Flu isn’t the only thing going around. An epidemic of economic optimism has seized the European Central Bank, and its president thinks that should be enough to get the continent’s economy going once again.
“There is a positive contagion when things go well,” Mr. Draghi said. “That’s what is in play now.”
Then he said something about a “jury” still being “out,” but I for one was too europhoric and busy stimulating the economy to hear it. Which is good, because Draghi & Co. won’t be doing any stimulation themselves. Read more »
Ooh look there’s another Europe thing. In this thing, Europe, in the form of the almost-existing ESM,* will take equity (?) stakes in troubled Eurozone banks, rather than its previous plan of buying senior debt of troubled Eurozone sovereigns so those sovereigns can invest the proceeds in equity stakes of their troubled banks.
There has been a lot of talk about collectivizing some European government debt, with people proposing plans in which Europe as a whole would be responsible for the amount of each country’s debt under X% of GDP, or over Y% of GDP, or other. You can think of this as sort of a more financialized, more palatable, and more targeted version of that: instead of collectivizing an arbitrary dollar amount of each country’s sovereign debt, you collectivize the amount needed to bail out that country’s insolvent banks. This favors peripheral countries (because they have most of the bad banks, or at least the bad banks whose badness expresses itself in the form of insolvency rather than criminality), yet also has a certain appeal to Euro-core financial bureaucrats because the collectivized debt is going to bankers like them rather than to over-vacationed Greek pensioners etc. And money being fungible it’s not the worst outcome for the pensioners etc. either.
The other thing about this new Europe thing is that the EFSF/ESM can stabilize peripheral government debt in the market without imposing new austerity conditions and without taking seniority, though people have doubts about that because you can always flip yourself into seniority if you’re the lender of last resort. And there are many other details to be worked out and I invite you to read about them from someone who knows something about them. But the new news is the bank capitalizing, and that seems promising; the syllogism is I guess (1) this is TARP and (2) TARP kind of worked, ergo (3) this will kind of work. Read more »
So Europe’s all better now, or something. The banks are anyway. They have had the money flung at them, in the form of the European Central Bank advancing them tons of medium-term funding at attractive rates and with pretty chill collateral requirements, and now they just have to sit back and be awesome.
Since they’re now all flush and awesome, various people have come out of the woodwork to help them spend their money. (I’m happy to help too! Call me!) One possible answer is “bail out your reprobate governments,” which FT Alphaville have dubbed the “Sarko trade” after a guy who said this:
French President Nicolas Sarkozy said the ECB’s increased provision of funds meant governments in countries like Italy and Spain could look to their countries’ banks to buy their bonds. “This means that each state can turn to its banks, which will have liquidity at their disposal,” Sarkozy told reporters at the summit in Brussels.
Alphaville point to a equity research note by Morgan Stanley, who estimate that the size here is maybe less than Sarkozy hoped for but much, much more than zero. You can have various views on the desirability and/or plausibility of this.
Another thing the banks could do is take all these gobs of money and actually go lend it to people to, like, buy Portuguese villas and stuff. This seems very broadly speaking like a good thing for them to do, since banks lending to people and businesses is sort of their job. One guy likes this idea: Read more »
We don’t spend much time with Jean-Claude Trichet, the president of the European Central Bank, and really that’s our loss because he is quite the charmer, though less seductive and/or rapey than other French international bankers who come to mind. Last week he sat down with a French magazine for an interview that was released yesterday, and he had a message for anyone who might still want to speculate on Greece defaulting:
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Another €187 billion will vanish over the next couple of weeks, the always-optimistic European Central Bank predicted.
Banks in the euro-zone will write off that much before the end of the year, the ECB reports. That’s about one-third of the total of €553 billion in write-downs predicted between 2007 and next year. Oh, and that estimate is €65 billion higher than the one made by the ECB six months ago.
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If the European Union isn’t regulating, it isn’t happy.
Stymied by fear and common sense, the EU seems likely to drop the most odious aspects of its proposed new rules on hedge funds and private equity firms. But the Europeans have simultaneously struck upon the only thing more likely to drive hedge funds out of Europe than strict oversight: draconian pay restrictions. And now it’s turned its sights on the insurance industry.
The president of the European Central Bank today backed plans to place new encumbrances on the continent’s economy by regulating big insurers the same way it regulates banks. After all, can’t those insurers be just as “systemically relevant,” á la AIG?
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Furthering the U.S. Euro divide on financial crisis (non)response, the ECB is not having any more of this private asset buying crap. And, you will be happy to know, the incident many refer to as a “credit crunch” or “credit crisis” is absolutely, positively over. Got it? Over. Done. Finished. Ceased to be.
European Central Bank Governing Council member Axel Weber said he sees “no need” for the ECB to buy further private assets to support lending.
“I currently don’t see the need for outright purchases of further private debt obligations,” Weber said in a speech in Munich today. “There is no credit crunch in the euro area; therefore, there is no reason why we should surpass the banking system with our monetary-policy instruments.”
Well, since that’s over….
ECB’s Weber Sees ‘No Need’ for More Purchases of Private Debt [Bloomberg]
Trichet said it was difficult to describe the euro as weak after its 6.2 percent drop against the dollar this year.
When the euro was introduced, it was 1.17 to the dollar, now it’s about 1.31 so “to speak of a euro that is weak doesn’t reflect the present situation,” Trichet said.
Perhaps we’ll have to speak instead of a euro that is:
Trichet Says ECB Must Do Everything to Restore Confidence (like preventing people from using the word “weak” in its connection?) [Bloomberg]
The audience able to take advantage of the morning’s European rate cut was almost entirely composed of the vanishingly small community of insomnia plagued index futures traders, and even that crowd better have taken their gains quickly, as the advance had all but evaporated by the open.
This shouldn’t surprise anyone. Markets have priced in “regulatory miracle work” to such an extent at this point that short of turning water into warrants we can’t see how any major financial authority can even make markets crawl out of their crate, much less sit up, roll over and fetch.
Several commentators have already called the “fiscal bag of tricks” top (erroneously in our view until this week) and expect that further government intervention will effectively be useless. The United States has perhaps another cut left in it, but that’s probably about it. And then? Well, that depends on your view of future earnings and the like. If you think that commercial real estate is going to be just ducky, that LBO loans outstanding will be just fine because their covenants are oh-so-light that acceleration, or default won’t be triggered so easily (though this fails to explain how slowdowns in loan payments won’t slug bond holders anyhow) and consumer confidence will suddenly rebound when Britney’s father hands control of the estate back to the hedonistic pop-star, and commodity prices, currently in a holding pattern over KREC (Recession National Airport), will remain orbiting forever, well, you probably won’t mind going long today.
The Bank of England surprised markets with a sweeping one-and-a-half percentage point interest-rate cut Thursday, as central banks in Europe slashed their key rates to stave off deep and prolonged recessions.
The Bank of England cut its key lending rate to 3% from 4.5%, signaling deep concern as the British economy struggles with falling house prices and sharply tighter credit conditions.
The European Central Bank, which makes monetary policy for the 15 countries that share the euro currency, cut its key rate by half a percentage point to 3.25%, as expected. Switzerland’s central bank joined in, cutting its key rate target by half a percentage point to 2% in an unusual between-meeting move.
Europe’s Central Banks Slash Interest Rates [The Wall Street Journal]
Maybe it is just us, but three categories of prediction have become so laden with spin, obfuscation and ass-covering, their prose so muddied, that really it would be better if they were merely never spoken of again. These three are energy prices, terrorism and inflation. Pronouncements about the risk of these three-horsemen are so utterly devoid of content that one feels lighter after listening to them. It is possible that the recent abject uselessness of public debate and the public officials who publicly debate it has jaded us. But, actually, we don’t think so. Consider, for example, the opaque blathering of European Central Bank President Jean-Claude Trichet today, conveniently filtered through the prose-sanitizer of financial journalist William Watts:
Inflation pressures in the euro zone have diminished “somewhat” and downside economic risks have increased, European Central Bank President Jean-Claude Trichet said Thursday, following the central bank’s decision to leave its key lending rate unchanged at 4.25%. Trichet warned, however, that inflation was likely to remain elevated for some time and noted that wage growth has been picking up despite weaker economic activity and declining labor productivity.
I think you will agree that the floor of the House yields more meaningful content.
Also, a hint for aspiring financial journalists everywhere: If you really have to torture headlines to work in both the name and the title of the article’s primary subject to make sure your readers know who and what the hell you are talking about, or if you have to remind them that short sellers profit when share prices fall, just save everyone the headache move on to a simpler subject.
ECB’s Trichet: Inflation pressures diminished ‘somewhat’ [MarketWatch]