Tag Archives: european central bank

Stratfor: Germany and ECB Face Off. Better than any WWF fight.

Summary: The monetary experiments central banks are running in Japan, Europe, and America will shape the global economy of the 21st century — no matter what the result. Here Stratfor looks at the growing tensions between the ECB and Germany. It’s a sound analysis. But note Stratfor’s top-down perspective. By “Germany” they refer not to its people, but to its corporations and elites. Stratfor provides a useful look at how the 1% (and their minions) see the world.

Stratfor

Germany and the European Central Bank Face Off

Stratfor, 20 April 2016

Forecast

  • The European Central Bank (ECB) looks as though it will stay on the course of loose monetary policy in the coming months.
  • Germany’s insurance and banking sectors will suffer as a result, whipping up anti-ECB sentiment among German voters.
  • The frustration of German voters will increase friction between Germany and the ECB.

Analysis

The ECB is gearing up to hold its first monetary policy meeting since bank President Mario Draghi announced a new package of measures that included more quantitative easing and an interest cut that will push rates, already in the negatives, even lower. During the April 21 meeting, Draghi will probably address concerns raised by German Finance Minister Wolfgang Schaeuble that loose ECB policies created and fueled the rise of the German opposition party Alternative for Germany (AfD). As Schaeuble’s statements highlight, the relationship between Germany and the ECB is antagonistic — and it is going to get worse.

Because the eurozone lacks a unified fiscal institution for its central bank, the ECB, to collaborate with, the bank plays more of a political role than peer institutions such as the U.S. Federal Reserve do. Unlike the Fed, the ECB has to balance the competing demands of the national economies under its jurisdiction. Aiding one country’s economy often means harming another’s.

Northern European countries such as Germany have historically preferred a tighter monetary policy so as to control inflation. Southern European countries such as Italy, by contrast, are more accustomed to looser monetary policy and to the economic stimulation that follows. Their confrontation over monetary policy has snowballed since the beginning of the global financial crisis, and the ECB is stuck in the middle.

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Today began the next phase of the great monetary experiment, as reality plays a trump card.

Summary: Today began the next phase of the great monetary experiment, the collision of Central Bankers’ bold promises with reality.  History suggests skepticism about the odds of CB’s success (e.g., see the many unbreakable currency pegs and unions which broke). Today the Swiss National Bank folded its cards. Here we discuss the significance of this to them and to us.  This is part one; see tomorrow’s post for the conclusion.

Wizard of Oz

Bow before our Monetary Wizards!

Since the crash, governments of the western nations have conducted the greatest economic experiment ever, with us as the subjects of unprecedented monetary and fiscal stimulus. We have had massive deficits, long periods of zero interest rates (for some now, negative interest rates), and repeated rounds of quantitative easing (in various forms). So far the results have varied by nation from good to great. But as with any experiment, preliminary results often don’t match the final tally. Today we began the next phase.  First here’s some background.

Switzerland’s bold monetary experiment.

“The minimum exchange rate remains for the foreseeable future the key monetary policy instrument. We’re prepared to buy unlimited amounts of foreign currencies and, if necessary, take further measures …. We will continue to defend the minimum exchange rate with utmost determination …”

— Thomas Jordan, President of the Swiss National Bank, 23 September 2014 — Speech in defense of the 1.20 peg to the Euro set in September 2011.

To keep their exports competitive in September 2011 the Swiss National Bank (SNB) set a minimum exchange rate (a ceiling to the Swiss Franc vs the Euro). In September 2014 President Jordan promised to print unlimited Swiss Francs to defend this level. Some were skeptics, such as the people at Grant’s Interest Rate Observer, 19 September 2014 — Excerpt:

Like a celebrity in flight from the paparazzi, the Swiss Confederation demands protection from its pesky admirers. … The {Swiss franc} is still, for many, the monetary bolt-hole of choice. To the Swiss, whose exports generate 54% of Switzerland’s GDP, it’s a kind of popularity they can live without — indeed, they insist, must live without. So the SNB prints francs.  It drew a monetary line in the sand three years ago: The franc shall not rally through the 1.20-to-the-euro mark, the authorities commanded in September 2011. To enforce this dictum, they bought euros with newly created francs (the cost of production of the home currency being essentially zero).

What to do with the rising euro mountain? Invest it, of course. CFA fashion, the central bankers are diversifying across asset classes and currencies. Among these asset classes are equities, and among these currencies is the dollar. As of June 30, the Swiss managers held $27 billion in 2,533 different U.S. stocks, according to the bank’s latest 13-F report …

Here’s a metaphysical head scratcher. The Europeans conjure euros, which the Swiss buy with their newly materialized francs. The managers exchange the euros for dollars (also produced by taps on a keyboard) and with that scrip buy ownership interests in real businesses. The equities are genuine. The money, legally and practically speaking, is itself real.. But what is its substance? We mean, how is it different from air?

… In these stupendous interventions, the SNB is hardly unique. Nor is it alone as it attempts to undo, through administrative means, the distortions it creates through monetary policy. New “macro- prudential” directives have tightened standards for home-loan amortization schedules, minimum down payments, affordability, bank capital ratios, etc.

Grant’s recommendation:

{W}e venture that the SNB will sooner or later be forced to permit the franc to appreciate and thus to enrich the holders of low-priced, three-year call options on the Swiss/euro exchange rate. It’s a long shot, to be sure — the options are cheap for a reason — but we judge that the prospective reward is worth the obvious risk.

Four months later their recommendation paid off — big. Bloomberg describes the fireworks:

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Update on Europe: Tinker Bell fails to deliver

Summary: Monday’s post explained why last week’s statement by ECB President Mario Draghi was not the game-changer Wall Street assumed. Today the ECB met and did little but give more comforting words. Here’s the scoop.

Sorry I disappointed you

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The ECB President Speaks to the world

Cutting through the blather, here is my guess what was in Mario Draghi’s notes for the press conference:

  1. Lead off with: no change in rates or policies.
  2. To periphery: pay your debts, slackers!
  3. To euro-governments: continue flogging austerity & reform until morale improves!
  4. To everyone, most especially myself: The euro is irreversible.
  5. About the future: in coming weeks we’ll think about doing stuff.
  6. Don’t worry: if conditions go into the toilet again, we’ll do stuff.
  7. What about my speech last week?  The euro is irreversible!
  8. What will stop the long slide of Europe into recession or worse? Austerity & reform!
  9. Why will those things work in the future since they have not so far? The euro is irreversible!

Excerpt from Draghi’s statement

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