures to debase the Euro. As more details emerge, it is now confirmed that there internal clashes and tensions and more or less all the guesswork that I made in my previous post tend to be confirmed by this report from Bloomberg:

May 14 (Bloomberg) -- European Central Bank policy makers clashed over the bank’s asset-buying program and prospects for a recovery less than a week after President Jean-Claude Trichet engineered a truce.

Vice President Lucas Papademos said in Vienna today that a recovery may come sooner than previously thought. Minutes earlier, Dutch council member Nout Wellink said economists shouldn’t get too optimistic about “green shoots.” That came a day after Germany’s Axel Weber and Slovenia’s Marko Kranjec reopened a split over the size of the ECB’s bond-purchase plan.
[...]
A split on the 22-member Governing Council this year has made it difficult for Trichet to send a clear signal on how the ECB will step up its fight against Europe’s worst recession since World War II. While he won support on a plan to purchase 60 billion euros ($82 billion) in covered bonds, a compromise on the program’s focus and scope may already be unraveling.

Kranjec said in an interview yesterday the ECB is likely to spend more than 60 billion euros, a figure that Weber insisted would be a “maximum.” The debate rumbled on today across Europe, with Slovakia’s Ivan Sramko saying nothing can be excluded and Executive Board member Jose Manuel Gonzalez-Paramo saying there’s no plan to expand purchases “at the moment.”
[...]
On May 7, the ECB cut the key rate to a record-low 1 percent and Trichet said that it’s not necessarily its lowest level. He also announced the ECB’s unprecedented decision to buy covered bonds, securities backed by mortgages and public-sector loans which have suffered a slump in demand during the financial crisis. Details of the plan are to be unveiled next month.
[...]
The size of the ECB’s plan “is peanuts for an economy the size of the euro zone,” economics professor and former Bank of England policy maker Willem Buiter said at a conference in Dublin yesterday. “I expect they will announce more or that the recession in the euro zone will be longer and deeper than would otherwise be necessary.”

The Federal Reserve, Bank of England and Bank of Japan have already lowered their key rates to close to zero and are buying government and corporate debt, effectively pumping new money into their economies in a policy some economists label quantitative easing.
[...]
Executive board member Juergen Stark later weighed in on the debate, saying Trichet is the only council member whose voice counts.

“At the end of the day the president is ‘porte parole’ of the governing council,” Stark said this evening in Berlin, using a French phrase meaning spokesman. “So listen to what the president says.”

“Trichet should probably impose some order,” said Stephane Deo, chief European economist at UBS AG in London. “The deluge of conflicting messages is putting more volatility into the markets.”
[...]

Here are the previous related posts:

• 2009-14-18 Trichet should resign
• 2009-03-12 ECB Stealthly Approaches Zero Rates
• 2008-10-14 R.I.P EUR
• 2008-08-08 $ up 0.05 € in 24 hours as Trichet abandons war against inflation

ECB Stealthly Approaches Zero Rates

I have already mentioned a couple of times last year that Trichet is no political courage and that he had abdicated from its duties which are very simple as they fit in one single statement: protect the value of the €. He has one task, and he has yet managed to miserably fail.

So basically, this is the third episode to this series, the first two ones being:

• $ up 0.05 € in 24 hours as Trichet abandons war against inflation
• R.I.P EUR

So basically Trichet has an issue: he cannot simply stick to his own words. Every time he says something, he does the opposite a few weeks later. He has constantly said that he won't decrease rates, yet he has actually decreased them substantially for the past several months. But here is the final straw:

March 12 (Bloomberg) -- European Central Bank President Jean-Claude Trichet’s new weapon to battle the recession is taking him closer than it seems to zero interest rates.

Trichet is allowing the ECB’s deposit rate, which lenders earn on overnight deposits with the central bank, to usurp the benchmark refinancing rate and become the main driver of short- term borrowing costs. At just 0.5 percent, the deposit rate matches the Bank of England’s key setting and is only a step away from the zero-to-0.25-percent range the Federal Reserve uses.
[...] The deposit rate is “very, very low,” Trichet said three times in an hour at a press conference on March 5.

The ECB’s decision to offer banks unlimited amounts of cash, announced on Oct. 8, has culminated in the deposit rate setting the new de facto cost of short-term money. The measure removed the need for banks to borrow in the money market to meet their reserve requirements.
[...]
Trichet hasn’t ruled out further rate cuts. The ECB has “not decided ex-ante that the present level was the lowest,” he said during a press conference in Vienna today. Still, “we are at very low rates.”
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The ECB has cut its main refinancing rate by a total of 2.75 percentage points since early October.
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That is allowing Trichet to argue “that the ECB does not have such a different monetary-policy stance from the Fed and Bank of England,” said Gilles Moec, an economist at Bank of America Merrill Lynch in London.