Category: Euroarea

Interpreting the ECB’s EUR120 billion APP envelope

Amongst the policy innovations introduced last week, the ECB’s new EUR120 billion Asset Purchase Program (APP) envelope was most interesting. The policy statement described: “a temporary envelope of additional net asset purchases of €120 billion until the end of the year, ensuring a strong contribution from the private sector purchase programmes.”
Meanwhile, when asked about the capital key, Lagarde confirmed that: “we will make use of all the flexibilities that are embedded in the framework of the asset purchase programme, and that, second, at the end of the asset purchase programme we will converge towards the capital keys.”

Continue reading “Interpreting the ECB’s EUR120 billion APP envelope”

Loose lips cost ships: Lagarde’s language and Italy’s EUR14 billion bill

“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”

ECB: What just happened?

ECB_WTF

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?”

How did the Eurosystem facilitate tiering?

Slides: Tiering adjustment_FINAL

pdf: How was tiering facilitated_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?”

Italy: Tiering up in October

Tiering up for Italy in October

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”

Draghi’s last stand

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”

Goodbye IMF, hello ECB. But what’s the quid pro quo?

Lagarde_ECB_FINAL.

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?”

Is euroarea monetary control now in the hands of official reserve managers?

Euroarea monetary control pdf version.

It’s remarkable how the euroarea crisis elevated arcane relations between central banks within the Eurosystem to dinner table talk for households across Europe. After decades of disregard, central bank balance sheets and liquidity management are fashionable once more. Continue reading “Is euroarea monetary control now in the hands of official reserve managers?”

Hidden flows: Asset prices and eurosystem balance sheets

To suppose large and successive [external] balances to be formed into a debt is to assume an accumulation of debt which is almost equally incredible.

Henry Thornton, Paper Credit, 1805

PDF: Hidden information_FINAL.

Charts: Hidden information_chartpack.

THERE WAS ONCE a time when international macroeconomics was conducted largely through the prism of the central bank’s balance sheet. Absent all but patchy data or guesswork on external current or financial transactions—such as the overall goods and service balance or net lending abroad—changes in central bank reserve assets, typically specie, served as the only real indicator of net flows against the rest of the world—if not, of course, internal drain. Thus, monitoring balance sheets became crucial for investors. Continue reading “Hidden flows: Asset prices and eurosystem balance sheets”