The following figure is taken from the FT:
Tag Archives: European Central Bank
The Euro Area as a System of Currency Boards?
Willem Buiter argues in a Citi research note that due to limited risk sharing, the system of Euro area national central banks has morphed into a system of currency boards.
Greek Complaints about the ECB
In the FT’s Brussels Blog, Peter Spiegel links to Alexis Tsipras’ letter to Angela Merkel and comments on it.
Three Letters
Monetary Policy Tightening for Greece
Claire Jones reports in the FT that the ECB starts tightening Greek lenders’ access to liquidity already now, earlier than expected.
Here is the ECB press release and further reporting in the FT.
Germany and the Euro
In an FT oped, Thomas Mayer summarized a rather typical “German” perspective on European monetary policy. In his view, a sound euro needs either full political union or just stringent rules that are enforced. Helmut Kohl promised the former. When it didn’t happen, ECB independence and the Maastricht treaty should substitute. Ex post, Germany should have asked for more, in particular resolution and exit procedures (and, one may add, it should have played by the rules itself). The crises in the Eurozone illustrated governance problems. Merkel feared Grexit and tried to reestablish the rules. She
built a pan-European “shadow state” — a web of pacts to ensure that countries followed policies consistent with sound money.
It has not worked. From Greece to France, countries resist any infringement on their sovereignty and refuse to act in a way that is consistent with a hard currency policy. The ECB is forced to loosen its stance. Worse, it has allowed monetary policy to become a back channel for transfering economic resources between eurozone members, which politicians have refused to allow through fiscal mechanisms they control. This is Germany’s worst nightmare.
How will the situation be resolved? A century ago, Eugen Böhm-Bawerk, the Austrian economist and finance minister, proclaimed laws of economics to be a higher authority than political power. Some Germans say that a hard currency is an essential part of their economic value system. If both are right, politicians will be powerless to prevent Germany’s departure from a monetary union that is at odds with the country’s economic convictions.
Quantitative Easing by the ECB
The ECB announced the long-awaited expansion of asset purchases. The press release lists these main points:
- ECB expands purchases to include bonds issued by euro area central governments, agencies and European institutions
- Combined monthly asset purchases to amount to €60 billion
- Purchases intended to be carried out until at least September 2016
- Programme designed to fulfil price stability mandate
Less expected is the arrangement for the sharing of “hypothetical losses”. The ECB will directly be exposed to only 20% of the risk of the additional asset purchases.
Another ECB website provides an overview over the ECB’s open market operations.
ECB Balance Sheet Policy
A blog post in Sober Look discusses recent ECB actions and the outlook.
The ECB and Ireland: Bailout But no Bail-In
Vincent Boland and Peter Spiegel suggest in the FT that the ECB coerced Ireland into applying for a bailout in 2010, based on letters recently released by the ECB. The ECB, in contrast, argues that the bailout was unavoidable anyway, and that the Irish Minister for Finance shared this view. In a Q&A section on its website the ECB writes:
While the ECB always acted within its remit and in line with rules established for the whole of the euro area, there are limits to the support that the Eurosystem can provide to banks in the Member States. … First, collateral has to be adequate; and second, counterparts have to be financially sound and solvent. The letter dated 15 October 2010 from the former ECB President recalled these rules and their implications for Ireland. … [Another letter dated 19 November 2010] explained the conditions under which further provisions of ELA to Irish financial institutions could be authorised. In his already public reply of 21 November 2010, the Irish Minister for Finance stated that he fully understood the concerns raised by the ECB Governing Council.
The ECB also addresses the question why it opposed the bail-in of bondholders in 2010:
As regards the possible bailing-in of senior debt in late 2010, it is important to recall the words of EU leaders in a European Union statement of 29 October 2010 and during the G20 meeting in South Korea on 12 November, according to which burden-sharing of senior debt would not be applied until mid-2013. … Furthermore, the necessary EU governance tools to address the bail-in of creditors, which were set out in the Bank Recovery and Resolution Directive (BRRD) and have been fully endorsed by the ECB, were not available in late 2010. … any potential burden-sharing of senior debt in the immediate aftermath would first and foremost have had negative spillover effects on the financial stability of Ireland, as well as on other European countries.
ECB Takes up Banking Supervision
René Höltschi reviews in the NZZ how the ECB became European bank supervisor within just two years. The article also surveys the pillars of the European Banking Union—supervision, resolution and safety nets—and its fundament, the Single Rulebook.
ECB Bank Stress Test
Claudia Aebersold Szalay reports in the NZZ on the findings of the stress test conducted by the ECB. The article contains a map and tables.
The ECB downgraded the quality of bank assets (mostly bad loans) relative to banks’ own estimates. This is reflected in lower estimates of banks’ equity positions. Moreover, the ECB conducted a stress test and considered two scenarios. According to the adverse one, banks’ equity positions would fall by more than 250 billion Euros. Italy, France and Germany would be hit hardest.
Claire Jones and Alice Ross as well as Martin Stabe offer additional insights in the FT, FT. A report in the FAZ. The ECB‘s page with press release and other information.
Dangers of Deflation
The Economist worries about deflation, specifically in the Euro area. The central passages are:
Central bankers can no longer set real (that is, inflation-adjusted) interest rates low enough to restore demand. Wages, incomes and tax revenue all stall, undermining the ability of households, businesses and governments to pay their debts—debts which, in real terms, will grow more burdensome under deflation.
… bad deflation results when demand runs chronically below the economy’s capacity to supply goods and services, leaving an output gap. That prompts firms to cut prices and wages; that weakens demand further. Debt aggravates the cycle: as prices and incomes fall, the real value of debts rise, forcing borrowers to cut spending to pay down their debts, which ends up making matters worse.
Banking Union
Willem Buiter, Ebrahim Rahbari and Antonio Montilla provide a detailed assessment of the need for a Euro Area banking union and the progress towards it, in a Citi Research document. Some excerpts from the abstract:
… a single supervisor, a common resolution mechanism, including a joint recapitalisation back-up, and an effective lender of last resort – is necessary for the euro area (EA) to survive.
The CA’s [comprehensive assessment’s] conclusion will likely boost EA financial conditions in coming months. Even so, we believe the CA should have been more stringent, current backstops are still inadequate, and the CA will not eliminate divergences in financial conditions …
Remaining elements of narrow banking union are also very important — These are the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM). In particular, the SRM and its bail-in provisions should materially reduce the likelihood that an EA sovereign will be dragged into insolvency through tax-payer-funded bank bailouts. Reduced moral hazard will also likely lower the likelihood and severity of future banking crises. And the combination of CA, SSM and SRM are also likely to mean that the ECB will be an effective lender of last resort for EA banks (and sovereigns).
… one key fragility remains: excessive two-way links between national sovereigns and banks. Risk-weighting of sovereign debt and concentration limits on sovereign debt holdings by banks are necessary to break these links.
A single deposit guarantee scheme is not necessary for monetary union and requires a deeper fiscal union than the minimal common backstops required to make monetary union work. It is therefore unlikely in the foreseeable future, in our view. An EA sovereign debt restructuring mechanism (SDRM) may be necessary to handle legacy sovereign debt restructurings and possible future sovereign insolvencies, but beyond the limited mutualised fiscal backstops necessary for banking union and the SDRM, deeper fiscal union is neither necessary for EA survival nor likely, for political reasons, in the foreseeable future.
The report contains many interesting figures, for example on the exposure of banks to their domestic governments; the correlation between sovereign and bank CDS spreads; lending standards; the share of bank loans in banks’ balance sheets etc.
How The Euro Was Saved
Household Balance Sheets in the Euro Area
The ECB has published the results of the Eurosystem’s first Household Finance and Consumption Survey. Some results:
- About 60% of households in the euro area own their main residence—with or without a mortgage. About 11% own a business, and 76% own vehicles.
- 97% of households own sight deposits or savings accounts. Some (33%) hold voluntary private pensions or life insurance and few (15%) own other financial assets. Only a quarter of households in the top income quintile holds mutual funds; also, a quarter of households in the top income quintile holds publicly traded shares.
- 23% of households have mortgage debt and 29% have non-mortgage debt. Conditional on having debt, the median value is Euro 68400 and Euro 5000, respectively.
Here are the mean and median net wealth statistics by country and socioeconomic characteristic.