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?”

Argentina: BCRA accounting and government debt

Slides: BCRA_October 2019

pdf: Argentina_BCRA accounting

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”

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?”

What to expect from Argentina’s 5th Review debt sustainability analysis

What can we expect of Argentina’s 5th program review? We are told the IMF team arrived in Buenos Areas on Saturday. Presumably the objective is to complete this review by end-September—as this review will be judged against the end-June program targets, already passed. IMF funds can be released before the election, therefore. The implications of the election can be dealt with later. This is the right decision, in my view—despite the challenges facing Argentina. The global community owes Argentina some forbearance. Continue reading “What to expect from Argentina’s 5th Review debt sustainability analysis”

Argentina’s monetary meltdown: What policy reaction function?

BCRA meltdown pdf.

The Central Bank of the Argentine Republic (BCRA) provides, with a short lag, updates on daily contributions to the change in Peso (ARS) base money. With this, BCRA on Thursday offered a glimpse into their reaction function in response to the acute market pressures that followed the primary election outcome. What can be learnt from this experience?

First, local LELIQ claims on BCRA are flighty. In short, ARS257bn of LELIQs were maturing on Monday 12th August; together with interest (annualized at 62.6%) of roughly ARS3bn this provided a rollover need of perhaps ARS260bn to neutralize the impact on base money. However, they were only able to rollover ARS100bn in LELIQ (at 74.8%.) And so, they replaced less than 40% of the LELIQs falling due. Most (but not all) of the rest contributed to the expansion of base money from ARS1,345bn outstanding as of Friday to ARS1,487bn on Monday. Continue reading “Argentina’s monetary meltdown: What policy reaction function?”