LONDON—European banks, increasingly concerned about their ability to access funding, are devising complex and potentially risky new deals that enable them to continue borrowing from the European Central Bank…..
They also are a sign that struggling banks across Europe are preparing for a period of prolonged reliance on financial lifelines from the ECB. The Continent’s intensifying financial crisis has made it difficult for many banks to obtain funding from customary market sources.
Markets largely shrugged off the ECB, as long-term investors continued to dump everything but German bonds—considered the market’s safe harbor—and it became increasingly difficult to find private buyers for bonds issued by the large, indebted countries such as Italy and Spain…..The ECB fought a running battle throughout the day, traders said, in an attempt to drive the yield on the 10-year Italian note below 7%. The trading session started with price rally that drove the closely watched rate down to 6.84%. Then, as ECB buying lightened, private sellers took over, driving the yield—which moves in the opposite direction of price—up to 7.22%, according to Tradeweb data. Prices then rallied in the afternoon, with some market participants citing more ECB buying as well as comments from German Chancellor Angela Merkel indicating German support for more fiscal integration in the euro zone.
via ECB Fights to Put Lid on European Bond Yields – WSJ.com.
FT reports:
The president of Germany’s powerful Bundesbank has firmly rebuffed international demands for decisive intervention in the bond markets by the European Central Bank to combat the eurozone debt crisis, warning that such steps would add to instability by violating European law. Bundesbank president Jens Weidmann told the Financial Times that only politicians could resolve the crisis, and he rejected the idea of using the ECB as “lender of last resort” to governments.
We’ve seen this movie before. Higher rates after a severe debt-deflation recession are burdensome, perhaps economically fatal. Hiding behind the excuse that we must fight inflation NOW requires a grand dismissal of economic history. There are times to impose austerity and don the hawkish posture, but there are times when that’s exactly wrong. This is one of those times, particularly for Europe.
via EconoMonitor : EconoMonitor » The Triumph of Austerity (and its Consequences).
“Common responsibility for the European currency will also engender a common decision-making instance for the European economy. It is unthinkable to have a European central bank but not a common leadership for the European economy. If there is no counterweight to the ECB in European economy policy, then we will be left with the incomplete construction which we have today… However even if the building is not finished it is still true that monetary union is part of a supranational constitution… It is our task for the future to work with the appropriate means for the transfer of traditional elements of national sovereignty to the European level.”
~ Italian President Carlo Ciampi, Frankfurter Allgemeine Zeitung, February 8, 2000
With thanks to Grant Williams (via John Mauldin)
With the ECB providing a bid for Italian bonds that might not otherwise exist, board members at some of Europe’s largest bank say now is the time to accelerate disposals. Many are also reversing long-standing policies of buying into new Italian bond issues, denying Rome an important base of support.
“Our traditional buying days are no longer,” said one board member at a European bank, one of Italy’s 10 biggest creditors, who added that the bank has also sold off previous bond purchases. “Unless there is more certainty on Italians changing direction, it will be very tough for them to find buyers.”
Lucas Papademos, named today to be interim prime minister of Greece, steered the country into the euro region as central bank governor more than a decade ago. Now the former European Central Bank vice president will have to secure the country’s euro membership for a second time.
Papademos, who has never held elected office, helped foster economic growth rates that surpassed Germany’s and France’s in his eight years at Greece’s central bank before moving to the ECB in 2002.
Having followed the German political scene closely for the last five months, it is clear to me that almost the entire German political establishment is out of its depth, ideological, sometimes smug, apt to view the EMU debt-crisis as a Calvinist morality tale, and lacking in deep understanding of what it has got itself into.
One can understand German worries about money printing – and especially the loss of fiscal sovereignty and democratic control – but matters have already moved on. It is too late for that.
via America and China must crush Germany into submission – Telegraph Blogs.
Governments and central banks shouldn’t throw principles overboard in their efforts to fight the debt crisis, Jürgen Stark, a hawkish member of the European Central Bank’s Executive Board, warned Tuesday. “Red lines mustn’t be crossed, otherwise efforts to solve the crisis today create the basis for a new crisis tomorrow,” Mr. Stark said in a speech in Lucerne, Switzerland.
via ‘Excessive Liquidity’ Not the Solution for Central Banks – WSJ.com.
A former vice president of the European Central Bank has emerged as an early favorite to lead what could become a new Greek caretaker government of technical experts that would finalize aid talks and stabilize the country’s fractured politics. The interim government would oversee the transition until possible new elections next year.
Officials from the country’s two leading political parties said Lucas Papademos keeps coming up as political insiders consider candidates for a prime minister of a transitional national unity government, if Prime Minister George Papandreou resigns, a possibility that is now widely expected.
The European Central Bank has cut interest rates by a quarter percentage point under new head Mario Draghi to boost weakening growth in a eurozone struggling with a crisis over too much government debt. The move, which comes earlier than expected by many economists, takes the bank’s benchmark rate to 1.25 per cent.
European growth is expected to slow to near or below zero in the last three months of the year.
via European Central Bank makes surprise rate cut – World – CBC News.
