Tag Archives: ECB

Europe’s Bond Selloff Is Taking the Urgency Out of Boosting QE

Bloomberg, Sep 18, 2016

  • Increase in yields makes more bonds eligible for ECB purchase
  • German two-, 30-year spread reaches most since Brexit vote

By disappointing bond investors this month, Mario Draghi has bought himself some time on quantitative easing.

The selloff since the European Central Bank president failed to signal an extension of the bond-buying plan on Sept. 8 has reduced the proportion of German sovereign debt yielding less than the institution’s deposit rate to 60 percent, from about two thirds in late August. Since the ECB is prohibited from buying securities below this threshold, the prospect of it running out of bonds to purchase has receded, data compiled by Bloomberg show.

The need for a tweak to QE has therefore become less urgent, Vincent Chaigneau, London-based global head of rates and foreign-exchange strategy at Societe Generale SA, said in a note. 

When the euro region’s central banks are able to buy more shorter-dated bonds, because their yields are no longer below the ECB’s minus 0.4 percent deposit rate, then there’s less pressure for officials to purchase longer-term securities. This helped shorter debt outperform this week, steepening the German two- to 30-year so-called yield curve.

“It’s a nice side effect that yields are going up and it’s getting easier for the ECB to get all the bonds it needs, but it wasn’t their intention to talk yields up,” said Rene Albrecht, a rates and derivatives analyst at DZ Bank AG in Frankfurt. “Beyond a three-month horizon, yields should be biased for moving higher.”

Brexit Vote

The two- to 30-year yield spread widened to as much as 132 basis points, or 1.32 percentage points, this week, the most since the June 24 Brexit announcement. It was at 128 basis points as of the 5 p.m. London-time close on Friday.

Where bunds, and markets generally, go from here will be largely down to the Sept. 20-21 meetings of the Federal Reserve and Bank of Japan — particularly with the ECB’s next policy decision not due until Oct. 20. 

Following the Frankfurt-based ECB’s last meeting, Draghi said officials would consider how to ensure its bond-purchase plan doesn’t run out of assets to buy.

Even with the slide since that gathering, German debt with maturities out to seven years yield less than the deposit rate. And with data Thursday showing euro-zone inflation remains well short of the ECB’s goal, for many investors, a QE extension is still a question of not if, but when.



Brexit Means Draghi’s ECB Seen as Euro-Area Rescuer Again

Bloomberg, July 4, 2016


Frexit. Quitaly. The names are amusing, the reality would be anything but.

In the days since the U.K. voted to leave the European Union, the fact that commentators are scanning for the next country to worry about illustrates the existential crisis that the European project is having. For the euro area — the 19-nation section of the EU that has pursued the deepest integration — a dangerous loss of economic momentum is on the way, according to a Bloomberg survey.

Even with the economy entering its 14th quarter of expansion, unemployment is still above 10 percent and populist parties are on the rise from Germany to the Netherlands. Slower growth risks pushing political positions further toward extremes, yet questions still hang over issues including Italy’s failing banking system and reform of the bloc’s budget rules, and the European Central Bank looks like the only institution willing to act.

“Populism is a real threat to cohesion across Europe now, and a weaker growth environment makes solving the issues more difficult,” said Philippe Gudin, the Paris-based chief European economist at Barclays Plc. “To get out of this negative feedback loop we need a very strong message of confidence to the business sector on the future of Europe. The answer isn’t there yet.”

The ECB forecast economic growth for the euro area of 1.6 percent in 2016 and 1.7 percent in 2017 — but it did so before the June 23 Brexit vote. The next update is scheduled for September.

Economists in the survey said the fallout from Brexit will shave off 0.1 percentage point of growth in gross domestic product, 0.3 percentage point in 2017 and 0.15 percentage point in 2018. That’s about 59 billion euros ($66 billion) of lost output.

Useful hard economic data won’t be available until September, when July’s figures will be reported. The political impact could be felt sooner though. Pressure from euroskeptic parties in France and Italy, the euro area’s second- and third-largest economies, mean leaders there are struggling to implement the policies needed to extricate their countries from the current low-growth trap.

A constitutional referendum in Italy slated for October and the fate of France’s labor-market reform ahead of a 2017 presidential election are political flash-points that could further ratchet up investor uncertainty and curb the growth Outlook.

While ECB President Mario Draghi implored European leaders at the post-Brexit EU summit to “address bank vulnerabilities,” there’s little sign of a region-wide plan to do so. Quite the opposite: Italian Prime Minister Matteo Renzi’s efforts to design a 40 billion-euro bank bailout that can skirt EU rules are meeting stiff opposition from Germany and elsewhere.

“Each country doubts its neighbor’s ability to reform its economy and willingness to move forward together,” ECB Executive Board member Benoit Coeure said in an interview with Le Monde published July 1. “We cannot move forward under these conditions. Once confidence returns, it will be time to integrate further.”

Yet the euro-area now risks drifting even further apart. On Sunday, German finance minister Wolfgang Schaeuble said in a series of interviews that national governments should set the pace of change in the region — if necessary sidestepping the EU’s executive, the European Commission.

“If the Commission isn’t coming along, then we’ll take matters into our own hands and solve problems between governments,” Schaeuble told Welt am Sonntag. “The Brexit decision has to be seen as a wake-up call for Europe.”

While the EU decides on its response to Brexit, a boost to the economy from either fiscal support or the pace of reform may go wanting. That would leave the ECB carrying the burden of countering the slowdown. More than 80 percent of economists surveyed said the central bank will have to add more stimulus, up from 67 percent in a similar survey at the end of May.

Of those who expect action, 90 percent said it will come at one of the next two meetings, either July 21 or Sept. 8, considerably more than said the same in May.

A similar share said Draghi will extend the 80 billion euros-a-month asset-purchase program beyond the scheduled end-date of March 2017. Thirty percent said the amount will be increased.


Germans sue European Central Bank over stimulus

AP, May 17, 2016

Europe ECB Red king European Central Bank PIMCO

German opponents of the European Central Bank’s latest economic stimulus program have filed a legal challenge in an attempt to bar their national central bank from taking part.

The complaint in the Federal Constitutional Court aims to keep the Bundesbank from taking part in the ECB’s upcoming purchases of bonds issued by corporations, a measure that pumps newly created money into the economy to lower borrowing costs.

The corporate bond purchases, which haven’t started yet, are part of a broader effort to raise inflation and growth that started with large-scale purchases of government bonds in March 2015.

The suit follows earlier, so far unsuccessful legal efforts by professors and legislators to block ECB stimulus, which many in Germany view as excessive and mainly benefiting countries with what are seen as uncompetitive economies or lax government finances.

Markus Kerber, a professor of law and finance at Berlin Technical University, said he was bringing the suit along with like-minded academics and heads of family-owned, midsize companies. He said ECB corporate bond purchases would distort business competition because such purchases would drive down borrowing costs for the companies whose bonds were being purchased.

Another objection is that any default on such bonds would be borne in part by German taxpayers, without parliamentary approval. “All risk-taking by public entities has to go through parliament,” he told The Associated Press.

The ECB relies on the national central banks to execute its market operations, so barring the Bundesbank from taking part would present a major roadblock.

A court spokesman confirmed the complaint was filed last week. A spokesman for the European Central Bank declined to comment.

Legislators and a citizens’ group earlier challenged a different ECB program, its offer to purchase government bonds issued by countries that get into financial trouble. That program, known as outright market transactions, is aimed at preventing financial crises. The program has never been used, but its mere existence was credited with helping prevent the breakup of the eurozone when it was announced in 2012. The European Court of Justice upheld the program last year but sent the matter back to a German court for further review.


IMF’s Lagarde: We’re not in a crisis, yet

CNBC, Apr 5, 2016


The world economy is continuing to recover but it’s still at a delicate stage, IMF Managing Director Christine Lagarde has warned. 

“We have growth; we are not in a crisis. The not-so-good news is that the recovery remains too slow, too fragile, and risks to its durability are increasing,” Lagarde said in a speech Tuesday in Frankfurt, Germany.

She warned that because growth had been “too low for too long”, too many people were “simply not feeling it”.

“Let me be clear: We are on alert, not alarm. There has been a loss of growth momentum. However, if policymakers can confront the challenges, and act together, the positive effects on global confidence—and the global economy—will be substantial,” Lagarde said.

In its January World Economic Outlook, the organization cut its global growth forecast to 3.4 percent for 2016 and 3.6 percent in 2017. It warned that the pick-up in global activity was projected to be more gradual than in its October outlook.

“The slowdown and rebalancing of the Chinese economy, lower commodity prices, and strains in some large emerging market economies will continue to weigh on growth prospects in 2016–17,” the IMF’s January report said.

The IMF releases its latest set of forecasts next week.

Lagarde warned that the global outlook had weakened further over the last six months—exacerbated by China’s relative slowdown, lower commodity prices, and the prospect of financial tightening for many countries.

“In the United States, growth is flat due partly to the strong dollar; in the euro area, low investment, high unemployment and weak balance sheets weigh on growth; in Japan, both growth and inflation are weaker than expected,” she said.

Meanwhile, China’s transition to a more sustainable economic model has led to a slowdown in growth, while downturns in Brazil and Russia were larger than expected, she added. On top of this, the Middle East had been hit hard by the oil price decline.

Lagarde said further easing from the European Central Bank, which unleashed a bigger-than-expected package of stimulus measures last month, and the Federal Reserve’s “apparent shift to a slower pace of rate increases” had improved economic sentiment.

But longstanding “crisis legacies” – high debt, low inflation, low investment, low productivity, and, for some, high unemployment – posed a risk for advanced economies. Emerging economies meanwhile were at risk from lower commodity prices, higher corporate debt, volatile capital flows, she warned.

Lagarde stressed these risks could, in adverse circumstances, create feedback loops to sovereign balance sheets.


John Rubino: Well That Didn’t Work

By John Rubino, Mar 18, 2016

Well That Didn’t Work

The Bank of Japan and European Central Bank eased recently, which is to say they stepped up their bond buying and/or pushed interest rates further into negative territory. These kinds of things are proxies for currency devaluation in the sense that money printing and lower interest rates generally cause the offending country’s currency to be seen as less valuable by traders and savers, sending its exchange rate down versus those of its trading partners.

This was what the BoJ and ECB were hoping for — weaker currencies to boost their export industries and make their insanely-large debt burdens more manageable. Instead, they got this:

Yen March 16

Euro March 16

Both the yen and the euro have popped versus the dollar, which means European and Japanese exports have gotten more rather than less expensive on world markets and both systems’ debt loads are now harder rather than easier to manage. And it gets worse: Japan’s yield curve has inverted, meaning that long-term interest rates are now lower than short-term rates, which is typically a harbinger of recession. Here’s a chart from today’s Bloomberg:

Japan yield curve March 16

This sudden failure of easy money to produce the usual result is potentially huge, because the only thing standing in the way of a debt-driven implosion of the global economy (global because this time around emerging countries are as over-indebted as rich ones) is a belief that what worked in the past will keep working. If it doesn’t — that is, if negative interest rates start strengthening rather than weakening currencies — then this game is over. And a new one, with rules no one understands, has begun.

This article is written by John Rubino of Dollarcollapse.com and with his kind permission, Gecko Research has been privileged to publish his work on our website. To find out more about Dollarcollapse.com, please visit: