ECB Watch

#2062 … 0-Jun2014/

Quick, get me a list of Michelin starred restaurants.



The rate drop is not the only measure announced today though, … iness-live … -a-glance/


Morgan Stanley believe that the reason the ECB only cut the refinance rate by 10 bps today was to allow for another cut to take place later this year. The rate cut show might not be over yet.


Good news for existing trackers but then the banks have to increase the standard variable rates in order to cover the money they are losing on the trackers. And given that the mortgages being given out are mostly SVR that decreases the affordability a bit.


It is not all about net interest margin at a retail level. Banks have saved a significant sum today on emergency liquidity costs thanks to the massive 35 bps cut in the marginal lending rate today, which will obviously boost banks profitability.


ECB Coeure: We are going to keep rates close to zero for an extremely long period … sinessNews


Basically accepting that their operations don’t actually work!

Low rates forever certainly fixed Japan . . . . . :unamused:


The problem that most frightens me are the consequences of these actions.

Normally, the more you borrow, the higher interest rates climb.
This is a natural feedback mechanism.
If you’re borrowing too much, it results in having to pay more for additional loans, thereby forcing you to cut back and live within your means.
This feedback has been disrupted by artificially manipulating interest rates.

Look at the consequences; 7-8 years on from the end of the boom and governments are *still *deficit spending.

National debts continue to increase.

The whole point about forcing interest rates low is to allow these debts to remain ‘affordable’.
But it was this very thinking that sunk us in the first instance

Who cares if you’ve just taken out a €500,000 loan to buy a 1-bed apartment, sure aren’t the repayments ‘affordable’.

The arrears chart is most interesting when you consider trackers are now costing just above 1%,
**Of course they are able to repay the interest, but it is the capital that’s killing them.

Governments are simply making the same errors as the very people (and corporations) they are bailing out.


As an individual: yes. As a currency issuing sovereign: no.

Of course, much of the Eurozone’s problems relate to the fact that it is multi-sovereign but with a uniquely distinct currency issuing arm.


All these new LTRO’s ahead of the bank stress test results…how bad were they going to be?


I disagree.
Without ECB support/backing we’d be paying much higher interest rates.

Ireland (pre-euro) had far more of an ability to print it’s own money, but our interest rates were much higher than present.

Having an ability to print does not automatically bestow an ability to lower rates.


Wonder how the Germans took the news… :angry:


Without implied ECB backing but with EURO denominated debt then yes, rates would be massively higher due to default risk. This does not exist with typical currency issuing sovereign with debts denominated in such. Why Draghi “whatever it takes” speech collapsed risk when traditional market commentators did not understand why.

Rates were higher pre-Euro because Irish central bank set them higher.
Monopolistic issuer of currency - so sets price.

On such debt that is denominated in that currency then that is exactly what it does bestow.

Remember: floating rate regime not hard money.


The Irish Central Bank ‘set’ rates higher, because nobody would lend to us at a lower rate.
They followed the market pricing, not their own.

Ireland’s rates were far higher than Germany’s because of additional risk.
There was nothing the Irish CB could do about that (other than reducing interest rates to the detriment of the punt).

Same principle would apply within the euro with it not for the ECB.
Yes, being able to issue in euro helps, but Ireland and Germany can [be forced to] sell bonds in the same currency, but at much different rates due to risk.


The state was monopoly provider of Punt, ergo it could meet any & all obligations denominated in Punt.
Everything else you said is incorrect too – but stems from that.

E.G your “thinking” cannot explain: Irish 10Yr at 2.5%; cannot explain Japan 10Yr at .60%; nor Swiss 10s at .75%; etc etc etc

Wrong paradigm I’m afraid. If hard money returns then you will be right but for now . . . no.


Yes, governments can meet any and all obligations by printing cash, but everyone knows if it gets to that stage then the game is essentially over.

Zimbabwe has zero default risk, but the money you receive isn’t worth it’s weight in toilet paper.


Zimbabwe! :laughing: The last bastion of the monetarist inflationistas!

Despot dictatorships generally terminate in hyperinflation: not applicable.

Explain my examples of 10Yr rates? You can’t.

HOWEVER - You are correct that currency exchange rate is important and not under monopoly control of central bank — unless central bank wants to weaken it, in which case they are unlimited (cf. CNY, CHF etc.) **Do not confuse with interest rate. ** Notice that in pegging fx rate (CNY, CHF) you do give up interest rate control, essentially inheriting interest rates of currency you have pegged to.


The market has set these interest rates, 1-due to risk of default and 2- pricing in inflation rates, these are not set by CB’s, and if they are being set by a particular CB’s, then they are monetising the debt.

Euro area- trade surplus (Ireland now backed by Draghi)
Japan - has a shit load of reserves
Swiss - shit loads of reserves
US - Monetising the debt - Zimbabwe here we come

Market sets interest rates.


Yes they do. But a CB can enter the market and pay whatever price it wants to pay for the government bonds. The higher the price it decides to pay the lower that rates go.

CBs can only do this if they are allowed to print unlimited amounts of their currency. Hence Argentina’s CB is unable to buy their government’s USD bonds because it is not allowed to print USD, and the owners of the bonds aren’t stupid enough to accept pesos.


There’s surely an important distinction between FX risk (particularly associated with bonds denominated in a loose/weakening currency) and default risk.

FX risk is always substantial, and doesn’t require any kind of triggering “event”. Check out the long term USD charts against GBP, JPY, CHF etc. Since the mid-20th century foreign holders of USTs have lost enormous amounts of the principal value of their bonds. Does that stop people buying USTs?

Reserve currency me arse!