How Germany Just Undercut the Euro

A German court may have just weakened European Central Bank President Mario Draghi’s most potent weapon in the battle to save the euro.

Back in July 2012, Draghi calmed panicked markets with a pledge to do “whatever it takes” to defend the euro and with a program, known as outright monetary transactions, to stabilize interest rates throughout the euro area by buying the bonds of financially distressed governments. The move was a game changer, shifting the crisis in Europe from acute to chronic. European markets have been relatively calm ever since. Read more of this post

ECB’s Parking Fees Show Its Weakness

European Central Bank President Mario Draghi surprised markets and analysts last week by saying the central bank is open to an unconventional stimulus tactic: pressuring banks to lend by charging them a fee for parking cash at the ECB.

The development does more to highlight the limits of the ECB’s powers than to demonstrate its boldness in dealing with the euro area’s economic slump. Read more of this post

Germans Are Poorest in the Euro Area. Really?

With a title like “The Eurosystem Household Finance and Consumption Survey,” the European Central Bank’s latest piece in its Statistics Paper Series doesn’t sound like a page-turner. It has received a lot of attention, though, because of its conclusion that the poorest households in the euro area are German.

These findings are likely to incite a lot of resentment among German taxpayers, who will no doubt feel all the more strongly that they shouldn’t have to bailout other countries where households are even wealthier than theirs. So the study deserves some scrutiny. Read more of this post

Will we see yield/spread targeting by the ECB?

This week, the rumor that the ECB is planning on yield or spread targeting has been mooted and denied so many times I’ve lost count. We will presumably find out more about this when we hear from Mario Draghi after the ECB governing council meeting on September 6th. In the meantime, falling peripheral short- and long-term bond yields would suggest that investors are betting the rumors are true. With so much upside already priced into the bond markets regarding ECB intervention, the room for disappointment is substantial. Will the ECB engage in a yield or spread targeting exercise? It might, but I doubt we’ll be told about it. Read more of this post

ECB Will Build a Bridge…But to Where?

All eyes are on the ECB governing council meeting on August 2nd to see exactly what Mario Draghi meant last week when he pledged that the ECB would preserve the euro. The way the markets have rallied off the back of this statement, it seems that investors think that the ECB is poised to intervene aggressively. Will they be disappointed? EZ policymakers have practically made an Olympic sport out of under-delivering throughout this crisis. Still, I think the ECB will succeed in sustaining the current market rally. The big question is whether EZ policymakers use the time lent to them by the ECB wisely, and on this I am highly skeptical. Read more of this post

Has the 3-year LTRO changed the path forward for the EZ crisis?

There has been relative calm in the EZ crisis since December last year, when the ECB announced a three-year long term refinancing operation (LTRO) and a sharp widening of its collateral requirements. Government bond yields fell in the periphery and debt issuance in January went remarkably well, particularly for Spain and Italy. Has the LTRO fundamentally changed the likely path forward in the EZ crisis? Read more of this post

3yr LTRO: Breaking or strengthening the banking/sovereign feedback loop?

The 3-year LTRO was announced by ECB president Mario Draghi following the December governing council meeting, alongside (among other things) a drop in collateral requirements at the ECB. These measures were designed to short circuit the endless feedback loop between sovereigns and banks by sticking the ECB right in between them. The idea is for banks to offload questionable assets from their balance sheets in exchange for cheap liquidity from the ECB, which banks can use to lend and invest as banks are meant to do. Will attempts to break the circular reference between sovereigns and banks and prevent the interbank markets from freezing succeed with this new 3-year LTRO, or will banks take advantage of the carry-trade and strengthen the feedback loop? Read more of this post

ECB as LOLR unlikely

There are only two real game-changers left in the euro crisis: fiscal union and the ECB stepping in as a lender of last resort (LOLR). The former for now is resolutely off the table, particularly in the time period necessary for it to keep the eurozone together. Very bright people have fallen on both sides of the debate whether the ECB will step in as LOLR. For a number of reasons, even when push comes to shove, I don’t think it will. Read more of this post

ECB bond purchases won’t really help

I have discovered a new leading indicator for when the eurozone is going to go into full meltdown mode: my holidays. The good news is I’ve just returned from a holiday that spanned the second half of last week. The bad news is I’m only back for a few hours before flying off again for a whole week. This does not bode well for the euro crisis, but neither does any recent policy making at the EU level. This includes the ECB’s announcement on Sunday that it will intervene actively in the markets through its Securities Markets Programme (SMP), indicating it will purchase significant amounts of Italian and Spanish government debt. This move alone is very unlikely to offer lasting reprieve in the euro crisis.

Read more of this post


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