After the smoke had cleared from ECB’s announcement to cut the deposit rate another 10 BASIS POINTS to NEGATIVE FORTY, the central bank ADDED MORE MONEY TO THE SYSTEM VIA AN INCREASE IN QE TO EIGHTY BILLION EUROS A MONTH. The press called this a BAZOOKA but I THINK IT IS A WATER PISTOL. The most significant piece of the press release on monetary policy decisions was item six, “A NEW SERIES OF FOUR TARGETED LONGER-TERM REFINANCING OPERATIONS (TLTRO 2), EACH WITH A MATURITY OF FOUR YEARS, WILL BE LAUNCHED, STARTING IN JUNE 2016. BORROWING CONDITIONS IN THESE OPERATIONS CAN BE AS LOW AS THE INTEREST RATE ON THE DEPOSIT FACILITY.”
So the ECB is going to pay banks MAYBE 40 basis points to take money and lend it out to borrowers—-the previous TLTRO plan led to European banks borrowing from the ECB and purchasing huge amounts of government debt. (Think of Italian banks buying Italian government bonds.) The domestic banks in each nation can buy their government’s debt and under the CURRENT BANK OF INTERNATIONAL SETTLEMENTS (BIS) RULES government debt is given a zero-weighted risk so sovereign debt does not require holding reserves to offset the liability of lending to the government. DRAGHI IS TRYING TO BAIL OUT THE BANKS THROUGH THE BACK DOOR. As I wrote yesterday, the NON-PERFORMING LOANS ON THE BOOKS OF ITALIAN BANKS ARE CONSERVATIVELY ESTIMATED AT 16%. Do you really think that the battered Italian banks are in a hurry to make more loans to zombie firms or will they take the zero-priced money and load up on Italian 10-year notes that yield 150 basis points?
DRAGHI IS TRYING TO LOAD UP THE ECB WITH DEBT THAT WILL BE SECURED WITH THE GERMAN CREDIT CARD. YET, DRAGHI DID NOT CHOOSE HIS NUCLEAR OPTION, WHICH WOULD HAVE BEEN TO BURY THE ECB’S CAPITAL KEY AND THUS CAUSE THE BUNDESBANK TO RUSH TO THE GERMAN CONSTITUTIONAL COURT AND GET A WRIT TO DECLARE THE LISBON TREATY NULL AND VOID. President Draghi was too fearful of Weidmann making the front pages of every German newspaper. The logic of increased QE is senseless as long as the capital keys are in place because there just isn’t enough quality assets to purchase based on the legal ratios of the capital key.
I know others will say that the ECB is stepping up to purchase INVESTMENT GRADE CORPORATE BONDS but that will not be enough to meet the increased 80 billion a month QE because the European corporate bond market is not that big and very few banks will want to give up quality assets for ECB funds to invest in new loans of a questionable nature. The MARKET HEARS WHAT IT WANTS TO HEAR AND DISREGARDS THE REST. Now it is important to hear what the BIS has to say about Draghi’s efforts to take on risk without the adequate safeguards. Be vigilant for this weekend’s German elections.
***Challenging Draghi for financial mendacity award was referenced in a Bloomberg article by Matthew Brockett, “Wheeler’s Communication Criticized After RBNZ Policy “U-TURN.” The opening line says so much about the fabric of today’s financial world: “New Zealand central bank Governor Graeme Wheeler faced criticism from economists Thursday after delivering an interest-rate cut that took most of them by surprise.” Economists were caught off-guard because they failed to pay attention to many of the signals that the market had provided. Three cheers to Governor Wheeler for making the financial literati actually earn their living through sweat. Good on you, mate!
Tags: bazooka, BIS, ECB, Germany, Italian banks, Jens Weidmann, Mario Draghi, QE, sovereign debt, TLTRO 2
March 10, 2016 at 8:51 pm |
Listening to Jeffrey Gundlach of DoubleLine webcast on Tuesday he was prescient. He stated that NIRP is more hurtful than helpful and that Japan showed that it has the opposite effect. In Japan the Yen increased rather than declined. And the Nikki swooned rather than rally.
Today was a repeat of the Japanese market reaction to more NIRP and QE. The DAX huge reversal today along with Euro also reversing and going higher revealed that the not only have the markets had enough of central bankers. But that today looked like the bottom in Interest Rates.
Draghi threw his last punch. He will not get any more approval from the ECB, the Germans and the FED. Besides what good is NIRP if your currency moves against you. NIRP is intended to depreciate your currency.
Today the markets have finally buried QE and NIRP.
Yra your correct that today was about Non-Performing Loans. While Draghi was speaking the Chinese slipped this under the radar.
http://www.reuters.com/article/us-china-banks-npls-exclusive-idUSKCN0WC0MD
The central bankers have for years been “gaslighting” the market talking about trying to get to 2% inflation and full employment. They have not been fighting disinflation. The central bankers all along have been fighting bank solvency. The Non Performing Loans in Europe and now China have all been kicked down the road are coming home to roost. The non-performing mortgages were already swept up with QE.
I don’t think the BIS as any choice but to go along with the charade. The German went along with Draghi because it bails out Deutche Bank. But today was the last straw.
It also looks like the markets are trying to put a bottom in on commodities. And gold continues to shine.
Your reference to Simon & Garfunkel’s “The Boxer” are so appropriate. As the central bankers sing the refrain “lie la lie, lie la lie, lie, lie”
March 11, 2016 at 4:34 am |
Frank C—–BIS will stand on the outstanding research of its staff which is far better then some of the work done by the individual central banks.It seems that the research is tainted by politics and a good example is the unleashing of the work of Danielle DiMartino Booth which is acerbic in tone and prescient in outlook and she worked for one of the best practical voices —Richard Fisher.The BIS has great impact and go back and look to see what William White was writing and warning back in 2006.The BIS sees more and has influence especially the Financial Stability Board which is presently chaired by Mark Carney of the BOE and he is playing politics with the BREXIT and not measuring the devastating possible outcome of the British inheriting the buiklding toxic pile on the ECB’s balance sheet—thank you sir may I guarantee another 100 billion of European bank debt—-tell me lies ,tell me sweet little lies
March 14, 2016 at 2:00 pm |
Frank – From the Reuters article: ‘The new rules would reduce commercial banks’ non-performing loan (NPL) ratios, and free up cash for fresh lending…’
Is this a move to collateralize equities or do you believe it’s simply to reduce debt ratios?
March 11, 2016 at 1:03 am |
Isn’t the BIS actually comprised of the very same central bankers?
March 11, 2016 at 4:35 am |
Chicken –yes but they meet in more purified air
March 11, 2016 at 4:26 am |
BIS rules state that sovereign debt carries zero risk. That institution is composed of 60 Central Banks. Some of the commercial banks overseen by some of their own Central Banks have substantially more non-performing assets than their capital. In truth some of the sovereign debt has substantial risk and would not qualify for QE (now meaning bailout of Italian banks) Saying so would cause the whole system to collapse.
Self immolation by the BIS as a possibility? Really?
Draghi and Weidmann at a future date will start back to back and walk ten paces before turning around and firing in a neutral venue, the Tuilleries Gardens.
March 11, 2016 at 4:37 am |
Asherz—well taken points but the BIS has over eighty years taken some very contrary positions to its members and a risk reweighting for sovereign debt is always a possibility and if not official policy the discussion and recommendation will be a burden for the commercial banks
March 11, 2016 at 7:37 am |
Mendacity/mendacious is such a great word and very apt with the majority of Central Bank/Politician jackasses we have to put up with.
March 11, 2016 at 8:09 am |
Judging by today’s action, it’s apparent Draghi’s pistol sports a precision laser sight?
“DRAGHI IS TRYING TO BAIL OUT THE BANKS”
March 11, 2016 at 10:33 am |
Yra- It is true that the BIS has taken severe measures in the past, but the plight of the European peripherals in 2016 is nothing like the BIS has ever seen before and Long Term Capital was not 2009.
The dominoes are all lined up accompanied by 11/4 quadrillion in derivatives floating around.
The lessons of 1937 are not instructive for the captains steering the ship despite their claims to the contrary. Draghi’s desperate announcement yesterday cannot be judged by the market performance 24 hours later. More telling are Japan’s mufti-decade history of low interest rates and the Fed stimulative QEs and ZIRP in the last 7 years.
The BIS, ECB, FED, BOJ and BOE are all in the same very leaky boat without life preservers. They will keep bailing the bilge water in the midst of a perfect storm until that 50 foot wave with a black swan on top comes crashing down.
March 11, 2016 at 10:37 am |
US Rates still lifting, gold has been doing quite well lately, wonder if the short treasuries long gold trade has finally arrived….
March 11, 2016 at 10:41 am |
chicken–I would be careful as it is only a trade because the ECB is driving all global debt marjkets insane and with 20 billion more a month its effect will become more dramatic to raise bond prices
March 11, 2016 at 12:08 pm
Good point yra, it’s been an illusive concept.
March 13, 2016 at 6:58 pm |
totally agree on rates Chicken. As i said on Thursday – Draghi´s omission that the ECB can´t go any further into negative territoriy might be THE catalyst to bring this interest rate cycle to an end.
I guess we will see some rotation back into equities and commodities. That will bring headline inflation back, thus making the job harder for central banks to stimulate any further. If rising commodity prices fail to reignite some growth in emerging markets, we might eventually fall to stagflation, which we feared just a couple of years ago.
March 11, 2016 at 11:20 am |
Trump (my new neighbor mentioned a few years back) is like a steam roller, hun? Pretty consistent, that’s the style he arrived here carrying.
Not sure if he’s making money with the largest East Coast winery (I should check on progress) but I hear Trump steaks are on the menu?
March 12, 2016 at 6:08 pm |
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