Notes From Underground: Interest Rates In Limbo (Or, How Low Can You Go)?

Today it was the Danish Central Bank that lowered its interest rates in order to prevent the markets from trying to break the Danish KRONER/EURO peg and lowered the overnight rate to NEGATIVE 0.20% from a NEGATIVE 0.005%. It was unusual that the Danish Bank lowered the rate on a Monday rather than the usual Thursday but some analysts of the Nordic banking system believe the Danes may act again this Thursday after the ECB reveals its QE program. NEGATIVE RATES ARE THE NEW NORMAL! Danish banking authorities maintain that the Danes are not under as much stress as the Swiss were because the reserves at the DCB are 13% below the peak of 2012, the height of the EU financial crisis.

The news wires were alight with stories about the Swiss National Bank and all the damage that the January 15 surprise move left in its wake. The majority of reporting on the SNB is conjecture on why Thomas Jordan decided to move now. Meaning, what did Jordan know after his conversation with Chancellor Merkel, Jens Weidmann and Mario Draghi? The ECB has been reported to have agreed with the Germans that the QE program will be 625 BILLION EUROS and will come with all types of stipulations. Some analysts surmise that the SNB ended the PEG because the of the ownership structure of the Swiss Central Bank.

In the Financial Times, Gavyn Davies noted that 45% of the SNB is owned by PRIVATE SHAREHOLDERS, many of “… whom are individuals, who receive dividends from the SNB. The rest is owned by cantons, which have been complaining recently about insufficient cash transfers ….” So it seems that the ill-conceived PEG had to call because it was a grand mistake as a corporate policy. (As an aside, if a central bank is owned by private shareholders and the bank is involved in secret conversations with the ECB, Fed, BOJ, BOE and others, isn’t any trade made by the SNB the ultimate in insider trading?) The bank shareholders were purportedly putting great pressure on Chairman Jordan to cut its losses.

In another view on the SNB‘s move for Forbes, Frances Coppola raises a point by John Authers of the FT. It seems that the ECB resented that the SNB was slowing the impact of its monetary policy because of the massive purchases of euros by the SNB and if the new QE policy was going to be undermined by the SNB intervention. The ECB let the SNB know that the amount of QE would be so large as to destroy its balance sheet. The previous buying by the SNB had grown its reserves to 85% of the Swiss GDP. A central bank representing the GDP of 15 trillion euros could muster the firepower to overwhelm the much smaller Swiss economy so it was game over for Chairman Jordan and his beloved PEG.

Today, French President Hollande let it be known that the QE program would definitely be revealed at this Thursday’s ECB meeting. Wow, I wonder if IMF Managing Director Christine Lagarde was also let in on the “secret.” President Hollande did not provide any details of the program but it seems that German inside sources were busy revealing what type of compromise ECB President Draghi worked out with Chancellor Merkel. (NOTE: Hollande already backtracked on his statement that the ECB will announce QE, according to the Telegraph.)

Some of the details of the PLAN were revealed in a Bloomberg article by Alessandro Speciale and Andre Tartar. “Those plans limiting risk-sharing by having national central banks buy the debt of their own countries (per Der Spiegel). Purchases would be based on the ECB’s capital key, or roughly equivalent to the relative size of each economy–Germany 18%, France 14%, Italy 12% and Spain 9%–all other members are below 5%. Also, total purchases would be limited to 20-25% of each country’s debt.” In German paper Frankfurter Allgemeine Sonntagszertung, it was reported the National Central Banks would be liable for at least half of any losses that may arise from buying bonds issued by their own country.

If these reports are correct it seems that Draghi and the ECB have bent to German concerns for it will not be an unlimited QE program and it will not be totally backstop by the German taxpayers (at least not at first). If any  major European nation were to suffer unbearable debt problems the ultimate burden will certainly fall upon the shoulders of the ECB regardless of  the stipulations of QE. For Mario Draghi, Greece is one thing; Spain would be a totally different problem. The markets are not going to receive the “big bazooka” that some pundits maintain. Again, this is based on leaks from the German press so everything has to be considered accordingly.

***Tomorrow night the Bank of Japan will announce its rate intentions. There will be no change to the present Japanese policy even as the YEN has appreciated almost 10% over the last few weeks. But with the SNB and ECB at center stage, the Japanese policy makers will be reticent to steal the world’s attention. NO CHANGE FROM JAPAN.

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9 Responses to “Notes From Underground: Interest Rates In Limbo (Or, How Low Can You Go)?”

  1. Alex Says:

    Yra, you’ve long made the point that Euro QE could be very interesting for the price of Gold on the upside.

    What are your latest and updated thoughts on this re the expected QE announcement this week.

    Thanks a lot. Alex

  2. yra Says:

    alex–thanks for the reminder.Will give my opinion on Gold soon,maybe tonight ,but as I have long argued Gold is not a reaction to inflation at this point or for the last 6 years but as an alternative to the actions of central banks and what the fear of deflation would force them to do–the swiss action provides more support for that argument which is why I pointed out the Gold/swiss ratio after the recent swiss rally against all financial assets as a possible opportunity for gold/swiss but you must be patient as it is a difficult environment to establish risk parameters

    • Alex Says:

      Yra, thanks. I know it’s difficult right now and basically anything and probably everything will happen re vol and price moves. Your view will be just that, but it’s interesting to hear the views and ideas of people like yourself.

      Right now Gold looks like it’s metamorphosing back into a currency rather than a commodity or inflation hedge. The next 3-6 months Gold action will be very interesting.

      Whatever the case, I’m a buyer of a few coins every month and have been for 12 years, high or low prices, it doesn’t matter.

  3. asherz Says:

    Following the SNB PEG abandonment, put the EUR/DKK on your radar screen based on recent developments. This will be the new game in town. Soros set the template over 2 decades ago.

  4. yra Says:

    Aherz–yes but I don’t think the danes will break but the Hong Kong may get into play—but it will be a slog.The Danes have room to drop rates before letting go of the Peg—the swiss were just ridiculous in their policy

  5. arthur Says:

    when it’s on the front page of the newspaper, it’s too late

  6. asherz Says:

    Yra- The Swiss PEG was ridiculous but they thought they could jawbone the market with their unlimited checkbook remark. Draghi has been jawboning as well, but his string runs out on Thursday.

    Once you have a reversal of a PEG in this historic period in global financial history, other dominoes will follow. Self preservation is the first law of nature.

    The markets are bigger than the Central Bankers who have allowed their cockamany theories distort the markets instead of letting the markets clean house allowing for a phoenix-like repairing process.

    If Greece does repudiate their debt and next Sunday may be the harbinger of that, look for others to follow suit as well. But Greece jummping ship is not a given.

  7. arthur Says:

    How Investors Are Positioned for a Euro Break-Up???

  8. Yra Says:

    Arthur–there is no positioning for a Euro break-up for if there was the bond spreads in Europe sovereigns would be much different –see July 2012 as the template for that risk being priced in the market

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