Tag Archives: European Central Bank

Distributed-Ledger Based Payment Systems Could Work

The ECB has published a first report on Stella, a joint research project with the Bank of Japan. The two banks are interested in potential roles that distributed ledger technology could play to support the financial market infrastructure. The report assesses whether existing payments systems could be safely and efficiently run on a distributed ledger. It concludes that

  • a distributed-ledger-based system could meet the performance needs of real-time gross settlement systems, up to some limits;
  • such a system could strengthen resilience.

German Federal Constitutional Court vs. European Central Bank

In the FT, Claire Jones reports about the German Federal Constitutional Court’s decision to refer a case against the European Central Bank’s PSPP program to the European Court of Justice.

“In the view of the [court] significant reasons indicate that the ECB decisions governing the asset purchase programme violate the prohibition of monetary financing and exceed the monetary policy mandate of the European Central Bank.” …

While Germany’s constitutional court said the OMT programme was legal, it stipulated, based on an earlier ECJ judgment, that bond purchases had to meet a number of requirements. On Tuesday the Karlsruhe-based court said there were “several factors” to indicate that one of these requirements — that bonds must be purchased on secondary markets and not directly from governments — was being violated under QE.

From the court’s statement:

… any programme relating to the purchase of government bonds on the secondary market must provide sufficient guarantees to effectively ensure observance of the prohibition of monetary financing. The Senate presumes that the Court of Justice of the European Union deems the conditions which it developed, and which limit the scope of the ECB policy decision on the Outright Monetary Transactions (OMT) programme of 6 September 2012, to be legally binding criteria. Against that background, the Senate further presumes that contempt of these criteria would amount to a violation of competences also with regard to other programmes relating to the purchases of government bonds.

… several factors indicate that the PSPP decision nevertheless violates Art. 123 AEUV, namely the fact that details of the purchases are announced in a manner that could create a de facto certainty on the markets that issued government bonds will, indeed, be purchased by the Eurosystem; that it is not possible to verify compliance with certain minimum periods between the issuing of debt securities on the primary market and the purchase of the relevant securities on the secondary market; that to date all purchased bonds were – without exception – held until maturity; and furthermore that the purchases include bonds that carry a negative yield from the outset.

… the PSPP decision can no longer be qualified as a monetary policy measure but instead must be deemed to constitute a measure that is primarily of an economic policy nature.

… the ECB Governing Council may be able to modify the rules on risk sharing within the Eurosystem in a way that would result in risks for the profit and loss accounts of the national central banks and also threaten the overall budgetary responsibility of national parliaments. Against that background, the question arises whether an unlimited distribution of risks between the national central banks of the Eurosystem regarding bonds in default where such bonds were issued by central governments or by issuers of equivalent status would violate Art. 123 and Art. 125 TFEU as well as Art. 4(2) TEU (in conjunction with Art. 79(3) GG).

Previous, related post.

“Monetary Economic Issues Today,” Panel, 2017

Panel discussion with Ernst Baltensperger, Otmar Issing, Fritz Zurbrügg and Mark Dittli (moderator) on the occasion of the publication of the Festschrift in honour of Ernst Baltensperger, Bern, June 16, 2017. SNB press release. Video (SNB Forschungs-TV).

Monte dei Paschi Bail-X

The Economist reports about plans for Monte dei Paschi’s future:

… retail investors in the bank’s junior bonds, many of them ordinary customers. European state-aid rules say that they should lose their money along with shareholders. Technically, they will. In fact, to preserve their savings and avoid a political outcry, they will be deemed to have been “mis-sold” the bonds: they will receive shares which will in turn be swapped for new, safer bonds.

Italy has to come up with a restructuring plan, likely to involve job losses and branch closures, for the commission’s approval. (The ECB must also certify the bank’s solvency.) Bosses’ pay will be capped at ten times the staff average. And Monte dei Paschi must sell its sofferenze, the worst category of non-performing exposures, which in March amounted to 24% of all its loans. A state guarantee will cover senior tranches of these securitised debts. Atlante 2, a fund backed by Italian financial institutions, and others are negotiating with the bank over more junior slices.

ECB Collateral Framework

In an ECB occasional paper, Ulrich Bindseil, Marco Corsi, Benjamin Sahel, and Ad Visser review the European Central Banks’s collateral framework.

From the executive summary, on misconceptions:

… differences e.g. with interbank repo markets: first, central banks are not subject to liquidity risk in the way “normal” market participants are, and can therefore accept less liquid collateral. Second, as the central bank has a zero default probability in its domestic market operations, collateral providers are willing to accept severe haircuts to obtain credit. …

According to the authors the ECB is the most transparent central bank when it comes to its collateral framework. But the latter is also complicated:

However, it is true that the ESCF is relatively broad in terms of the scope of eligible collateral and rather complicated. This is inevitable because of the diversity of financial institutions and markets in the euro area.

The IMF In Greece

The IMF has released a report with an ex-post evaluation of Greece’s 2012 Extended Fund Facility (Exceptional Access under the 2012 Extended Arrangement under the Extended Fund Facility with Greece).

A critical discussion by Charles Wyplosz on VoxEU.

The Greek authorities are more optimistic than IMF staff about the economy’s outlook.

Collateral Values in ECB Operations

In the NZZ, Kjell Nyborg questions whether the collateral values of the securities the ECB accepts in monetary policy operations reflect market values. He argues that the valuation is discretionary and politicized.

Meine Analyse macht deutlich, dass der Besicherungsrahmen in der Euro-Zone in unterschiedlicher Ausprägung unter all diesen Problemen leidet. Das öffentliche Verzeichnis der zulässigen notenbankfähigen Sicherheiten enthält 30 000 bis 40 000 verschiedene Wertpapiere, von Staatsanleihen bis hin zu unbesicherten Bankanleihen und forderungsbesicherten Wertpapieren (Asset-Backed Securities). Die überwiegende Mehrheit dieser Wertpapiere hat keinen Marktpreis. Ungefähr ein Drittel all dieser Sicherheiten wird in nichtregulierten Märkten gehandelt. Zudem können Banken nichtmarktfähige Anlagen und Wertpapiere mit «privaten Ratings» verwenden, die nicht im öffentlichen Verzeichnis sind. Daher basieren die Werte der Sicherheiten mehrheitlich auf Modell- statt auf Marktpreisen. Interessanterweise ziehen Banken es vor, Sicherheiten zu benutzen, bei denen häufiger theoretische Preise verwendet werden. Generell tendiert die Besicherungspolitik der Euro-Zone zu risikoreichen und illiquiden Sicherheiten. Die untergeordnete Rolle des Marktes sieht man auch an der Häufigkeit, mit welcher die Sicherheitsabschläge für die Repo-Geschäfte des Euro-Systems aktualisiert werden: Dies geschieht lediglich alle drei bis vier Jahre.

Im Kern des Geldsystems in der Euro-Zone gibt es somit wenig Spielraum für Marktkräfte oder Marktdisziplin. Insgesamt kann die Besicherungspolitik des Euro-Systems als expansiv beschrieben werden. Die Liste notenbankfähiger Sicherheiten ist äusserst umfangreich und oft auf die «Bedürfnisse» von Banken in verschiedenen Ländern zugeschnitten. Sicherheiten können, zum Beispiel, durch Staatsgarantien aufgewertet werden. … Weil es im Kern des Euro-Geldsystems an Marktkräften und Marktdisziplin fehlt, entsteht ein Vakuum, das von anderen Kräften, wie Rating-Agenturen und der Politik, aufgefüllt wird.

… Ich dokumentiere, dass DBRS eine ausschlaggebende Rolle innehatte, indem sie über eine lange Zeit hinweg Italien und Spanien ein Rating von A– und Portugal ein solches von BBB– gab. Das hob den Wert der in diesen Ländern begebenen Sicherheiten um ungefähr bis 200 Mrd. € an und kann als unterstützende Massnahme für indirekte Bail-outs interpretiert werden.

Im Dezember 2011 und Februar 2012 hat die EZB eine ihrer wichtigsten geldpolitischen Massnahmen vor dem Beginn des Quantitative Easing implementiert. … Um aus dieser Möglichkeit Vorteil zu schlagen, hat die italienische Regierung gleichzeitig eine präzedenzlose Anzahl von Garantien für Bankanleihen mit niedrigem oder gar keinem Rating gesprochen. Damit erhöhte sie deren Besicherungswert. Darüber hinaus hat die EZB mehr als 10 000 unbesicherte, auf nichtregulierten Märkten gehandelte Bankanleihen der öffentlichen Liste notenbankfähiger Sicherheiten hinzugefügt, obwohl der aggregierte Wert notenbankfähiger Sicherheiten die Nachfrage von Banken nach Zentralbankgeld schon bei weitem überstieg.

OMT Does Not Manifestly Exceed ECB Competences

The German Federal Constitutional Court has decided that the policy decision on the OMT program does not “manifestly” exceed the competences attributed to the European Central Bank:

If the conditions formulated by the Court of Justice of the European Union in its judgment of 16 June 2015 (C-62/14) and intended to limit the scope of the OMT programme are met, the complainants’ rights under Art. 38 sec. 1 sentence 1, Art. 20 secs. 1 and 2 in conjunction with Art. 79 sec. 3 of the Basic Law (Grundgesetz – GG) are not violated by the fact that the Federal Government and the Bundestag have not taken suitable steps to revoke or limit the effect of the policy decision of the European Central Bank of 6 September 2012 concerning the OMT programme. Furthermore, if these conditions are met, the OMT programme does not currently impair the Bundestag’s overall budgetary responsibility.

Sovereign Debt in Bank Balance Sheets

In the FT, Martin Arnold reports about estimates by Fitch according to which

European banks would have to raise up to €170bn of extra capital or sell almost €500bn of sovereign debt if regulators push ahead with plans to break the “doom loop” tying lenders to their governments …

The European Commission and the European Central Bank support steps in that direction while some European governments oppose them.

Greek Debt: Now and Then

In the FT, Mehreen Khan offers a “Greek debt dilemma cheat sheet.”

  • Face value: EUR 321 billion, thereof EUR 248 billion owed to official creditors.
  • Official creditors: Eurozone countries (Greek loan facility), eurozone rescue funds (EFSF and ESM), IMF, ECB.
  • Maturity profile:
    1
  • IMF proposal for restructuring:
    2

Report on the Irish Banking Crisis (And the ECB’s Role)

In the Irish Times, Colin Gleeson summarizes the findings and recommendations of the main Report of the Oireachtas Banking Inquiry. They are:

  • Incentives were distorted.
  • Banks and the property sector ran out of control.
  • Regulators were too optimistic.
  • “IMF favoured imposing losses on senior bond holders in October/November 2010.”
  • “No Troika programme agreed in November 2010 if Government burned senior bond holders.”
  • “ECB position contributed to inappropriate placing of significant banking debts on Irish citizens.”

Agreement on Net Financial Assets (Anfa)

In the FAZ, Daniel Plickert reports about a “secret” program of national central banks in the Euro zone to issue money. The Agreement on Net Financial Assets has been used since 2006 for securities purchases by national central banks, including the Bundesbank, Banque de France and Banca d’Italia.

Google does not find significant first hand online information about Anfa.

“Fiskalunion auf tönernen Füssen (Fiscal Union on Shaky Grounds),” FuW, 2015

Finanz und Wirtschaft, October 7, 2015. PDF. Ökonomenstimme, October 9, 2015. HTML.

Fiscal union proposals are not convincing:

  • Enforcement should be key but remains weak.
  • Monitoring and counteracting of “imbalances” is dubious.
  • Subsidiarity is important.

PS: In the FT (October 18), Wolfgang Münchau reaches a similar conclusion albeit from a different starting point: “Better no fiscal union than a flawed one.”

“Institutionelle Schwächen der EU (Institutional Problems in the EU),” FuW, 2015

Finanz und Wirtschaft, July 15, 2015. PDF. Ökonomenstimme, July 16, 2015. HTML.

The collapse in Greece is a consequence of major institutional problems:

  • Political decision makers in Berlin, Paris, Brussels, Frankfurt and Washington didn’t follow the rules. This seemed optimal ex post, but is suboptimal ex ante (see Kydland and Prescott).
  • The ECB’s mandate is unclear.
  • The monetary system is fragile.

Arguments in Favor of ELA to Greece

Martin Hellwig argues in the Handelsblatt that the ECB should not cut Emergency Liquidity Assistance (ELA) to the Greek central bank. He makes the following points:

  • In 2010, the ECB pressured Ireland to guarantee bank liabilities (vis-a-vis other European banks) by threatening to cut ELA. Such blackmailing is inconsistent with the ECB’s task to safeguard cash and payment systems.
  • The same applies to Greece now. As lender of last resort, the ECB should provide funding to Greek banks even (or exactly) when they don’t have access to markets, as long as they are solvent. In principle, the banks may use central bank funding for whatever purpose they see fit; right now, however, the ECB has put restrictions on Greek banks’ purchases of Greek government bonds.
  • Are the Greek banks solvent? There are certainly liquidity problems, due to heavy withdrawals triggered by fears that the Greek government may convert Euro into Drachma denominated deposits. Solvency problems are only very recent, due to the economic malaise.

At this point Hellwig stops arguing based on the European treaties.

  • Instead, he suggests that the solvency rule could be waived in situations like currently in Greece or in Germany in 1931.
  • He concedes that a freezing of ELA could be considered a precautionary measure against Grexit—an event that is not anticipated in the European treaties.
  • But it could also be considered a measure that forces Greece into economic turmoil; the Greek banks into insolvency; and Greece out of the Euro area against its will.

The Greek Bank Holiday and Capital Controls

Saturday, 27 June 2015 and earlier:

  • In a Medium blog post, Karl Whelan provides an excellent discussion of the policy mistakes that worsened the Greek debt crisis.
  • Hans-Werner Sinn’s “The Greek Tragedy.”
  • Alex Barker discusses in the FT the options for Greece’s banking system.

Sunday, 28 June:

  • Christian Rickens comments in Der Spiegel that the upcoming Greek referendum is the price to pay for five years of cowardice, both on the part of the Greek government and its European partners.
  • The FT summarizes the main policy decisions during the last days that led the Greek economy to “hit a roadblock.”
  • The Economist writes that “[I]n these circumstances a cap on ELA must mean tough restrictions on deposit withdrawals both in cash and through transfers abroad.” It draws parallels to Cyprus in March 2013 where banks closed for two weeks and where capital controls were recently lifted.
  • Ekathimerini reports about the decision to close the banks and instate capital controls. It quotes the Greek prime minister as saying that “[Rejection] of the Greek government’s request for a short extension of the program was an unprecedented act by European standards, questioning the right of a sovereign people to decide. … This decision led the ECB today to limit the liquidity available to Greek banks and forced the Greek central bank to suggest a bank holiday and restrictions on bank withdrawals. … One thing is clear: the refusal of a short extension, and the attempt to nullify a democratic procedure is an act deeply offensive and shameful for the democratic traditions of Europe.”

Monday–Tuesday, 29–30 June:

  • Claire Phipps summarizes in The Guardian the main elements of the ‘Bank Holiday break’ decree that the Greek prime minister and president enacted during the night, in response to “the extremely urgent and unforeseen need to protect the Greek financial system and the Greek economy due to the lack of liquidity caused by the Eurogroup’s decision on June 27 to refuse the extension of the loan agreement with Greece”.
  • Philip Stafford and Roger Blitz speculate in the FT about the implications of Grexit. (See also the earlier post on Lex Monetae.)
  • The FT’s liveblog.
  • In the FT, Martin Sandbu convincingly addresses questions on the bigger picture, including political aspects of the crisis.
  • Anil Kashyap has published “A Primer on the Greek Crisis.”
  • In the FT, Shawn Donnan discusses the consequences of a Greek default against the IMF.
  • Der Spiegel reviews how the international press assigns responsibility for the crisis.

Wednesday, 1 July:

  • In the FT, Peter Spiegel outlines the way forward to a new “Greek” bailout.
  • The Economist’s Free Exchange blogger on the limited experience with capital controls (Iceland, Cyprus, now Greece).

Note: This post has been updated repeatedly.

Greece is not Ireland

In a Credit Writedowns blog post, Frederick Sheehan collected quotes that relate to the European debt crisis (he writes that Dennis Gartman first compiled the list). Some highlights:

“For a small, open economy like Cyprus, Euro adoption provides protection from international financial turmoil.”
– Jean-Claude Trichet, President, European Central Bank, January 2008

“Spain is not Greece”
– Elena Salgado, Spanish Finance Minister, February 2010

“Portugal is not Greece”
– The Economist, 22 April 2010

“Ireland is not in Greek territory”
– Brian Lenihan, Irish Finance Minister

“Greece is not Ireland”
– George Papandreou, Greek Finance Minister, 22 November 2010

“Spain is neither Ireland nor Portugal”
– Elena Salgado, Spanish Finance Minister, 16 November 2010

“Neither Spain nor Portugal is Ireland”
– Angel Gurria, Secretary-General, OECD, 18 November 2010

“Spain is not Uganda”
– Mariano Rajoy, Spanish Prime Minister, 9 June 2010

“Italy is not Spain”
– Ed Parker, Managing Director, Fitch, 12 June 2012

“When it becomes serious, you have to lie.”
– Jean-Claude Juncker, President, Euro Group, April 2011

“The worst is now over—the situation is stabilizing.”
– Mario Draghi, President, European Central Bank, March 2012

“Uganda does not want to be Spain”
– Asuman Kiyingi, Uganda’s Foreign Minister, 13 June 2012

A Plan for Greece

In the FT, Willem Buiter proposes a 5 point plan for a way out of the Greek debt crisis:

  • Greece effectively regains sovereignty and can do whatever it pleases, with some exceptions, see below.
  • Greek debt held by the ECB is bought by the ESM: The ESM extends long-term, low-interest financing to Greece which Greece uses to repay the ECB debt. “Since most of Greece’s other sovereign liabilities have long maturities and deferred interest payments, payments to creditors would fall sharply.”
  • No further financing by the IMF, the ESM or other official sources is extended to Greece.
  • The ECB does no longer accept any Greek government debt paper as collateral or for purchase.
  • Commercial banks in Greece are recapitalized or restructured using funds from the Hellenic Financial Stability Fund and other sources. The ECB bars Greek banks from accepting any Greek government debt paper.

The plan would require additional European taxpayer money for the ECB-ESM debt swap and the bank recapitalization. It would isolate the Greek banks from the mayhem triggered by government default.

Update: 7 July 2015

A related proposal by Willem Buiter and Ebrahim Rahbari.

The European Court of Justice’s Verdict on OMT

The court ruled (full text) that

[t]his programme for the purchase of government bonds on secondary markets does not exceed the powers of the ECB in relation to monetary policy and does not contravene the prohibition of monetary financing of Member States. …

The Court finds that the OMT programme, in view of its objectives and the instruments provided for achieving them, falls within monetary policy and therefore within the powers of the ESCB. …

The Court also states that the OMT programme does not infringe the principle of proportionality. …

The Court states that this prohibition does not prevent the ESCB from adopting a programme such as the OMT programme and implementing it under conditions which do not result in the ESCB’s intervention having an effect equivalent to that of a direct purchase of government bonds from the public authorities and bodies of the Member States.

Claire Jones reports in the FT.

It is now up to the German Bundesverfassungsgericht to consider the ruling. The German court’s previous considerations can be found here.