“We are not here to close spreads.” How expensive were these seven words? It’s impossible to know, of course. But we can put down a marker based on some reasonable assumptions. And they probably cost Italy EUR14 billion in interest payments over the next decade, though it could be even more. That’s EUR2 billion per word. Continue reading “Loose lips cost ships: Lagarde’s language and Italy’s EUR14 billion bill”
Today’s policy meeting and press conference were astonishing for a number of distinct reasons. Amid the noise, there are three crucial take-aways.
First, TLTRO3 has been unleashed from money market rates. Second, the deposit rate is no longer the fulcrum of policy—but for good reasons. And, third, we might have seen the end of the Draghi put—the end of “whatever it takes.” Continue reading “ECB: What just happened?”
As the COVID-19 shock continues to fan out across the global economy, policymakers are contemplating the correct response. Curiously, though the shock is of a different character to that during the Great Financial Crisis (GFC) the policy response should be broadly similar—monetary easing, (where possible) liquidity provision by central banks, and fiscal expansion. Whether policymakers react in the correct manner is crucial; the biggest danger facing the global economy right now is that they take the view that a different shock requires a different policy response. This is not the case—with an important caveat. Here we briefly frame the challenge of responding to COVID-19.
With a new Chancellor of the Exchequer safely in place, Rishi Sunak’s Budget on March 11th promises to be the most important fiscal announcement in the United Kingdom (UK) since Chancellor Osborne’s politically astute, but economically and socially destructive austerity budget in June 2010.
The next Budget needs to provide clarity on two aspects of fiscal policy for the generation ahead: first, how will the UK navigate inevitable Brexit-related disruptions; second, what is the overall fiscal envelope available for necessary long-term investment and “levelling up” of the UK economy. Continue reading “United Kingdom: Calibrating fiscal policy for Brexit”
Text, charts, tables, and technical annex: Argentina sustainability note_FINAL
What is needed to restore Argentina to sustainability? An emerging view suggests: (i) domestic law debt—largely held by residents, including the central bank (BCRA)—will carry most of the “sustainability” burden, including through a “haircut” of principal and coupons if necessary; while, related, (ii) foreign law debt—held largely by non-residents—might expect to be reprofiled, but no substantial action in terms of coupon or principal haircut is needed. Continue reading “Argentina: A sustainability assessment”
Slides: Tiering adjustment_FINAL
On 30th October, the European Central Bank’s (ECB) new tiering system came into operation, resulting in the reshuffling of liquidity across the Eurosystem. As noted previously, and reported variously, this caused a record one month decline in Italy’s TARGET2 debit, falling EUR48bn to reach EUR420bn—the lowest debit for 2 years. At that time this blog speculated the introduction of tiering created an arbitrage opportunity, allowing Italian banks to draw in liquidity to deposit at 0%. As liquidity was returned to the periphery, TARGET2 balances adjusted. Continue reading “How did the Eurosystem facilitate tiering?”
Slides: BCRA_October 2019
Buried deep within the monthly balance sheet of the Banco Central de la República Argentina (BCRA) is an arcane accounting entry of crucial import. The entry in question, reported as “Cents Varias,” is more often labelled in IMF documents as Other Items Net (OIN.)
Now, OIN is indeed a misunderstood accounting entry—thus greatly abused. People sometimes think of it as similar to “errors and omissions” reported in the BOP—a measure of our ignorance. This makes it tempting to use OIN as a residual when projecting or interpreting the monetary accounts. But OIN is completely different. Rather, it scoops up balance sheet items that, though not typically pivotal, can still of value in interpreting macro-financial developments. As for Argentina. Continue reading “Argentina: BCRA accounting and government debt”
THE ECB’s new two-tier system for excess liquidity began operation on October 30th. As a result, up to six times banks’ required reserves held in current accounts with National Central Banks (NCBs) of the Eurosystem will no longer be subject to the negative deposit rate (currently -50bps) but rather the new tiering rate of 0% interest. The surplus above this will be charged, however. Continue reading “Italy: Tiering up in October”
THE LAST meaningful monetary policy meeting overseen by outgoing European Central Bank (ECB) President Mario Draghi was not without controversy. Indeed, Draghi seldom disappoints. And once more he delivered an aggressive package of measures designed to achieve the ECB’s price stability target—including a number of fascinating policy innovations. Yet somehow this package is more than simply another set of innovations. This set of measures instead represents Draghi’s last stand—an attempt by the outgoing President to secure his legacy by casting a spell over monetary policy into the distant future, creating new policy tools while tying the hands of successor Governing Council members and his successor. Continue reading “Draghi’s last stand”
WHEN FRENCH POLICE searched the Paris home of then-International Monetary Fund (IMF) Managing Director Christine Lagarde in March 2013, an undated, handwritten pledge of allegiance from Lagarde to former President Nicolas Sarkozy was uncovered. Later leaked to the press, the letter—presumably written while he was still President—urged Sarkozy to “use me for as long as it suits you and suits your plans and casting call.”
The pretext for the raid on Lagarde’s home was, of course, the investigation into possible misuse of public funds—more than €400 million—in settling a claim on the state by Sarkozy-supporting, French businessman Bernard Tapie. Eventually, Lagarde was found “guilty of negligence in public office” for settling the case, but absent a sentence or formal criminal record from the finding by a special Paris court in December 2016, her position as IMF Managing Director was unthreatened. Continue reading “Goodbye IMF, hello ECB. But what’s the quid pro quo?”