Mario Draghi

Related: Europakten - Banks - Funding - Otmar Issing - Tyskland - Frankrike - Stabilitetspakten - Finanskrisen - Euron

The ECB "will continue to monitor the situation while euro-area financial markets in general are going back to normal functioning,''
Mr Trichet said in a statement on Tuesday. 14/8 2007

Targeted long-term refinancing operation - TLTRO
TLTRO is a super-cheap funding vehicle for banks that choose to participate,
getting liquidity into the more challenged parts of the EU’s regional banking system.
Think Greece and Italy.
Bloomberg 21 January 2019

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The main instrument of coercion in the eurozone is not its fiscal rules, but the power of the European Central Bank to withdraw funding from national banks.

The short history of the eurozone has taught us that resistance is futile.
Wolfgang Münchau FT 28 October 2018

The ECB has bought €2.5tn of eurozone debt securities under a QE programme that is set to stop at the end of this year.
The central bank’s monthly purchases halve to €15bn of bonds in October.
FT 4 October 2018

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Next Bubble U.S. Government Bonds

The ECB defines price stability as inflation “below, but close to, 2% over the medium term.”
That is a lower inflation rate than even the Bundesbank achieved during its celebrated pre-euro history,
and it is a tighter target than virtually all other central banks pursue.
For some, too much of a good thing is apparently wonderful.
Stefan Gerlach Project Syndicate 12 July 2018

Stefan Gerlach is Chief Economist at EFG Bank in Zurich and Former Deputy Governor of the Central Bank of Ireland. He has also served as Executive Director and Chief Economist of the Hong Kong Monetary Authority and as Secretary to the Committee on the Global Financial System at the BIS.

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Italy illustrates the way to liberal democracy’s demise
Wolfgang Münchau FT 20 May 2018

If liberal democracy fails to deliver economic prosperity for a sufficiently large portion of the population over long periods, it ends — along with the financial and economic institutions it has created.

Read more here

The euro is run in the interest of whichever country faces the biggest problems and
poses the biggest threat to the survival of monetary union at any particular time.
Right now that is Italy,”
Bernard Connolly, a hedge fund advisor and former currency chief for the European Commission, Ambrose Telegraph 22 February 2018

Germany is the largest guarantor of the European Central Bank’s credit default insurance, known as the OMT,
and provides by far the largest stock of “target” overdraft credit to other European countries, currently €956bn.
Hans-Werner Sinn FT 27 June 2018

Until Greece can successfully sell a multi-billion euro bond to international investors,
it can’t truly be said to be on a sustainable path.
For now, the European Union, the International Monetary Fund and European Central Bank have chosen to extend and pretend.

Blooomberg 22 June 2018

Greece - Extend and Pretend, again
An agreement was close that would leave Greece with minimal repayments
until after 2030 on the €228bn it owes to the rest of the eurozone.
FT 21 June 2018

For three years, the ECB has allowed investors to overlook the fragilities in the public finances of several member states and the flaws in the monetary union.
Governments must now learn to do without the central bank’s support.
Bloomberg Editorial 15 June 2018

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What fixes does the euro really need?
As Isabel Schnabel and Nicolas Véron have recently explained, this requires, at a minimum,
that banks’ creditworthiness is no longer at the mercy of the public finances in the country they happen to emerge from
that the “doom loop” between banks and sovereigns be broken.
Martin Sandbu 11 June 2018

Mario Draghi, the euro’s central banker, inimitably set out what this means in his speech in Florence last month;
the single best guide to the eurozone’s challenges.

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The head of Germany’s central bank Jens Weidmann, who is seen as a leading candidate to become the next president of the ECB,
has taken aim at plans for creating new eurozone funds to help crisis-hit countries, urging governments to instead make greater efforts to put their finances in order.
FT 5 June 2018

How to Unite 340 Million People: The ECB Turns 20
Highlights from the first two decades of a monetary union.
Bloomberg News 1 juni 2018

Italy no longer has a lender of last resort standing behind its sovereign debt,
and therefore has no backstop defence for its commercial banking system.
Ambrose Evans-Pritchard 30 May 2018

The European Central Bank is progressively removing its shield as quantitative easing is wound down and purchases of Italian bonds fall to zero. There will be no protection by the end of the year. The Draghi pledge to do “whatever it takes” no longer holds.

No future rescue by the ECB is possible unless the Italian government of the day – endorsed by parliament – formally invokes the bail-out mechanisms (OMT-ESM) and accepts austerity imposed by Brussels.

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Mario Draghi, head of the Bank of Italy before his ECB appointment
QE, since the programme began in March 2015, the ECB has bought €341bn in Italian bonds
FT 31 May 2018

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OMT, Italy and ELA
Bloomberg 29 May 2018

Mario Draghi’s defining moment as ECB president came in July 2012 when he unexpectedly pledged to do “whatever it takes” to preserve the euro.

Outright Monetary Transactions
Under OMT, the ECB would make large-scale purchases of Italian debt, bringing yields down and ensuring the government can fund itself.

There is a catch: The country must apply for it, and must also go to the European Stability Mechanism, the euro area’s bailout fund.
And an ESM rescue comes with conditions requiring economic reforms

Bank of Italy can fund solvent lenders directly through Emergency Liquidity Assistance, at a penalty interest rate.

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Otmar Issing vänder sig mot hur ECB-chefen Mario Draghi har drivit igenom obligationsköp
som ska stötta euroländer med stora interna problem som Italien och Grekland
Johan Schück DN 26 maj 2018

IMF calls for an agreement on Greece’s debt by next week
CNBC 15 May 2018

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The ECB has soaked up €300bn of Italian debt
buying time for the country to claw its way out of a debt-deflation trap.
Italy has pulled off an “internal devaluation” within the eurozone, albeit at the cost of a deeper depression than the 1930s.
Ambrose Evans-Pritchard Telegraph 13 May 2018

ECB should not have regarded low inflation as a permanent or even long-term condition that demanded an aggressive monetary-policy response.
Jürgen Stark, former Member of the Executive Board of the ECB and former Deputy Governor of the Deutsche Bundesbank, Project Syndicate 19 February 2018

The ECB, in particular, defends its low-interest-rate policy by citing perceived deflationary risks or below-target inflation. But the truth is that the risk of a “bad” deflation – that is, a self-reinforcing downward spiral in prices, wages, and economic performance – has never existed for the eurozone as a whole.

It has been obvious since 2014 that the sharp reduction in inflation was linked to the decline in the prices of energy and raw materials.

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The vast bond-buying operations nominally undertaken by the ECB in recent years
have been handled largely by national central banks, which purchase their own governments’ bonds.
Daniel Gros, Procect Syndicate 11 October 2017

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“The blunt truth is there is a single monetary policy, but there is not a monetary union,” Mr Tucker said.
Claire Jones, FT 13 November 2017

As Paul Tucker, former deputy governor of the Bank of England, remarked this month at an ECB conference in Frankfurt, the region may have a common currency — but it has many different forms of money.

“The blunt truth is there is a single monetary policy, but there is not a monetary union,” Mr Tucker said. “There are 20 moneys within the European monetary union. There is the money that Mario [Draghi, ECB president] issues, the notes. But these are inconvenient to carry about. Most of the money we use are deposits held in 19 national banking systems.”

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The job of a normal central bank faced with this situation is to be the lender of last resort.
But the ECB was deliberately constructed to be different from normal central banks.
Matthew C Klein, FT Alphaville 9 November 2017

One of the most striking moments in the euro crisis saga was when European elites forced Silvio Berlusconi to leave office in favour of unelected Mario Monti. This was possible because Italy is a member of the euro area, and is therefore uniquely vulnerable to capital flight and bank runs.

Spaniards have good reason to hold euros in bank deposits and euro-denominated bonds as their safe asset, but have literally no reason to hold Spanish bank deposits or Spanish government bonds.

At any moment, euro-area creditors could decide they no longer wish to finance a country’s banks and its government.

This arrangement is inherently unstable.

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Mr Draghi gave a brutally honest account of central bank failings before the Lehman crisis,
admitting that the orthodoxies of the day bore little relation to reality on the ground.
There was too much trust in the dogma of “rational expectations” and a chronic neglect of how capital markets really work.
Mario Draghi speaking at a forum of Nobel Prize economists at Lake Constance, Ambrose Evans-Pritchard, Telegraph 23 August 2017

Mario Draghi’s ‘whatever it takes’ outcome in 3 charts
Where do we stand 5 years after the ECB head’s famous pledge?
FT 25 July 2017

Policymakers pushed the deposit rate to minus 0.4 per cent, eurozone banks received more than €1tn of liquidity via Long Term Refinancing Operations, and the ECB has purchased over €2tn of government and corporate bonds in a programme which accumulates another €60bn every month.

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The European Central Bank has for the first time published its
rule book for giving emergency loans to ailing lenders,
breaking with the secrecy that fuelled controversy over the programme during the financial crisis.
FT 19 June 2017

ECB-sanctioned “emergency liquidity assistance” was a lifeline for a clutch of banks that were cut off from normal financing channels during the crisis.

Greek banks are still using €44bn of ELA help.

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ELA emergency liquidity

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ECB’s Coeure calls for clarity on Greece debt relief before QE inclusion
Mehreen Khan, FT 31 May 2017

Mr Coeure added the ECB would have to make its own assessment of Greece’s debt dynamics should the IMF and EU agree on the restructuring to kick in after 2018.

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Christine Lagarde said that eurozone creditors must provide considerably more detail on debt relief for Greece
before the fund will take a decision to join the country’s bailout programme.
“There cannot be a specific case for any particular country.”
FT 12 April 2017

ECB faces impossible choice between German overheating or Italian debt storm
When ECB runs out of plausible justifications for why it is still covering Italy's entire budget deficit
and rolling over its existing €2.2 trillion of public debt.
Ambrose, 25 May 2017

“There are risks that euro area bond yields could increase abruptly without a simultaneous improvement in growth prospects,”
said the ECB in its Financial Stability Review released today.

Clemens Fuest, head of the IFO Institute, says ultra-loose policies are distorting the capital markets,
hurting banks and insurance companies, and bleeding savers to help debtors.

QE is near its technical limits anyway. The ECB balance sheet has reached €4.17 trillion, or 39pc of eurozone GDP.

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Germany trade surplus of nearly $300bn outpacing China by more than $50bn
Schäuble blames ECB for euro that is ‘too low’ for Germany
FT 5 February 2017

ECB needs to be more clear about its calculation that ailing bank Monte dei Paschi di Siena
needs more than €8 billion pumped into it, Italy's economy minister Pier Carlo Padoan says.
EUobserver, 30 december 2016

The European Central Bank has come under renewed pressure in Germany,
after a group of academics and business people filed a complaint at the country’s highest court
over the monetary policymakers’ mass bond-buying programme.
FT 16 May 2016

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Mario Draghi
Apparently, the chorus of German voices pointing to the obvious - that his policies are killing savers, insurance companies, pension funds and banks — got his dander up:
“We have a mandate to preserve price stability for the whole of the euro zone, not only for Germany,” he said.
“We obey the law, not the politicians, because we are independent.”

David Stockman, 21 April 2016

Mario Bothers: Germany Takes Aim at the European Central Bank

- In hardly any other euro-zone country is the financial investment sector so dominated by savings accounts and insurance policies.

It is mostly life/retirement insurance policies that are suffering. Insurance providers have primarily invested their customers' money in sovereign bonds. But returns are extremely low, in part because of the massive ECB purchases of such bonds.

German money being thrown out of a helicopter: It would be difficult to find a more fitting image to show people that the money they have set aside for retirement may soon be worth very little.

A few weeks ago, Finance Minister Wolfgang Schäuble warned the ECB head that his ultra-loose monetary policies could "ultimately end in disaster."

Der Spiegel 8 April 2016

David Stockman:
We are now ruled by about 200 unelected central bankers.
He can afford one cappuccino.

Draghi, Dennis, Wolodarski och Tomas Fischer
700 Days In No Man’s Land -- Why They Can’t Keep It Up
David Stockman, January 23, 2016

Germany's Constitutional Court to hear case against ECB bond buying
Todd Buell, MarketWatch, Jan 15, 2016

Most people also understand that the Greek debate is not just about Greece but also about whether or not several other countries
— Spain, Portugal and Italy among them, and perhaps even France — will also have to restructure their debts with partial debt forgiveness.
What few people realize, however, is these countries have effectively already done so once.
Michael Pettis February 25, 2015

I vastly overestimated the risk of /Euro/ breakup, because I got the political economy wrong
— I did not realize just how willing euro elites would be to impose vast suffering in the name of staying in.
Relatedly, I didn’t realize how easy it would be to spin a modest upturn after years of horror as success.
Paul Krugman, NYT 10 June 2015

I’m sorry to say that I completely missed the important of liquidity and cash shortages in driving bond prices in the euro area.
It wasn’t until Paul DeGrauwe weighed in that I realized just how much difference it would make if the ECB did its job as lender of last resort;
if the euro survives, DeGrauwe — and this guy named Draghi, who put his ideas into practice — should get a lot of the credit.

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As Greece approaches the mathematical limit of its entitlements under the ELA program,
the ECB may find itself in the untenable position of acting as judge, jury and executioner.
Mark Gilbert, Bloomberg 19 May 2015

Greek banks have been increasingly reliant on emergency liquidity assistance from the European Central Bank since February.
And because Greece's banks only have sufficient collateral to cover 95 billion euros ($106 billion) of ELA funding,
extrapolating the growth in that reliance on a chart delivers a deadline -- May 29:

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Bank run in Greece

The success of eurozone QE relies on a confidence trick
Programme’s impact unknown without evidence of how the policy transmits to the real economy
Wolfgang Munchau, FT 22 March 2015

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The euro is engaged in two dances of death.
The fact that both /ECB and Greece/ threaten euro destruction is testament to the astonishing mis-construction of the euro itself.
Peter Doyle, an economist and former IMF staffer, FT 10 February 2015

Greece is expected to run out of cash as soon as April 9
- ECB höjer Emergency Liquidity Assistance till grekiska banker till €71.3bn, cirka 664 miljarder kr.
Rolf Englund 26 Mars 2015

“Ending ELA would be a very last-resort type of intervention, paramount to a nuclear option
The European Central Bank is sending a message to the euro-area’s leaders: don’t make us pull the trigger on Greece’s banks.
After ECB blessed the expansion of so-called Emergency Liquidity Assistance by about 5 billion euros on Thursday,
officials are insisting that continued support is contingent on political talks over Greece’s bailout.
The ECB does not want to be pushed into a position where it is making decisions on the future of the Greek banking system
-- and the country’s membership of the euro -- without political cover from European capitals.

Bloomberg, Friday 13th 2015

ELA is funding provided by national central banks at their own risk, and is extended against lower-quality collateral than the ECB itself will accept.
Greece’s lenders now have access to about 65 billion euros in such funds, according to a euro-area central bank official. The expansion from 60 billion euros was reported Thursday by German newspaper FAZ.
An ECB official declined to comment, as is the policy on all ELA operations.

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Greek Finance Minister met ECB president.
Analysts said the ECB statement was a sign the meeting had not been a success.
ECB has effectively just given a green light for Greek bank runs
Rolf Englund 5 februari 2015

The ECB may or may not have good reasons to cut off Greece – depending on your point of view – but let us all be clear that such a move would be political.
A central bank that is supposed to be the lender of last resort and guardian of financial stability would be taking a deliberate and calculated decision to destroy the Greek banking system.
Ambrose Evans-Pritchard 2 Feb 2015

In reality, the ECB cannot easily act on this threat.
They do not have the political authority or unanimous support to do so, and historians would tar and feather them if they did.

The ground is shifting in Paris, Rome and indeed Brussels already.

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The biggest threat is that the European Central Bank ceases to fund Greece's banks.
ECB may well feel obliged to turn off the tap, since right now it is only financing those banks
because the country is officially complying with the terms of its IMF and eurozone bailout
The moment that Greece was deemed not to be in compliance, it is difficult to see
how the ECB could continue to provide emergency liquidity assistance to Greek banks.
Robert Peston, BBC economics editor, 2 February 2015

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The game is up. It’s time for Greece to leave the eurozone and move on
The stand-off between Greece and the rest of the eurozone will escalate,
neither side will blink and the country will default
Allister Heath, Telegraph 29 Jan 2015

There is now a clear threat of Grexit.
In 2011-12 Mrs Merkel did not want Germany to be blamed for another European disaster,
and both northern creditors and southern debtors were nervous about the consequences
of a chaotic Greek exit for Europe’s banks and their economies.
The Economist, editorial, Jan 31st 2015

Financial Times, 22 January 2015

Economic theory discredited

Knepet är att trycka nya centralbankspengar som sedan används för att köpa statspapper.
Räntorna pressas, och en viktig effekt är att valutan tappar i värde.
Men åtgärderna är kriminellt senkomna och beslutet tas långt efter både Storbritannien och USA.
OECD understryker att ECB:s sedelpress inte kommer att räcka för att lyfta Europas ekonomier.
DN-ledare 23 januari 2015

Den penningpolitiska stimulansen är nödvändig, men effekten avklingande och för att häva sig ur stagnationsfällan krävs andra medel.

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Jag tycker det är skriande uppenbart att räntan världen över är för låg och att en större del av stimulanserna borde ske via finanspolitiken.
Rolf Englund 5 december 2009

Dagens Nyheter

QE - Monetary easing will not cure structural difficulties.
But the eurozone did not fall into a slump because supply-side problems suddenly became worse.
It faltered because demand collapsed.

Martin Wolf, FT 22 January 2015

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If investors perceived that the central bank of Italy, for example, were taking on unaffordable risks when buying Italian government bonds,
at that point the price of those bonds would fall, the implicit interest rate paid by the Italian government would rise,
and the whole point of QE would be blown up.
Robert Peston, BBC economics editor, 22 January 2015

This means that in theory German taxpayers are sheltered from notional exposure to the stretched finances of the Italian or Spanish governments, for example.
But as I explained the other day...

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Athanasios Orphanides, a former member of the ECB’s governing council, said it potentially broke EU rules.
“It is as if it’s accepted that the euro area’s modus operandi is to clear things with Germany,
and for the ECB to constrain its actions to what is best for Germany,”
he told the Financial Times.
“This is inconsistent with and violates the [EU] treaty.”
FT 20 January 2015

Speaking in front of Mr Draghi and hundreds of other guests at a finance industry reception on Monday, Ms Merkel warned against using monetary policy to let governments in vulnerable economies off the hook over reforms.
She said: “One must prevent the dealings of the ECB from easing the pressure for improvements in competitiveness.”

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QE and central bank solvency
- what would happen to the Eurosystem’s capital resources if a country defaults?
Would this generate a fiscal transfer between members?
Jérémie Cohen-Setton, Bruegel, 20th January 2015

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Draghi would like his trillion euros to go to Italian factories to re-equip themselves, to Greek tourist resorts to smarten themselves up,
and to German consumers to spend more on that Italian-made stuff and those Greek holidays.
But banks won’t want to lend to Italian or Greek companies just because they have a lot more money on their balance sheet.
So if a trillion euros get printed in Frankfurt, a lot of it will wash its way across the English Channel.
Matthew Lynn, Telegaph 19 Jan 2015

Economists will no doubt be debating the effectiveness of QE for a couple of generations at least. Yet one thing we know for sure is that when a major central bank prints money, it floods the rest of the world. When Japan started, it fuelled asset booms in the US and Europe. When the Fed and the Bank of England launched QE, much of the money poured into the emerging markets.
In a world where capital is mobile, and there are no controls on its movement, that is what you would expect.

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Ever since his “whatever it takes” speech of mid-2012, ECB president Mario Draghi has been hinting that QE salvation is just around the corner.
That’s allowed cash-strapped eurozone governments to borrow at ultra-low interest rates even while presiding over moribund economies and national balance sheets riddled with debt.
Liam Halligan, Telegraph 10 Jan 2015

For a couple of years, then, eurozone stock and bond markets, and their global counterparts, have been pricing in,
ever more enthusiastically, the idea the ECB will ride to the rescue.

Almost everyone is betting on the Frankfurt-based institution joining its US and UK equivalents in using money-from-nothing to buy up vast swathes of government debt,
so “solving” Europe’s chronic state of indebtedness and ensuring the eurozone remains intact.

Yet, Draghi’s plan is probably illegal under EU Treaties.
Next Wednesday, the European Court of Justice (ECJ) will rule on a challenge brought by a group of German activists and politicians.
The ECJ will no doubt fudge the ruling, leaving the too-hot-to-handle decision in Merkel’s court.

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Mr Draghi issued his own cri de coeur in Helsinki six weeks ago, laying out the "minimum requirements for monetary union".
His prescription amounts to an EU superstate, with economic sovereignty to be "exercised jointly".
His plea is Utopian. There is no popular groundswell anywhere for such a vaulting leap forward
The northern creditor states have in any case spent the past four years methodically preventing any durable pooling of risk or any step towards fiscal union.
In airing such thoughts, Mr Draghi is really telling us that he no longer thinks EMU can work.
Ambrose Evans-Pritchard 7 Jan 2015

Peter Praet, the European Central Bank's chief economist:
"There is a risk of a real economic vicious cycle: less investment, which in turn reduces potential growth, the future becomes even grimmer and investment is reduced even further," he told Börsen-Zeitung.

Mr Praet warned that an "underemployment equilibrium" is setting in, invoking the term used by Keynes in the 1930s. He exhorted "all the authorities", including governments, to step up to their responsibilities and take "urgent action".
This is a man who knows that monetary union is in deep crisis.

Italy's political system is going to blow up soon. Its unemployment rate has just reached a modern-era high of 13.4pc,
with youth unemployment hitting a record 43.9pc.
The Mezzogiorno is sliding from depression towards social collapse.

The Telegraph has argued since Maastricht that a currency union of disparate cultures with no EMU treasury or political authority to guide it would end in paralysis
Mr Draghi issued his own cri de coeur in Helsinki six weeks ago, laying out the "minimum requirements for monetary union".
His prescription amounts to an EU superstate, with economic sovereignty to be "exercised jointly".

His plea is Utopian. There is no popular groundswell anywhere for such a vaulting leap forward, and it would imply a technocrat dictatorship beyond democratic control if ever attempted.
The northern creditor states have in any case spent the past four years methodically preventing any durable pooling of risk or any step towards fiscal union.

In airing such thoughts, Mr Draghi is really telling us that he no longer thinks EMU can work. Nobody can fault him for lack of effort.

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Draghi outlined the minimum requirements needed to complete monetary union in a way that offers stability and prosperity for all its members
in a speech to students of the University of Helsinki 27 November 2014

Sovereign debt needs also to act as a safe haven in times of economic stress. It can do so first of all through a strong fiscal governance framework.
Secondly, by having some form of backstop for sovereign debt in place. “Over the longer-term”, the President concluded,
“it would be natural to reflect further on whether we have done enough in the euro area to preserve at all times the ability to use fiscal policy counter-cyclically.
But it is also clear that… this could only take place in the context of a decisive step towards closer Fiscal Union”.

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Det makroekonomiska argumentet för /eller snarare emot/ EMU
Nils Lundgren i Helsingfors den 21 september 1994

Europe’s QE Quandary
Shouldn't the ECB Buy Bonds, Too?
Jana Randow, Bloomberg, Dec 3, 2014

It’s the new conventional wisdom: When all else fails to make economies grow, create new money and buy government bonds. That’s the formula dubbed quantitative easing, or QE.

Most economists think it helped keep the U.S. and the other countries that used it — Japan and the U.K. — from tumbling into a catastrophic depression. Shouldn’t Europe try it, too?

It’s difficult for the 18-nation euro area to do the same thing, partly because of European Union rules, and partly on concern about fueling asset bubbles.

But now that the European Central Bank has exhausted most other options, it’s pressing ahead with some asset purchases and other QE-like moves to get more cash into the economy.

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German Constitutional Court

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Mario Draghi's efforts to save EMU have hit the Berlin Wall
If the ECB tries to press ahead with QE, Germany's central bank chief will resign.
If it does not do so, the eurozone will remain stuck in a lowflation trap and Mario Draghi will resign
Ambrose Evans-Pritchard, 5 November 2014

Mr Draghi is accused of withholding key documents from the ECB's two German members, lest they use them in their guerrilla campaign to head off quantitative easing.
This includes Sabine Lautenschlager, Germany's enforcer on the six-man executive board, and an open foe of QE.

David Marsh, author of a book on the Bundesbank and now chairman of the Official Monetary and Financial Institutions Forum,
says the Bundesbank has been quietly seeking legal advice on whether it can block full-scale QE.
It is looking at Articles 10.3 and 32 of the ECB statutes, arguably relevant given the scale of liabilities.

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Deep Divisions Emerge over ECB Quantitative Easing Plans
Some view /ECB/ bond purchases as unavoidable, as the euro zone could otherwise slide into dangerous deflation
Others warn against a violation of the ECB principle, which prohibits funding government debt by printing money.
Der Spiegel, 3 November 2014

Is it important that the ECB adhere to tried-and-true principles in the crisis, as Weidmann argues?
Or can it resort to unusual measures in an emergency situation, as Draghi is demanding?

Bundesbank President Jens Weidmann, is opposed to most of these costly programs.

German Constitutional Court

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“whatever it takes” to save the euro, including purchasing “unlimited” amounts of struggling governments’ bonds
According to the German Constitutional Court, the policy violates European Union treaties – a ruling that the European Court of Justice is now reviewing.
The ECJ’s decision will have important implications for the eurozone’s future, for it will define what authority, if any, the ECB has to intervene in a debt crisis.
Gita Gopinath, Project Syndicate 3 November 2014

And yet, in a fundamental way, the current debate about OMT misses the point. Rather than asking whether the ECB’s mandate allows it to intervene in a debt crisis, EU leaders should be asking whether it should.

The Bundesbank’s position on this question is well known; a leaked submission to the Constitutional Court last year declared unequivocally that, “It is not the duty of the ECB to rescue states in crisis.”

But there is a strong case for allowing the ECB to act as lender of last resort.

Gita Gopinath is Professor of Economics at Harvard University. She is a visiting scholar at the Federal Reserve Bank of Boston, a research associate with the National Bureau of Economic Research, and a World Economic Forum Young Global Leader

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German Constitutional Court

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"extend and pretend/delay and pray"
Bank stress tests an unconvincing fudge
Willem Buiter, FT 30 October 2014

EBA, The European Banking Authority, has a long record of stress tests that grotesquely underestimate the capital holes in EU banks.

Both the AQR and the stress test relied heavily on national regulators and supervisors – the very entities on whose watch the excesses that led to the financial crisis were allowed to fester and compound.

They were in charge of the regulatory leniency that permitted the banks in their jurisdictions to engage in lender forbearance (extend and pretend/delay and pray) and to overstate the fair value of their assets.

The adverse scenario was not particularly stressful – no deflation, for instance.

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Will the asset quality review and stress tests conducted by the European Central Bank and the European Banking Authority mark a turning point in the eurozone’s crisis?
Leverage is 20 to 1 in Spain and Italy; 25 to 1 in Germany and France; and 30 Lto 1 in the Netherlands.
It is question­able whether this is enough loss-absorbing capital.
Martin Wolf, FT October 28, 2014

Perhaps the most important possibility omitted by this assessment is that of sovereign default.

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America’s eight biggest banks used to have 23 times more loans and investments than loss-absorbing capital
Now they are only 14 times “levered”.
The Economist print September 27th 2014


Martin Wolf

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ECB should abolish its OMT program – which, according to Germany’s Constitutional Court, does not comply with EU treaty law anyway.

The fiscal compact – formally the Treaty on Stability, Coordination, and Governance in the Economic and Monetary Union
French Prime Minister Manuel Valls and his Italian counterpart, Matteo Renzi, have declared – or at least insinuated –
that they will not comply with the fiscal compact to which all of the eurozone’s member countries agreed in 2012
Their stance highlights a fundamental flaw in the structure of the European Monetary Union

– one that Europe’s leaders must recognize and address before it is too late.
Hans-Werner Sinn, Project Syndicate 22 October 2014

Some two or three years ago, the European Central Bank (ECB) would have been seen as revolutionary and courageous,
if it had then set about buying bank debt in the form of bonds, including junk from Greece and Cyprus.
Robert Peston, BBC economics editor 2 October 2014

Today, with the eurozone economy still flatlining five years after its crisis erupted,
the ECB inauguration of a two-year programme to nationalise loans to households and businesses
- to the tune of several hundred billions of euros - looks like a slightly desperate last role of the dice.

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EMU Collapse

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Since the onset of the eurozone sovereign debt crisis in 2010,
the standard pattern has been to do the right thing between six and 18 months too late,
the delay generally originating in Frankfurt or Berlin.
FT Editorial 2 October 2014

Now is another opportunity to ditch faulty analysis and wrong-headed policy and arrest deflation before it takes hold.
Mr Draghi has shown the right instincts since he took over the ECB presidency.

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Only a weak euro can save the ECB now
Lorenzo Bini Smaghi, FT October 2, 2014

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Merkel has a duty to stop Draghi’s illegal fiscal meddling
The ECB is overstepping its mandate with anti-deflationary measures
Hans-Werner Sinn, FT September 29, 2014

In the summer of 2012, Mario Draghi, president of the European Central Bank, did something extraordinary.
He said the magic words the “ECB is ready to do whatever it takes to preserve the euro”.
He then waved a wand called “outright monetary transactions”.
Hey presto! The panic in eurozone sovereign debt markets subsided: yields on Italian and Spanish 10-year governments bonds are now below 3 per cent.

Mr Draghi this time seeks to end the threat of deflation. Will he be equally successful?
Experience suggests that only the brave would bet against him.
Yet to succeed twice would be quite a remarkable achievement.
Martin Wolf, Financial Times June 6, 2014

Nominal gross domestic product rose 4 per cent between the first quarter of 2008 and the last quarter of 2013.
Real GDP has stagnated over the three years since the start of 2011.

Further falls in inflation are likely and Japanese-style deflation quite conceivable.
The latter would weaken spending, raise the real burden of debt and make adjustments in competitiveness more difficult.
Indeed even ultra-low inflation greatly raises these risks.

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Lagarde och Englund om deflation och inflation

Realräntor - Real Interest Rates

Martin Wolf

The ECB auction, which will allow banks to borrow up to €400bn in cheap, four-year loans,
comes as markets continue to doubt whether the central bank can return inflation to
its target of below but close to 2 per cent.
FT 16 September 2014

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Draghi only had to say "whatever it takes" to end Europe's financial crisis.
But Draghi will actually have to do whatever it takes to end Europe's economic one.
That's what he's trying to do now, but the eurocrats might not let him.
They have their rules, after all.
Matt O'Brien, Washington Post, August 27, 2014

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Merkel: Not without Treaty change

German Constitutional Court

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Unemployment in the euro area
Speech by Mario Draghi, President of the ECB,
Jackson Hole, 22 August 2014

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Draghi’s recent speech at the annual gathering of central bankers in Jackson Hole has excited great interest,
but the implication of his remarks is even more startling than many initially recognized.
If a eurozone breakup is to be avoided, escaping from continued recession will require increased fiscal deficits financed with ECB money.
The only question is how openly that reality will be admitted.
Adair Turner, former Chairman of the United Kingdom’s Financial Services Authority,
member of the UK’s Financial Policy Committee and the House of Lords, Project Syndicate 8 September 2014

Jag tycker det är skriande uppenbart att räntan världen över är för låg och att en större del av stimulanserna borde ske via finanspolitiken.
Rolf Englund blog 5 december 2009

What impressed me was not so much the rate cut, but that Mario Draghi, ECB president,
allowed the decision to be taken on a majority vote. Quite a few central bankers were opposed.
Wolfgang Münchau, FT September 5, 2014

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European Banking Authority (EBA) revealed what information would be published about each bank.
The region's 124 most important banks are undergoing an assessment of their risky assets
designed to determine how well they would cope with future market shocks.
CMBC 20 August 2014

Draghi is running out of legal ways to fix the euro
The ECB should starting buying equities and junk bonds. It should subsidise mortgages and consumer credit....
All these measures would be effective. Most would be illegal.
Wolfgang Münchau, FT 17 August 2014

“Not without treaty change.”
It’s hard to believe, but almost six years have passed since the fall of Lehman Brothers
The crisis is by no means over. Recovery is far from complete,
and the wrong policies could still turn economic weakness into a more or less permanent depression.
In fact, that’s what seems to be happening in Europe as we speak.
Paul Krugman, New York Times 14 August 2014

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Dragi trollar fram 850 miljarder euro - men vad säger Bundesbank och Författningsdomstolen?
ECB pumps cheap cash into the banks through the targeted long-term loan program,
which kicks in next month and which Draghi says might supply 850 billion euros ($1.1 trillion).
Next, the banks lend that cash to companies.
They then bundle the loans together into asset-backed bonds,
and sell those securities to the ECB.
Mark Gilbert, Bloomberg View 8 August 2014

Formulating monetary policy at the European Central Bank is akin to "herding cats," former Bank of England governor Charles Goodhart said yesterday.

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RE: Varifrån får Dragi 850 miljarder euro (cirka 7800 miljarder kr)?
Från sedelpressen, eller, nuförtiden, genom att skriva 850 på datorn och trycka enter.
Se mer om sedelpress här

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Asset-backed securities: The key to unlocking Europe's credit markets?
Bruegel 24 July 2014

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Draghi insisted that the eurozone’s recovery remains on track
and offered no hint that it had moved closer to embarking on broad-based asset purchases, known as quantitative easing.
He maintained that a weak recovery would continue and longer-term inflation expectations remained anchored to the central bank’s target of below but near 2 per cent.
FT 7 July 2014

“The fundamentals for a weaker exchange rate are much better than they were two or three months ago.”

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"stock prices have reached what looks like a permanently high plateau."

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ECB’s chief economist Peter Praet:
“Normally, a fall in prices would be able to support purchasing power and, therefore, domestic demand. But ..."
It seems like Praet is not entirely sure about the difference between supply and demand shocks,
but let me just illustrate the dffference in two graphs
The Market Monetarist, Lars Christensen, 15 July 2014

ECBs Outright Monetary Transactions (OMT)
Did the German court do Europe a favour? ECJ will also not rubber-stamp the OMT – and, if it does, the legal victory will not resolve the fundamental dilemmas
The OMT programme was justified but the fiscal union question remains
Ashoka Mody, Bruegel, 15th July 2014

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IMF has issued a blistering attack on Europe’s authorities
“Inflation has been too low for too long.
A persistent failure to meet the inflation target could undermine central bank credibility,” said the IMF
with remarkable bluntness in its annual health report on the currency bloc.
Ambrose Evans-Pritchard 14 July 2014

“A negative external shock could tip the economy into deflation.
The recovery is neither robust nor sufficiently strong.
Financial markets are still fragmented, with contracting credit and high borrowing costs constraining investment in countries with large output gaps,
large debt burdens and high unemployment,” it added.

Gabriel Stein, from Oxford Economics, said the bar for /ECB/ QE remains very high,
whatever EU treaty law says, since it would face huge political opposition in Germany,
where the AfD anti-euro party has recently won its first seats in the European Parliament and
the press views asset purchases as the road to perdition.

The German constitutional court has already ruled that the ECB’s back-stop debt plan for Italy and Spain (OMT) is illegal and probably ultra vires. “The ECB is desperately trying to avoid doing QE. They are hoping that recovery will come along and save them in time.” he said.

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Public policy needs to prop up domestic demand until the threat of lowflation has subsided and banks are ready to lend again
IMF Report

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The European Central Bank’s decision to cut rates below zero was the headline-grabber but ECB-watchers view
the central bank’s offer of up to €400bn in cheap, fixed-rate loans – known officially as a targeted longer-term refinancing operation (TLTRO) –
as the package’s centrepiece.
Financial Times 6 June 2014

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Outright Monetary Transactions OMT
The European Central Bank's outright monetary transactions (OMT) or bond-buying programme was announced by Mario Draghi, president of the European Central Bank, in September 2012.
Under the outright monetary transactions programme the ECB would offer to purchase eurozone countries’ short-term bonds in the secondary market, to bring down the market interest rates faced by countries subject to speculation that they might leave the euro.

Schäuble explained that, as far as decisions over OMT bond purchases are concerned, the ECB ”cannot make these decisions because it has bound them to conditions that are beyond its control.”
Schäuble said that these conditions are decided by the European Stability Mechanism, the European governments’ bail-out program.
“ESM decisions are subject to a unanimous vote and we will not approve of such a program as announced by the ECB,” Schäuble explained
— buttressing a belief that, after a two-year interregnum, euro-area jitters may be about to restart.
David Marsh, MarketWatch, June 4, 2014

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Otmar Issing, the former chief economist of the European Central Bank and the German Bundesbank,
is a genial number-cruncher who believes in the overall benefits of European integration
has turned virulently pessimistic over the European single currency.
In a marked change from his relative sanguinity during his eight years at the ECB,
he terms member countries’ unreliability on economic policies “a basic design flaw of monetary union.”
David Marsh, Market Watch, Jan. 10, 2011


The ECB saved the euro by providing a backstop to the member states of the single currency in 2012.
That at least is the current received wisdom. I wonder, however, whether that will still be the judgment in two years’ time.
Mr Draghi speech in Amsterdam, he went through a number of “what if” type scenarios with admirable clarity.
One of those was the one we are now in: a worsening of the medium-term outlook for inflation /too low inflation/.
Wolfgang Münchau, Financial Times, May 18, 2014

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Otmar Issing, the former chief economist of the European Central Bank and the German Bundesbank,
is a genial number-cruncher who believes in the overall benefits of European integration
has turned virulently pessimistic over the European single currency.
In a marked change from his relative sanguinity during his eight years at the ECB,
he terms member countries’ unreliability on economic policies “a basic design flaw of monetary union.”
David Marsh, Market Watch, Jan. 10, 2011

Complacent policy makers and investors imagine the crisis is over.
Avoiding catastrophe is still not guaranteed. That is anyway a grossly insufficient goal.
Martin Wolf, FT, May 13, 2014

Mario Draghi, president of the European Central Bank, saved the day in July 2012 when he announced that “within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And, believe me, it will be enough.”

He needs to promise to do whatever it takes yet again, to eliminate excess capacity and raise inflation to 2 per cent.
If he does not, crisis might yet return.

I had doubted whether the ECB’s programme for Outright Monetary Transactions would work.
But in the end, this conditional promise by the central bank to purchase government bonds in the secondary markets proved so effective at stopping the panic that it never had to be carried out.

Ireland, Spain and Italy at the end of last year these economies were between 6 per cent and 9 per cent smaller than before the crisis.
Unemployment is very high, especially in Spain. Greece is in still worse shape.

A move to negative interest rates is part of the answer.
So is an asset-purchase programme that would expand the ECB’s balance sheet by buying collateralised private sector assets and government debt

Avoiding catastrophe is still not guaranteed. That is anyway a grossly insufficient goal.
The aim must be to secure a healthy recovery.

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Ireland, Spain and Italy


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‘If the euro falls, Europe falls’ - How the euro was saved - the third part
Angela Merkel was handed the piece of paper Barack Obama had just passed around.
“What is this?” the German chancellor asked. “I haven’t seen this before.”

A full-scale endorsement of a plan for the European Central Bank to protect eurozone countries when they came under attack from financial markets by automatically buying their bonds.
In retrospect, it marked the beginning of the final turning point in the crisis.
Peter Spiegel, Financial Times, 15 May 2014

Three months after the testy exchange, Ms Merkel would give her tacit endorsement to an equally ambitious bond-buying scheme designed by another Italian technocrat, ECB president Mario Draghi.
This would end the existential crisis that had faced the euro for more than three years.

That plan – unveiled after ECB staff spent a furious summer constructing the system following Mr Draghi’s declaration he would do “whatever it takes” to ensure the euro’s survival – has long been hailed as the coup de grâce of the eurozone crisis.

Yet Mr Draghi’s programme was unlikely to have quelled markets without Ms Merkel’s acquiescence, which was given despite the public objections of the powerful German Bundesbank.

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Under article 123 of the Treaty of Lisbon, the ECB is prevented from buying the government bonds of member states,
but it has nonetheless already promised to do so even though the threat was never carried out.
The ECB does not appear to find this rule wise and its members are not threatened with jail it it is broken.
Andrew Smithers FT 16 May 2014, click

Article 123 of the Treaty of Lisbon

German Constitutional Court

Part 1-3

How the euro was saved
In the French seaside resort of Cannes
To the astonishment of almost everyone in the room, Angela Merkel began to cry.
the man sitting next to her, French President Nicolas Sarkozy, and the other across the table, US President Barack Obama
Peter Spiegel, Financial Times 11 May 2014

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Europeiska centralbankens (ECB) högste chef Mario Draghi
Nu har det snart gått två år sedan italienaren uttalade de numera välkända orden
”Inom ramen för vårt mandat, är ECB redo att göra allt som krävs för att rädda euron. Lita på mig, det kommer att räcka”.
Louise Andrén Meiton, SvD Näringsliv, 6 mars 2014

Inom teaterns värld finns begreppet peripeti, en avgörande vändpunkt i ett antikt drama. Som när kung Oidipus inser sitt öde. Det finns ett tydligt före och ett efter. I den ekonomiska världen har Mario Draghis uttalande fått samma tyngd.

Få talar numera om eurons kollaps. Men desto fler talar om ECB:s möjliga åtgärder.
Vad kan då ECB göra? En möjlig åtgärd är att sänka räntorna.
Men med en styrränta på 0,25 procent och en inlåningsränta på 0 procent är handlingsutrymmet begränsat.

Ett ord är viktigt, mandatet. Centralbanken har lovat att köpa oändliga belopp av ett krisdrabbat lands obligationer, om landet genomför reformer och besparingar.
Men nyligen förklarade den tyska författningsdomstolen att de ser problem med ECB:s plan och att de anser att centralbanken har överskridit sina befogenheter.

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Den tyska Författningsdomstolen

Low inflation has, as is to be expected, coincided with weak demand.
In the fourth quarter of last year, eurozone real demand was 5 per cent below levels in the first quarter of 2008.
In Spain, real demand fell 16 per cent. In Italy, it fell 12 per cent.
Even in Germany, real demand stagnated from the second quarter of 2011: this is no locomotive.
Martin Wolf, FT 11 March 2014
Nice chart

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From The Economist 1999-09-25

These concerns have led the Bank of Italy to conduct its own intensive examinations across the nation, such as the one at Banca Alberobello, ahead of the ECB tests. From Banca di Sicilia in the deep south to Banco di Trento e Bolzano, in the German-speaking northeast, the Bank of Italy is staging its toughest examination of the nation’s banks in history.
Financial Times, 4 March 2014

Draghi's Monetary Nightmare
European Private Lending Remains Stuck At Record Low Levels
Tyler Durden,2/27/2014

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Can the European Central Bank legally act as lender of last resort to ensure the survival of the euro?
This question is of fundamental importance for the sustainability of the monetary union. Recently, the German Constitutional Court ruled that it cannot.
In the court’s view the ECB has the power to conduct monetary policy,
but not to support member states in financial distress even if necessary to ensure the survival of the common currency.
Katharina Pistor, Vox, 26 February 2014

RE: Det förefaller som om det var Fed och inte ECB som ställde upp som Lender of Last Resort för de europeiska bankerna
som professor Pelotard har viskat i mitt öra.

The Fed's $600 Billion Stealth Bailout Of Foreign /European/ Banks Continues
At The Expense Of The Domestic Economy, Or Explaining Where All The QE2 Money Went
Many speculated that the US central bank would primarily focus its "rescue" efforts on US banks,
not US-based (or local branches) of foreign (read European) banks:
after all that's what the ECB is for.
Tyler Durden, zerohedge, 6 December 2011

Europe or Democracy?
What German Court Ruling Means for the Euro
Either the European Court of Justice has to stop bond purchases or German justices will.
SPIEGEL Staff, February 10, 2014

When Europe’s leaders set out in June 2012 to break the “vicious circle” between banks and sovereigns,
they left rules for treating government bonds untouched, an oversight that may subvert their drive to prevent a recurrence of the debt crisis.
Under EU rules, banks can rate all debt issued by the bloc’s 28 national governments as risk-free,
avoiding any increase in their capital requirements.
Bloomberg, 10 February 2012

This encourages so-called carry trades, whereby lenders borrow at low cost from the European Central Bank and plow the money into state debt that offers higher returns.

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Capital requirements/Basel

EMU:s chef för banktillsynsmyndigheten SSM, Danièle Nouy:
"En av de största lärdomarna av den nuvarande krisen är att det inte finns någon riskfri tillgång, så statspapper är inga riskfria tillgångar.
Det har visat sig, så nu måste vi reagera"
Rolf Englund blog med länkar 10 februari 2014

Germany's constitutional court
The European Court of Justice will now decide the legality of the so-called debt "backstop", introduced in 2012.
Although the ECB has not used the emergency power, its existence calmed turmoil in European financial markets.
When he announced the Outright Monetary Transactions (OMT) programme, ECB President Mario Draghi said he would do "whatever it takes" to save the single currency.
BBC 7 February 2014

"There are important reasons to assume that it exceeds the European Central Bank's monetary policy mandate and thus infringes the powers of the member states."

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The /German Constitutional/ court concludes that OMT violates the German constitution.
It accuses the ECB of making a power grab by extending its own mandate.
It says the scheme endangers the underpinnings of the eurozone rescue programmes.
Worse, it says OMT undermined deep principles of democracy.
Wolfgang Münchau, FT 9 February 2014

Germany’s top court has issued a blistering attack on the European Central Bank,
arguing that its rescue plan for the euro violates EU treaty law and exceeds the bank’s policy mandate.
The tough language leaves it doubtful whether the ECB’s back-stop scheme for Spanish and Italian bonds can be implemented if Europe’s debt crisis blows up again,
and greatly complicates any future recourse to quantitative easing if needed to head off Japanese-style deflation.
Ambrose Evans-Pitchard, 7 Feb 2014

I’m the German Constitutional Court, get me out of here!
Court sees ECB bond buying as illegal but refers questions to ECJ
Open Europe Flash Analysis, 7 Feb 2014

The Fed's $600 Billion Stealth Bailout Of Foreign /European/ Banks Continues
At The Expense Of The Domestic Economy, Or Explaining Where All The QE2 Money Went
Many speculated that the US central bank would primarily focus its "rescue" efforts on US banks,
not US-based (or local branches) of foreign (read European) banks:
after all that's what the ECB is for.
Tyler Durden, zerohedge, 6 December 2011

Janet Yellen announced February 19th that America’s central bank is moving to
cut off the massive financial lifeline that has been subsidizing the European banking system since the beginning of the global financial crisis in March of 2008.
By delaying foreign bank compliance with the stringent capital and borrowing requirements of section 165 of the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) imposed on American banks,

the Fed was engaging in the moral hazard of allowing Europe to borrow at virtually zero interest from the Fed to fund its bloated social welfare states.
Chair Yellen’s actions mean the Fed is cutting off Europe and providing greater support for U.S. borrowing.
Breitbart, 24 February 2014

Whatever happened to the eurozone crisis?
To many people the eurozone crisis has disappeared. It is off the front pages.
It has certainly left the TV screens. I have heard prime ministers and presidents declare the crisis "over".
It needs to be said at the outset that Europe is still enjoying the "Draghi effect":
the reassurance given by the President of the European Central Bank (ECB) that he would do "whatever it takes" to defend the euro
- and no-one seems willing to bet against the ECB.
Gavin Hewitt, BBC 28 January 2014

Longer-Term Refinancing Operations
When the eurozone debt crisis was at its most intense in late 2011, Mario Draghi, the new ECB president,
decided to flood banks with a “wall of money”.
Eurozone banks were urged to take advantage of cheap three-year ECB loans, or “longer-term refinancing operations”,
The sweetener helped ensure the LTROs were successful in averting disaster:
banks borrowed more than €1tn and the eurozone crisis eased, at least temporarily.

FT 23 January 2014

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Marknaderna skiter i hur det går för Spanien, Grekland, Italien och andra krisländer
Det enda marknaderna bryr sig om är om dessa länders obligationer kommer att inlösas på förfallodagen, eller ej.
Rolf Englund blog, 10 januari 2014

Att dessa länders räntor nu har sjunkit är således inte något tecken på att marknaderna tror att dessa länders ekonomier är på rätt väg.

Det som gjort att räntorna gått ner är att marknaderna nu tror att ECB kommer att förse dessa länder med nya lån om det skulle behövas så att de kan lösa in sina obligationer på förfallodagen.

Skuldländerna har således fått om inte en egen sedelpress så i alla fall tillgång till ECBs sedelpress.

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It is two years since Mario Draghi launched his first big policy initiative as ECB president,
with the longer-term refinancing operation gratefully taken up by about 1,000 banks across the eurozone
The €1tn flood of cheap money extended under the scheme has served three vital purposes.
atrick Jenkins, FT, November 27, 2013

First, it ensured governments had ready buyers for the debt they needed to keep issuing. Even as banks have derisked since the crisis, cutting loans to companies and individuals, they have amplified their investment in sovereign bonds

Second, the LTRO’s low interest rate, now just 0.25 per cent, inflated banks’ profit margins, allowing weaker institutions to build up capital reserves.

Third, it levelled the playing field for banks across the region, albeit artificially. For the first time in an age Portuguese banks were borrowing money at the same price as their German counterparts

Given the benefits, it has been unsurprisingly popular.
Though more than a third of the money has been repaid early as banks have sought to prove their newfound strength, €630bn is outstanding
and Mr Draghi has been lobbied to extend the programme when it expires in a year.

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Mike Amey from the bond fund Pimco said the eurozone is “sleepwalking into a decades-long deflation trap” like the Japanese in the 1990s when they mistook near zero rates for easy money. The region has no margin for error as its ageing crisis takes hold.

While gentle deflation can be benign in low-debt economies, it plays havoc with the debt dynamics of leveraged economies,
an effect described by US economist Irving Fisher in his 1933 classic “Debt-deflation Theory of Great Depressions”.
Ambrose Evans-Pritchard, 7 Jan 2014

The Brussels think-tank Bruegel said deflation risks pushing Italy and Spain into a “runaway debt trajectory” as the debt stock rises on a shrinking or static nominal base.

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Irving Fisher


Ambrose Evans-Pritchard

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Day by day it is becoming more and more clear that the euro zone is heading for deflation and
despite of this the ECB so far has failed to act and it is blatantly obvious that
the ECB is in breach of its own mandate to secure "price stability" defined as 2% inflation.
The Market Monetarist, 7 January 2014

The failure to act is also a clear demonstration that the ECB in fact has an asymmetrical monetary policy rule (what I have called the Weidmann rule). The ECB will tighten monetary policy when inflation increases, but will not ease when inflation drops.


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Why Draghi was wrong to cut interest rates
Deflation in parts of a currency union is not the same as deflation of a union as a whole
Hans-Werner Sinn, Financial Times, November 13, 2013

Deflation in parts of a currency union is not the same as deflation of a union as a whole, because its internal effects on competitiveness cannot be compensated for by exchange rate adjustments.

In fact, Greece, Spain and Portugal need to devalue in real terms by about 30 per cent relative to the eurozone average in order to correct the distortions that were brought about before the crisis by the inflationary credit bubble created by the single currency and thus restore their competitiveness.

The ECB should not act against moderate deflation in these countries, but rather aim to offset such deflation by inflating the northern eurozone – Germany, in particular.

With its Outright Monetary Transactions programme, through which its offers to purchase government bonds of troubled countries at the taxpayers’ risk, the ECB is escorting private German savings again to southern Europe, where they are reluctant to go voluntarily.

The ECB has also been relocating its (electronic) printing presses from the northern to the southern central banks through its policy of allowing junk assets to be used as collateral for its lending to needy commercial banks.

These schemes have exported more public capital from north to south than the official rescues.

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Hans-Werner Sinn


Growth rates have remained stubbornly low and unemployment rates unacceptably high,
partly because the increase in money supply following QE has not led to credit creation to finance private consumption or investment.
Nouriel Roubini, Project Syndicate, 31 October 2013

Instead, banks have hoarded the increase in the monetary base in the form of idle excess reserves. There is a credit crunch, as banks with insufficient capital do not want to lend to risky borrowers, while slow growth and high levels of household debt have also depressed credit demand.

As a result, all of this excess liquidity is flowing to the financial sector rather than the real economy.

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Nouriel Roubini

Since the end of the credit boom in 2008, cross-border claims of banks based in the eurozone core (essentially Germany and its smaller neighbors)
toward the eurozone periphery have plummeted from about € 1.6 trillion to less than half that amount.
Part of the difference has ended up on the ECB balance sheet, but this cannot be a permanent solution.
Daniel Gros, Director of the Brussels-based Center for European Policy Studies, Project Syndicate, Nov. 6, 2013

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Daniel Gros

Lånen och stödköpen har inte i första hand gynnat grekerna.
Istället har pengarna gått till de främst tyska och franska banker som hade tagit stora positioner i Greklands och de andra krisländernas statsobligationer.
Genom att sälja sina obligationer till EU-fonderna, ECB och IMF har bankerna sluppit undan hotande förluster.
Mats Persson, Axess Nr 8, 2013

IMF har uppskattat att banker i Spanien, Italien och Portugal hotas av förluster på 250 miljarder euro, 2 200 miljarder kronor, bara på sina lån till företag.
Siffran motsvarar en tredjedel av bankernas totala kapital.
Wolfgang Münchau, kolumnist i Financial Times, har uppskattat de totala förlusterna i euroländernas banker till 2 600 miljarder euro, 23 000 miljarder kronor (!).
Andreas Cervenka, SvD Näringsliv 2 november 2013

det behövs pengar utifrån, mer specifikt från den gemensamma europeiska räddningsfonden ESM. Problem 1: Tyskland vill inte utan kräver istället att alla bankernas långivare betalar mer innan skattepengar ens kommer ifråga. Tyskland och andra länder är också emot en gemensam insättningsgaranti för eurozonens banker, en förutsättning för att undvika massuttag och seriekonkurser vid en ny kris.

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The German banking system appears healthy at first sight.
It certainly fulfils its function of providing the private sector with credit at low interest rates.
But I still find it hard to believe that the German banking system as a whole is solvent.

The country has been running large current account surpluses for a decade, currently at about 6 per cent of gross domestic product. This means German banks must have been building up huge stocks of foreign securities – a large yet unknown proportion of which are likely to default, especially if the main crisis resolution tool turns out to be a bail-in of investors.
Wolfgang Münchau, FT, June 23, 2013

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Deutsche Bank has one of the lowest leverage ratios of large banks globally
Financial Times, July 21, 2013


Svaret på galaxens alla frågor är inte 42.
För ekonomi och banker är svaret 20.
Rolf Engluns blog 23 augusti 2013

Outright Monetary Transactions
Tuesday was not an easy day for Asmussen, a member of the ECB's executive board, who was called
to testify before Germany's highest court in defense of an ECB program which,
while having proven to be economically successful, might be in violation of the law.
Der Spiegel, June 12, 2013

“probably the most successful monetary policy measure undertaken in recent times”.
Mr Draghi's robust defence of OMT, which was opposed by Germany’s Bundesbank and stirred controversy in Germany,
comes ahead of court hearings at the constitutional court in Karlsruhe
which is considering the legality of the scheme under Germany’s Basic Law.
Financial Times 6 June 2013

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German Constitutional Court

ECB sänker räntan med 0,25 procent
"Central bankers say they are flying blind", "Uncharted territory", "No one fully understands"...
IntCom 2 Maj 2013

Mario Draghi has revealed that some eurozone policymakers wanted to slash interest rates more aggressively this month,
said it was ready to enter uncharted territory and introduce a negative deposit rate.

Telegraph 2 May 2013

No one fully understands why rates have fallen so far so fast,
and therefore no one can be sure for how long their current low level will be sustained.
Economists simply have little idea how long it will be until rates begin to rise.

Kenneth Rogoff and Carmen Reinhart, Financial Times May 1, 2013

Central bankers say they are flying blind, FT
Growing concern at the IMF over the long-term side-effects of interest rates close to zero came as some of the leading figures in central banking conceded they were flying blind when steering their economies.
Lorenzo Bini Smaghi, the former member of the European Central Bank’s executive board,
captured the mood at the IMF’s spring meeting, saying: “We don’t fully understand what is happening in advanced economies.”

Financial Times, April 17, 2013

Det erinrar om dagens situation där i USA centralbankschefen Greenspan försöker uppnå en "soft landing" på ekonomins hangarfartyg.
Han känner att han inte kommer fram, drar gasen - räntan - i botten, men motorn, penningmängden, svarar inte. Farten sjunker ändå.

Grant drar också en mycket tänkvärd parallell mellan England och USA på 1920-talet och Japan och USA på 1980- och 90-talen.
England hade 1925 under finansminister Churchill återgått till guldmyntfonten på en då orealistisk växelkurs (den som rådde före första världskriget).
Bank of England förmådde USA att sänka räntan mot slutet av 1920-talet. Detta ledde till att aktiespekulanterna fick ny kraft inför 1929.

I mitten på 1980-talet var det USA som på hotellet Plaza (ägt av Donald Trump) fick japanerna att sänka sin ränta, vilket ledde till den japanska bubbla som nu spricker och hotar hela världsekonomin.

Rolf Englund på DN Debatt 26/8 1992

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Mr Wolf’s implicit point that this ECB de facto guarantee of eurozone sovereign debt has reduced the need for austerity is largely correct.
While austerity was not optional for most of the 2010-13 sovereign debt and banking crisis, it is mostly optional now.
Roger Altman, FT 13 May 2013

The decline in yields on Spanish debt, shown so clearly in the chart, dates almost precisely to 26th July 2012,
the date on which Mario Draghi, president of the ECB, told an audience in London that
“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

This statement, in turn, led to the announcement by the ECB on August 2nd 2012 of “outright monetary transactions” which would be aimed “at safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy”.

Rightly or wrongly, markets concluded that the risk of an outright default on Spanish bonds had largely disappeared.

Martin Wolf, Financial Times, 10 May 2013

Mario Draghi has again made clear in recent speeches that fixing the structural economic problems of Spain and the rest cannot be the job of the ECB.
But he has also said the ECB will continue to fight the balkanisation of European finance.
Stephanie Flanders, BBC Economics editor, 1 May 2013

These charts (page 6 of presentation attached) from a recent speech by ECB Vice President Vitor Constancio show that, although borrowing costs have fallen in much of the periphery when it comes to households and companies there's still a wide gap between German interest rates and rates at the periphery.

In the jargon, the "transmission mechanism" for the ECB's monetary policy is still impaired,
and credit is still crunched in the countries that need it most.
All of which may help to explain why market expectations surrounding this ECB meeting have been so high
- and expectations among economists are so low.

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Fragmentation and rebalancing in the euro area (slides from the presentation)
Presentation by Vítor Constâncio, Vice-President of the ECB,
Joint EC-ECB Conference on Financial Integration, Brussels, 25 April 2013

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ECB is under no illusion that a rate cut will do much good
It knows monetary policy is already too loose for Germany
(let’s hope flush German bankers don’t do anything reckless).
For much of southern Europe, however, its “transmission mechanism”
– the way lower policy rates are conveyed to the real economy – is broken.
Financial Times, 30 April 2013

Small businesses in Italy are paying interest rates German rivals were paying before Lehman Brothers’ collapse in late 2008 led to central banks slashing interest rates globally
– a fact that encapsulates all the weaknesses of banks across the eurozone’s southern periphery.

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French and German banks reduced their exposures to these markets by some 30-40 percent
ECB has taken extraordinary action to protect monetary union with the LTRO and conditional OMT.
Unfortunately, fragmentation continues and remains debilitating.

A common safety net is another essential element.
This would involve common deposit insurance and common backstop.
The other union Europe needs to contemplate is fiscal union.
David Lipton, First Deputy Managing Director IMF, April 25, 2013

Bundesbank takes aim at Mario Draghi’s ECB rescue plan in an opinion written for the German constitutional court.
ECB’s main justification for the programme
– that its interest rates were not being transmitted to the real economy in stressed countries because of speculation about a euro break-up
– relied on “strongly subjective elements” in assessing the effectiveness of this so-called transmission mechanism.
Financial Times, April 26, 2013

Revealed in an opinion written by the Bundesbank for the German constitutional court are a series of detailed objections to the plan.

The opinion, dated December 21, was not public but the German newspaper Handelsblatt said it obtained the document, which it also published on its website.

The Bundesbank said the ECB’s main justification for the programme – that its interest rates were not being transmitted to the real economy in stressed countries because of speculation about a euro break-up – relied on “strongly subjective elements” in assessing the effectiveness of this so-called transmission mechanism.

The bank also argued that it is not the role of a central bank to guarantee the irreversibility of the currency, a pledge Mr Draghi has made several times.

The legal opinion is a submission in a case to be heard in June by the constitutional court against the establishment of the eurozone’s permanent rescue fund, the European Stability Mechanism.

Bundesbank president Jens Weidmann has been public from the outset in his institution’s opposition to the Outright Monetary Transactions programme launched in September by Mario Draghi, ECB president, after pledging to do “whatever it takes” to save the euro.

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German constitutional court

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Spaniens statliga pensionsfond nu har 97 procent av sina tillgångar i spanska statspapper.
Moody’s rapport om de spanska bankerna. Andelen dåliga lån är uppe i 10,8 procent eller motsvarande 160 miljarder euro.
Många av bankerna är beroende av nödlån från ECB för att klara sig.
En annan stor risk enligt Moody’s: bankernas stora exponering mot spanska statspapper.
Bankerna har, vid sidan om pensionsfonder, nämligen stödköpt det egna landets skuldebrev i enorm omfattning.
Andreas Cervenka, SvD 5 april 2013

ECB to Push Cyprus Over the Brink
Will they really cut off all forms of support? That would give Cyprus no choice but to leave the Eurozone and could easily cause a chain reaction all across the periphery.
If they didn’t withdraw support they would be admitting that their threats were empty and would be encouraging every periphery country to openly defy them.
Naked Capitalism 21 March 2013

Now some believe that the ECB might extend the timetable. But I can think this will happen only if Cyprus has capitulated and there are merely some formalities to be tidied up. Eurozone officials were making threatening noises all during the day Wednesday about how Cyprus could not keep its banking system shut much longer.

So all eyes will be on the Cyprus parliament. Will it defy the Eurocrats or surrender to their will? As our accompanying Cyprus post describes, the island nation has no good choices. The one that is most destructive to all parties, that of a Eurozone exit, looks more likely than it should under any sane calculation.

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Governing Council decision on Emergency Liquidity Assistance requested by the Central Bank of Cyprus
The Governing Council of the European Central Bank decided to maintain the current level of Emergency Liquidity Assistance (ELA) until Monday, 25 March 2013.
Thereafter, Emergency Liquidity Assistance (ELA) could only be considered if an EU/IMF programme is in place that would ensure the solvency of the concerned banks.

Cyprus - The disaster scenario
If it fails to convince the eurozone that it has a viable alternative to bailing in depositors,
then the ECB could decide that Cypriot banks are no longer eligible for the eurosystem’s emergency loans,
known as Emergency Liquidity Assistance (ELA), which is now the only thing keeping the island’s banks afloat.

That is the gun pointing at Mr Anastasiades’ head, something made clear to him by ECB officials at the late-night negotiations
Financial Times, 20 March 2013

Without eurozone liquidity, Cyprus has no central bank to prop up its banks like a non-eurozone country does.
So either Cyprus becomes an economy with no money and reverts to the barter system,
or Nicosia would have to start printing its own currency to keep its banking system running.
When Cypriots next go into their bank branches they may be withdrawing Cypriot pounds.

The ECB’s next governing council meeting, when any decision to withdraw ELA could be taken, is on March 28.

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Jens Weidmann, president of the Bundesbank
and a member of the ECB's governing council,
Only politics, not the ECB, can solve the euro zone crisis
"We should quickly revert to our core business, which is monetary policy,"
CNBC 12 Mar 2013

"We face a structural crisis in Europe. We face a crisis of confidence, and this can only be overcome if politicians really tackle the root causes," Weidmann told CNBC in an interview.

"Monetary policy can only buy time at best. ... In that sense, I am a bit concerned about some of the expectations around the power and potential of monetary policy actions."

Weidmann said central bank actions had blurred the line between monetary and fiscal policy during the crisis.

"We should quickly revert to our core business, which is monetary policy," he said.

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Former Central Bank Head Karl Otto Pöhl:
Bailout Plan Is All About 'Rescuing Banks and Rich Greeks'
Der Spiegel May 18, 2010

The 750 billion euro package the European Union passed last week to prop up the common currency has been heavily criticized in Germany. Former Bundesbank head Karl Otto Pöhl told SPIEGEL that Greece may ultimately have to opt out, and that the foundation of the euro has been fundamentally weakened.

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Eurozone sovereigns will emphatically not be bailed out by their fellow governments following solemn announcements.
Instead, they’ll be bailed out by “exceptional liquidity assistance” (ELA),
which means the sovereigns’ own banks will write cheques to their local banks against the security of national bonds.
Totally different, you see.
Instead of money created by the ECB, this is money created by the ESCB, or European system of central banks.

John Dizard, Financial Times March 8, 2013

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By now it has become ever more clear that euro area policy is to make sure absolutely nothing happens
until after the German elections in September 2013.
John Dizard, Financial Times 16 December 2012

Of course once the elections are past, you and the new majority of the Bundestag will just have to pretend to be surprised by the easily foreseen consequences of everything you have been ignoring. Those will include an implosion of Spanish bank capital, seize-ups in cross-euro-area-border cash flows, dissolving client governments, and profits going into the offshore pockets of the loathed speculator class.

But that is all right. You have been re-elected with your majority.

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The biggest difference compared with a year ago is that Mario Draghi, ECB president,
has removed the “tail risk” of a eurozone blow-up
Ralph Atkins, Financial Times 5 March 2013

The ECB's Press Corps Realize They Have No Idea What OMT Is:
"The Rules Are What They Are" Explains Draghi

FT´s reporter Steen: Mr. Draghi, you just said that we know the rules on OMT.
I don't think I am alone in saying actually that I don't think we do.
zerohedge 7 March 2013

It took six months of humiliatingly empty rhetoric and bluster, before Europe's press corps, or rather just the FT's Michael Steen,
finally asked perhaps the one most important question regarding the OMT - "Outright Monetary Transactions"
(full Draghi definition here)
and is the magic "open-ended" bond-buying bullet and SMP replacement that has stabilized Europe:
namely "what is it?"

That it took so long for reporters, and by implication, the markets to actually point out that the emperor is indeed naked and inquire into the legal working of the ECB's deus ex machina is a testament to just what lengths the broader public has been zombified into believing that "the less you know, the better" historically, one of the KGB's better known slogans.

Draghi: On OMT, I mean the rules of OMT are what they are. So we will see, and it is not in our capacity. The ball is entirely with the governments; I have seen this on and on and on. OMT remains, is in place. It is a very effective backstop, and it is there. But you know the rules."

Steen: Mr. Draghi, you just said that we know the rules on OMT. I don't think I am alone in saying actually that I don't think we do.
The only thing I am aware of that you published a 440-ish word statement that you sent out to us in September, and other than that it feels like we've pieced it together.
So would you consider giving us at some point a written point by point this is how it works, this is what a country must do, or is this a deliberate policy to keep it a little bit vague.

Full text of excellen article

The great fear is that ECB will find it impossible to prop up the Italian bond market under its Outright Monetary Transactions (OMT) scheme if there is no coalition in Rome willing or able to comply with the tough conditions imposed by the EU at Berlin’s behest.
Europe’s rescue strategy could start to unravel
Ambrose Evans-Pritchard 26 February 2013

By adopting OMT earlier, the ECB could have prevented the panic that drove the spreads that justified the austerity.
It did not do so. Tens of millions of people are suffering unnecessary hardship. It is tragic.
Martin Wolf, Financial Times 26 February 2013

ECB has revealed that Italian government bonds make up nearly half of its holdings under a bond-buying plan
Italian bonds with a book value of 99bn euros account for the biggest holding under the now ended Securities Market Programme.
BBC 21 February 2013

Gloomsters buried the euro too soon
The turning point came when Chancellor Angela Merkel concluded that
a eurozone collapse would risk the break-up of the EU.

Philip Stephens, FT January 31, 2013

In the eurozone, the ECB succeeded in removing the tail risk of a eurozone break-up
by gaining German support for a promise to buy sovereign bonds.

It was victorious without firing a shot. But that does not tell us what would happen if it had to start firing.
The ECB might still be forced to deliver on its promises to buy. Nobody knows what would happen
Martin Wolf, FT January 29, 2013

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Marin Wolf

Draghi calls Schäuble a lawyer
At last week’s Ecofin, Schauble said, what he had reported before, that in his view, Cyprus was not systemically relevant
(which means that Germany could not legally participate in an ESM programme, as systemic relevance is a legal pre-condition under the German ESM law).
Draghi also warned that a default of Cyprus would also impede Ireland’s and Portugal’s return to the market
Eurointelligence 28 January 2013

Will the ECB really sanction Italy,
risking its economic collapse and possibly a financial meltdown in Europe?
Wolfgang Münchau, Financial Times September 16, 2012

Welcome back to the eurozone crisis
Germany will not after all allow Spain to dump the risk of its banks on to the ESM
Wolfgang Münchau, Financial Times 30 September 2012

Have you noticed that the half-life of eurozone optimism is getting shorter? It was only three weeks ago that Mario Draghi, the European Central Bank president, announced his outright monetary transactions, a programme of sovereign bond purchases with no upfront limit. It seemed that the consensus was that this had either ended the crisis, or its acute phase.

Last week investors – and Spanish journalists – suddenly discovered to their horror that Germany will not after all allow Spain to dump the risk of its banks on to the European Stability Mechanism, the eurozone rescue fund.

That seems to contradict the June 29 eurozone leaders’ summit statement, which said it was “imperative to break the vicious circle between banks and sovereigns”.

Whether or not you call this a banking union, or a breach of the June 29 agreement, is irrelevant. The point is that you cannot force through a banking union against the explicit will of the German government, the German parliament, the German public at large and the Bundesbank. I suspect the EU will ultimately agree on a fudge. But it would be irrelevant for the resolution of this crisis.

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Wolfgang Münchau

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Mr Draghi’s plan is a smart, if covert, way of doing something that’s been rejected formally,
namely leveraging the EFSF/ESM eurozone bailout funds.
George Magnus, Financial Times 17 September 2012

If countries need to apply to the EFSF/ESM for help, and for the ECB to authorise OMTs, it is because their austerity programmes need strengthening under international monitoring.

This makes no economic sense because it aggravates fiscal and economic instability, and no political sense because it is highly divisive within and between countries.

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Mr Draghi’s magic bullet has badly wounded something even more important – democracy in Europe. Certainly, for anyone with a sense of history, the sight of the German representative on the ECB being isolated and outvoted should be chilling.
Since 1945, the central idea of the European project was never again to leave a powerful and aggrieved Germany isolated at the centre of Europe.
Gideon Rachman, Financial Times, September 10, 2012

The ECB is saying that it will seek to eliminate the threat of a break-up, except when this threat is most real,
which is. of course, precisely when the country is failing to meet policy conditions.

Martin Wolf, Financial Times 11 september 2012

Investors know that electorates might choose a government that has no intention of sticking to agreed conditions. What happens then? The answer is: either the ECB stops buying, in which case the bond market implodes, or the ECB continues, in which case conditionality is jettisoned.

This latter possibility seems the more likely: it will be hard for the ECB to stop. But that, too, might have dire consequences.

Spurred on by opposition to this scheme from the Bundesbank, postwar Germany’s most respected institution, swathes of German opinion hate what is happening to their money, as my colleague, Wolfgang Munchau, explained a recent column. It is easy to imagine what would happen within Germany if an important member country started to backslide on agreed policy conditions, while the ECB went on buying its bonds.

The swelling rage would hardly strengthen confidence in the irreversibility of the euro.

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The ECB action will not prevent countries like Spain from having a pretty terrible few years.
But, for the first time since the start of the crisis, the eurozone - on paper at least - has what Americans would call a catastrophic insurance policy.
Stephanie Flanders, BBC Economics editor, 7 September 2012

As I said on the Today programme this morning, if the bank, with all its internal misgivings about the scheme, messes up in the implementation it might not save the euro either.

The ECB will not protect Spain, or Portugal, or Italy from being discriminated against by the markets - from paying higher interest rates to borrow than, say, Germany. But if Spain and the rest are able to keep their populations on the side of doing what it takes to stay in the euro, the ECB is saying it will not allow them to be forced out.

That is what Mr Draghi meant when he talked of the OMT programme as backstop against the "tail risks" hanging over the euro system - the extreme scenarios, like the whole thing blowing apart.

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Reports in Suddeutsche Zeitung on a new anti-euro case this morning that links last week’s decision by the ECB to start Outright Monetary Transactions (OMT) to the current ESM case.
The case was brought by Peter Gauweiler, a well-known Eurosceptic member of the Bundestag from the Bavarian CSU, and a serial litigator.
Eurointelligence 10 September 2012

Should Europe now seek political union?
Forming such a union implies nothing less than the end of the nation state.
There are powerful arguments why “Europe” – whatever this means and how many countries might be included – should have this ambition.
However, to base the argument for integration primarily on saving monetary union is anything but convincing.
And it is more than strange when foreign politicians and experts are pressing eurozone states to give up national sovereignty, out of fear that a collapse of monetary union might have severe consequences for their economies.
Otmar Issing, Financial Times 29 July 2012

The president of the Bundesbank was once the mightiest central banker in Europe. No more.
In the council of the European Central Bank, Jens Weidmann is just one of 23.
He has only one vote – the same as Greece.
Josef Joffe, editor of Die Zeit and a fellow of the Hoover Institution at Stanford University, Financial Times 4 September 2012

Under hotet att bli ett nästa Grekland kommer medborgarna låta ett nytt EU-fördrag kuppas igenom.
Peter Benson, SvD Näringsliv 21 juli 2012

ECB pytsade i december och mars ut ut hela 1 000 miljarder euro i treåriga lån.
Spaniens banker har stått längst fram i lånekön. De hande i juli lånat hela 376 miljarder euro av ECB.
En del av dessa pengar har bankerna använt för att köpa spanska statsobligationer. Det var också precis avsikten,
och ett sätt för ECB att självt slippa stödköpa direkt.
Andreas Cervenka, SvD Näringsliv 3 september 2012

Fotnot RE: 87 miljarder euro är cirka 733 miljarder kronor

Att låta Europeiska centralbanken stå för stödet till krisländerna trollar inte bort kostnaderna. De döljs bara för väljarna.
ECB kan alltid trycka hur mycket pengar som helst.
Lars Calmfors, kolumn DN 9 augusti 2012

Men på vilket sätt drabbas skattebetalarna av centralbankernas kapitalförluster?
Det måste vara väldigt kännbart eftersom det enligt Calmfors riskerar att leda till en politisk reaktion som avskaffar euron. Så vitt jag kan förstå innebär en kapitalförlust endast indirekta effekter på centralbankerna och mycket utspädda effekter på skattebetalarna.
Danne Nordling, 5 augusti 2012

I Berlin blev Jens Weidmann snabbt Angela Merkels viktigaste rådgivare i ekonomiska frågor. En smidig, pragmatisk och beslutsstark tjänsteman utan partipolitisk koppling som höll i trådarna bakom kulisserna.

I sin nya roll som Bundesbankchef – och medlem i Europeiska Centralbankens råd – överraskar han med att öppet brännmärka ECB:s stödköp av statspapper i det krisdrabbade Sydeuropa.

At Jackson Hole, Mr Weidmann refused to comment on these reports, which presumably means they must be true.
If he did resign, it would be the third such German walk out over ECB bond buying
after Jurgen Stark, who resigned late last year, and before him, Axel Weber, who was equally unable to contain his contempt for the practice.

It's plainly intolerable that perfectly solvent Italian households and businesses should be forced to pay much higher real rates of interest than their German counterparts. Such discrimination only hardwires national differences in competitiveness into the euro area.

It follows that Mr Draghi must urgently apply monetary stimulus in the form of bond buying to the parts of the eurozone economy that need it.

To hell with Mr Weidmann's objections. What's Germany going to do if Mr Weidmann is defied? Leave the euro? Come to think of it…

Daily Telegraph 31 August 2012

An article in Die Zeit, in which Mario Draghi answered his German critics. The full English version was published on the ECB’s website. He made a statement that would leave orthodox’ German monetarists shiver – that the ECB has to go beyond standard monetary policy monetary tools, and that it was an institution of the European Union, not just a technical apparatus.

“Yet it should be understood that fulfilling our mandate sometimes requires us to go beyond standard monetary policy tools. When markets are fragmented or influenced by irrational fears, our monetary policy signals do not reach citizens evenly across the euro area. We have to fix such blockages to ensure a single monetary policy and therefore price stability for all euro area citizens. This may at times require exceptional measures. But this is our responsibility as the central bank of the euro area as a whole.
The ECB is not a political institution. But it is committed to its responsibilities as an institution of the European Union...”

Eurointelligence, August 30. 2012

ECB Divided over Efforts to Save Euro
What is intended to keep the monetary union together could actually drive it even further apart.
Sven Böll, Michael Sauga and Anne Seith, Der Spiegel 30 juli 2012

Draghi's remark was not the result of any resolutions, and even members of the ECB Governing Council admitted that they had heard nothing of such plans until then.

The representatives of the northern European creditor countries fear that the ECB, out of consideration for the crisis-ridden south, is willing to sacrifice even the most sacrosanct principles to monetary policy.

Representatives of the Mediterranean countries, on the other hand, suspect that the Bundesbank, in particular, doesn't even want to defend the euro anymore and is secretly contemplating a return to the deutsche mark.

But it is already clear that the plan will encounter resistance. Many monetary watchdogs -- including Weidmann and, most of all, central bankers from the Netherlands, Belgium and Finland -- have already been very outspoken in recent months about their opposition to new bond purchases.

Many members of the ECB Governing Council view the purchase program that quietly expired at the end of last year as expensive, risky and generally counterproductive. Fewer and fewer central bankers are willing to do the work of the politicians and add more risks to the ECB's balance sheet.

Moreover, the purchases made to date have not proven very successful.

What is intended to keep the monetary union together could actually drive it even further apart.

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Lessons from the Fed’s Mistake of 1932
This week sees the 80th birthday of a fateful Fed decision in 1932, a decision which some scholars believe led inexorably to the bank failures of early 1933, and the suspension of US membership of the Gold Standard.
That decision was to end the only period of aggressive quantitative easing which was attempted by the Fed during the worst period of the Great Depression between 1929 and 1933.
Gavyn Davies, Financial Times 29 July 2012

End of game? Don’t bet on it
Policymakers are likely to fall back once again on a failed approach to avoid admitting past errors.
Ultimately, however, EZ leaders will come around to the only way forward
– the ECB underwriting both banks and sovereigns while additional controls on bad banking and bad fiscal governance are put in place.
Charles Wyplosz, 25 July 2012

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But will the euro really be saved? That remains very much in doubt.

Europe’s single currency is a deeply flawed construction.
And Mr. Draghi, to his credit, actually acknowledged that.
“The euro is like a bumblebee,” (humla) he declared. “This is a mystery of nature because it shouldn’t fly but instead it does. So the euro was a bumblebee that flew very well for several years.”
Paul Krugman New York Times 30 July 2012

But now it has stopped flying. What can be done? The answer, he suggested, is “to graduate to a real bee.”

Never mind the dubious biology, we get the point. In the long run, the euro will be workable only if the European Union becomes much more like a unified country.

Consider, for example, the comparison between Spain and Florida. Both had huge housing bubbles followed by dramatic crashes. But Spain is in crisis in a way Florida isn’t. Why? Because when the slump hit, Florida could count on Washington to keep paying for Social Security and Medicare, to guarantee the solvency of its banks, to provide emergency aid to its unemployed, and more. Spain had no such safety net, and in the long run, that has to be fixed.

But the creation of a United States of Europe won’t happen soon, if ever, while the crisis of the euro is now. So what can be done to save the currency?

Why did the euro seem to work for its first eight or so years? Because the structure’s flaws were papered over by a boom in southern Europe.

And bond purchases are the easy part. The euro can’t be saved unless Germany is also willing to accept substantially higher inflation over the next few years

Should it be saved? Yes, even though its creation now looks like a huge mistake. For failure of the euro wouldn’t just cause economic disruption; it would be a giant blow to the wider European project, which has brought peace and democracy to a continent with a tragic history.

But will it actually be saved? Despite Mr. Draghi’s show of determination, that is, as I said, very much in doubt.

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Kommentar av Rolf Englund
Bristande militans. Euron bör inte räddas, tills vidare, utan snarast avvecklas.
Euro-projektet är ohållbart. Ju förr euron avvecklas, desto bättre.
Men den kan ju Krugman ine säga.

On Friday Merkel and Hollande jumped on the bandwagon.
They said Germany and France would do everything they could to save the eurozone.
Last month, eurozone members agreed that the rescue fund known as the European Financial Stability Facility (EFSF) will start buying government bonds.
That fund is scheduled to be replaced by a bigger package called the European Stability Mechanism (ESM) later on.
However, the proposed purchase of government bonds will have to wait until September 12,
when Germany's constitutional court is expected to rule on whether Germany can participate in the rescue fund.
Deutsche Welle 28 July 2012

Last year, the ECB bought government bonds on a grand scale to prop up Italy and Spain.
However, Germany's central bank was highly critical of the move, since the ECB was not originally intended to take on governments' debts by buying bonds.

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German Constitutional Court

By suggesting that the ECB will be there to buy Italian and Spanish debt, the central bank could face an unhealthy rush by investors to offload their bonds.
The size of these sales, and the impact on the central bank could be considerable.
As one analyst very aptly pointed out, Italy has the third largest bond market in the world.
And how would this go down with Germany?
Wall Street Journal 27 July 2012

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"A banking license for the bailout fund would factually mean state financing via the printing press and would be a fatal route,
which therefore is prohibited by the EU treaty," the Bundesbank spokesman said.
Reuters, 27 July 2012

"The Bundesbank continues to view the SMP in a critical fashion," a Bundesbank spokesman said "The mechanism of bond purchases is problematic because it sets the wrong incentives."

The ECB has spent more than 210 billion euros on government bonds, having bought them in the secondary market.

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Det som händer i Europa är stort, mycket svårt att greppa, och åtgärderna som föreslås är stundtals radikala.
Det säger sig självt att en massiv uppbyggnad av nya institutioner under panikartad brådska inbegriper stora risker.
SvD-ledare 30 juli 2012

De europeiska politikerna svänger 180 grader, går från ena ytterligheten till den andra, med allt kortare intervaller. Spara eller slösa. Merkel eller Hollande. Åtstramning eller tillväxt eller bådadera.

Draghi sade att ECB är ”redo att göra allt som krävs” för att rädda euron, och lade – i en icke tidigare hörd ton av fräckhet – till ”Tro mig, det kommer att räcka.”
Det han syftade på tolkades enhälligt som att ECB återigen kommer att storköpa spanska statsobligationer, och andra krisländers, ifall de berörda obligationsräntorna blir så höga
att de stör det europeiska finansiella systemet, vars smidiga flyt ECB uppdragits att säkra.

Förutom marknadens positiva reaktioner handlade de efterföljande analyserna mestadels om huruvida ECB är på väg att överskrida sitt mandat.

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Svenska Dagbladet

Mr Draghi said the ECB was “ready to do whatever it takes” within its mandate to preserve the single currency. “Believe me, it will be enough,”
“To the extent that these premia have to do not with factors inherent to my counter party, they come into our mandate, they come within our remit, Mr Draghi said.
“To the extent that the size of the sovereign premia hamper the functioning of the monetary policy transmission channels, they come within our mandate.”
Financial Times, 26 July 2012

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EMU Start

The only issue that matters at this late stage is whether Germany is willing to let the ECB step up to its responsibility as a global central bank after
and take all risk of sovereign default in Spain and Italy off the table - which it can do easily enough once it stops playing politics and obeys the “financial stability” clause (Article 127) of the Lisbon Treaty.
That is to say, whether Latin states are willing to mobilize their majority power on the ECB’s council to force a change in policy over German protest,
Failure to halt a full-blown debt debacle in Spain and Italy would tip the entire global system into a downward spin,
triggering the sort of feedback loop that caused such havoc in late 2008.
Ambrose Evans-Pritchard 29 July 2012

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Article 127
1. The primary objective of the European System of Central Banks (hereinafter referred to as "the ESCB") shall be to maintain price stability.
5. The ESCB shall contribute to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system.

Article 125
The Union shall not be liable for or assume the commitments of central governments, regional, local or other public authorities

Actually, the ECB is currently in breach of Article 127 (clause 5) of the Lisbon Treaty obliging it to contribute to "the stability of the financial system".

The first duty of every central bank is to avert disaster.

It is time for Spain and the victim states to seize the initiative.
What they can to do is use their majority votes on the ECB's Governing Council to force a change in monetary policy.
Germany has two votes out of 23, with a hardcore of seven or eight at most.

If Germany storms out of monetary union in protest, that would be an excellent solution.
Ambrose Evans-Pritchard, 22 July 2012

The currency misalignment eating away at EMU would be cured instantly. There might even be a stock market rally once the boil was lanced. It would certainly be a better outcome than the current course of deflationary Troika regimes and loan packages for economies trapped with the wrong exchange rate, destined to end with one country after another being thrown out of EMU in a chain reaction.

For Germany it would entail a revaluation shock and stiff losses for German banks and insurers with large holdings of Club Med debt.

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EMU Start

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ECB President Mario Draghi
The euro is “irreversible” and is not in danger of collapsing
eurozone nations will eventually be bound even closer together
analysts have been too pessimistic and had not recognised the political will behind the eurozone
Telegraph 21 July 2012

Mr Draghi claimed that the currency was “absolutely not” in danger when asked by France’s Le Monde newspaper in an interview.
“We see analysts imagining the scenario of a euro zone blow-up,” he said. "They don't recognise the political capital that our leaders have invested in this union and Europeans' support. The euro is irreversible."

Mr Draghi argued that it was unavoidable that in the future states in the currency bloc will be drawn even closer together, politically and financially, leading to the formation of new European institutions.

"All movement towards financial, budgetary and political union is for me inevitable and will lead to the creation of new supranational bodies," Mr Draghi said.

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Resonerar man kring vad som är ”långsiktigt hållbart” så landar man lätt i slutsatsen att eurons dagar är räknade.
Det finns dock starkare krafter som talar för att EMU-länderna trots allt lär ge upp makten till Bryssel.
Etablissemanget vill det. Nästan alla etablerade partipolitiker kommer framstå som åsnor om EMU havererar.
Marknaden vill det. Finansiella marknader har nästan alltid ett kortsiktigt fokus och bryr sig inte om vad som är rättvist eller demokratiskt.
Lobbyisterna vill det. Hela banksektorn och tyska exportindustrin kämpar med alla medel för att euron ska överleva.
Peter Benson, SvD Näringsliv 21 juli 2012

The IMF’s latest report on the eurozone is an astonishing document.
When the full history of this episode is written, this "Article IV Consultation" will be cited as a key exhibit.
However I dare say that if there is going to be a move towards a full United States of Europe some people might quite like to vote on it
Ambrose Evans-Pritchard, July 19th, 2012

The euro area crisis has reached a new and critical stage. Despite major policy actions, financial markets in parts of the region remain under acute stress, raising questions about the viability of the monetary union itself."
The adverse links between sovereigns, banks, and the real economy are stronger than ever. Financial markets are increasingly fragmenting along national borders.

"It’s difficult to argue with the basic thrust of the IMF’s report, in the sense that if they want to save the eurozone, the politicians probably do have to take dramatic action. However I dare say that if there is going to be a move towards a full United States of Europe some people might quite like to vote on it," Gary Jenkins from Swordfish said.


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"The euro area crisis has reached a new and critical stage.
Despite major policy actions, financial markets in parts of the region remain under acute stress,
raising questions about the viability of the monetary union itself,"

Telegraph staff and agencies, 18 July 2012

The fund added that the independent ECB, which is legally forbidden to finance governments, could be given full lender-of-last-resort functions, to help break the vicious circle of highly indebted governments borrowing from banks, which in turn become vulnerable due to the risk associated with the bonds.

"The ECB can provide further defences against an escalation of the crisis," the IMF report said. "These could include policies to support demand in the short run and fend off downside risks to inflation, as well as measures to ensure monetary transmission, currently impaired by financial stress in some countries."

Full text

IMF Executive Board Concludes Article IV Consultation on Euro Area Policies
Public Information Notice (PIN) No. 12/80, July 18, 2012

The ECB’s trillion-euro liquidity operation brought temporary relief, but
only at the cost of increasing Spain’s financial fragility as its banks used the ECB’s loans to buy more of their government’s subsequently downgraded debt.
Bloomberg Editors May 1, 2012

Spanish, Italian and Portuguese banks are loading up on bonds issued by their own governments,
a move that shifts more of the risk of sovereign default to European taxpayers from private creditors.
Holdings of Spanish government debt by lenders based in the country jumped 26 percent in two months, to 220 billion euros,
Bloomberg 18 April 2012

In an interview with Stern magazine, Jörg Asmussen warned that a negative ruling by the German constitutional court on September 12 would mean “that the ESM in its current form has failed”. Asmussen also said that he was worried about centrifugal forces at work within the eurozone.
“There is a perceived north south divide that I have not known in the past 10, 15 years and that we have to overcome quickly”
Europe is at a crossroad. Either it integrates further and render national powers to the European level or it disintegrates, the central banker insisted.
“There are only those two possibilities, we cannot afford to have permanent instability”, Asmussen said.
Eurointelligence 19 July 2012

Jörg Asmussen
2003-2008 Director General for financial market policy at the German Federal Ministry of Finance
2008-2011 State Secretary at the German Federal Ministry of Finance, responsible for the Directorates Fiscal Policy and Macroeconomic Affairs, Financial Market Policy and European Policy
Since January 2012 Member of the Executive Board, European Central Bank

More here

Germany’s man at the ECB, Jörg Asmussen:
The influential “commentariat” comes predominantly from outside the euro area.
The big English-language newspapers, the news agencies and wire services that shape opinions in the economic and financial sphere on the Continent
But if the profound political commitment of Eurozone countries to the historical project of “ever closer union” is neglected, the assessment remains superficial and partial
P O Neill,, 6 July 2012

Moody's downgraded Italy's government bond rating two notches from A3 to Baa2. This is just above junk status.
Moreover, the outlook is negative with further downgrades possible in the near future.
So what happened in the Italian government bond auction this morning? Did buyers demand higher interest rates?
No they didn't. How is this possible?
Apparently Italian banks couldn't resist an urge to grossly overpay for their government's newly issued debt.
The ECB was most certainly backing them up behind the scenes.
Seeking Alpha 13 July 2012

The next summit on June 28 and 29 will unveil a long term road map towards fiscal and banking union,
which in better economic circumstances could appear highly impressive.

But the market is currently focused on the shorter term.
Unless there is some form of debt mutualisation at the summit, resulting in a decline in government bond yields in Spain and Italy, the crisis could rapidly worsen.
Gavyn Davies, Financial Times 22 June 2012

The first call on this money will be the €100bn which will be disbursed for the Spanish bank bail out. That €100bn will presumably need to come out of the total €500bn of new lending capacity, leaving €400bn for other purposes.

Germany has been very insistent on maintaining the €500bn ceiling, because this sets a limit on its potential losses from this form of debt mutualisation. There is no sign of this changing.

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Angela Merkel balked at committing to direct sovereign debt purchases through the euro-area bailout fund,
pushing back on calls by the bloc’s leaders who support the measure as a way to ease the crisis
Such a move, while legally possible, “is not up for debate” at present, Merkel said yesterday in Berlin.
French President Francois Hollande championed the idea of using the European Stability Mechanism to purchase indebted countries’ bonds
Just returned from the Group of 20 summit in Los Cabos, Mexico, Merkel said: “I haven’t heard about such things.”
Bloomberg, 21 June 2012

“There is no concrete planning that I know about, but there is the possibility of purchasing sovereign bonds on the secondary market,” Merkel told reporters in Berlin after meeting with Dutch Prime Minister Mark Rutte. “But this is a purely theoretical statement about the legal situation.”

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Berlusconi says Italy should quit eurozone unless Merkel changes course
Ok, he is no longer Italy’s prime minister, but he is still the leader of one of Italy’s most important political parties.
Either they agree a full backstop – which can logically only come from the ECB, and which in turn requires a political union – or the eurozone collapses.
Eurointelligence Daily Briefing 21.06.2012

With the EU’s politicians unable or unwilling to act, everything depends on the European Central Bank and its chief, Mario Draghi.
The EU’s political leadership understands that a Spanish default would be a cataclysm -- including for Germany
The ECB has to step up. It wasn’t easy for the Fed to enlarge its role in this way, and it will be even harder for the ECB, which operates under tighter legal restraints.
There’s no alternative. We will know one way or the other within days. EU leaders have a summit meeting scheduled at the end of the month
Clive Crook, Bloomberg, June 20, 2012

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European leaders are poised to announce a £600 billion /cirka 6.600 miljarder kronor/ deal to bail out Spain and Italy
Telegraph 20 June 2012

G20 sources suggested that Angela Merkel was preparing to
allow eurozone institutions to begin buying bonds issued by member state's governments.
The purpose of the intervention would be to bring down sovereign bond yields of weaker eurozone states
The Independent 20 June 2012

Den union som nu håller på att ta form, med ett stort inslag av överstatlighet, stödfonder och styrning av enskilda länders skatter och utgifter,
är en helt annan union än den ”rena” valutaunion som Sverige folkomröstade om 2003.

Många av dem som röstade ”ja” då har nog anledning att känna sig lurade i dag.
Mats Persson,professor vid institutet för internationell ekonomi, Stockholms universitet, DN Debatt 19 juni 2012

Fredrik Reinfeldt i riksdagens partiledardebatt 13 juni 2012
Ett stort steg som pekar på fördjupning och överföring av suveränitet från nationalstaterna till den europeiska nivån.
Med kort varsel kommer det nu att avkrävas svar av Sverige som nation och av riksdagens partier om hur vi ska förhålla oss till mycket av det här.
Klicka här

"A secret plan to save Europe": That's how the German newspaper Welt am Sonntag described it this weekend.
According to the paper, Van Rompuy, Manuel Barroso,Juncker and Draghi were all working behind the scenes on a master plan.
But it turns out the grand plan is not all that secret. At the last European summit on May 23, the four were explicitly given the task of finding a permanent solution to the crisis by the end of this month.
Deutsche Welle June 6 2012

Merkel was probably responding to a comment from ECB head Mario Draghi last week. He said that the crisis had exposed the inadequacy of the financial and economic framework set up for the monetary union before it was launched in 1999.

"That configuration that we had with us by and large for ten years which was considered sustainable, I should add, in a perhaps myopic way, has been shown to be unsustainable unless further steps are taken," Draghi said in response to questions in the European Parliament.

Only gradually did it become clear how dramatic this statement was:
the man in charge of the European Central Bank no longer believes in the future of the euro in its current form

Full text Deutsche Welle

Full text Die Welt 3 Juni 2012


Is the euro entering the end game?
World Bank head Robert Zoellick argued that it is almost time to "break the glass" on the emergency alarm.
Such sentiments about the dangers currently facing the European common currency are hardly new.
But this week, concern at the highest levels appears to be slowly morphing into panic.

Der Spiegel 1 June 2012

Spain, though, is far from the only concern. Recent economic numbers have indicated that the situation is getting worse rather than better in Ireland and Portugal, two countries that have already been forced to take advantage of European bailout money.

Full text

Italian Prime Minister Mario Monti also got into the act on Thursday by
demanding that the euro backstop fund, the European Stability Mechanism (ESM),
be allowed to provide fresh capital directly to struggling European banks,

a move that Germany has strictly opposed thus far.
Der Spiegel 1 June 2012

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ECB, Lender of last resort, current account
As Paul Krugman said to me earlier this week on his trip to London,
if the eurozone is going to end, it's a fair bet that the process will start with a Spanish bank run

Stephanie Flanders, BBC Economics editor, 1 June 2012

Yesterday we found out that nearly 100bn euros had fled the Spanish banking system in the first quarter.
I discussed the options for Spain and its banks, and its government's desire to get help from the European Central Bank, on the Today programme this morning.

It's worth remembering why there is a gap in the first place - why the periphery countries need to borrow a large amount from the outside world.

These countries need the money because, as this second chart shows, even after three years of austerity and crisis, with the exception of Ireland, all of the economies in crisis are still importing a lot more stuff than they export.

What looks like ECB emergency liquidity for periphery banks is just as much balance of payments financing for the entire economy - something that has previously tended to be provided by the IMF. (I went into this distinction in greater depth a while ago).

Suitably designed, the ECB's balance sheet could perhaps be a temporary bridge to a full-blown fiscal union.
But it's quite something to ask it to play this role in a vacuum, however convenient that might be for governments like the French.

Apart from anything else, it's deeply undemocratic. No-one ever elected the ECB.

The governor /Draghi/ has said all this before, but he has perhaps tried a little harder, in the past, to hide his frustration. Today he said, testily, that most of the people who thought the ECB should be a "lender of last resort" for the euro seemed not to understand what a lender of last resort actually was - lending to solvent concerns, at good collateral, for a "penalty rate".

It is not what it /ECB/ thinks it is doing when it buys Italian or Spanish sovereign debt, which it has always defended, very separately, as an element of monetary policy.

The governor said buying a lot of periphery debt would be tantamount to financing those countries' current account deficits:
in effect, a transfer from surplus countries to creditor countries, which should more properly be the job of governments.

For the ECB, there is an important technical difference between the emergency liquidity programmes for banks and any sovereign bond purchases:
in the lending to banks, the ECB gets collateral.
In the second case, the sovereign risk is simply taken directly onto the ECB's balance sheet.

You can't draw an easy dividing line between "ordinary monetary policy operations" and "extraordinary current account financing"
in a single currency area with one central bank and 17 sovereign governments.

Or if you can, the ECB crossed it a long time ago.

Full text

Bank run, The beginning of the end

Can one have balance of payments crises in a currency union?
The answer to this question is an unambiguous “yes”.
Martin Wolf, FT February 16, 2012

Stephanie has been a reporter at the New York Times (2001); a speech writer and senior advisor to the US Treasury Secretary (1997-2001); a Financial Times leader-writer and columnist (1993-7); and an economist at the Institute for Fiscal Studies and London Business School.
She became BBC economics editor in April 2008.
She has won numerous awards, including the 2010 Harold Wincott Award for online journalism.
Her father was Michael Flanders, of the 1950s and '60s musical comedy duo, Flanders and Swann.
She lives in West London with her partner and their two children.

There isn’t much that Germany has in common with Greece but in one regard the two countries are actually quite similar
– both say they want the euro but neither is prepared to do the things necessary to keep it.
Jeremy Warner, 30 May 2012

ECB has drawn a strict distinction between acting as lender of last resort to governments – a definite no, no
– and providing lender of last resort facilities to banks, which is apparently fine.

Banks have thus been provided with virtually unlimited cheap liquidity through the LTRO programme so as to enable them to keep lending. But, rather than using these funds to support the real economy, banks have either bought sovereign bonds or simply deposited the money back with the ECB. Through the back door, the ECB has thus played some sort of role in doing what it said it wouldn’t – supporting sovereign bond markets.

These actions are now creating big complications. Many banks in Italy and Spain are already badly underwater on their sovereign bond purchases, thus compounding the solvency problem at the heart of the banking system.

No asset manager outside these countries will invest in Spanish and Italian bonds any longer, leaving domestic banks as the only purchasers left of sovereign debt.

Bizarrely, Spanish banks will therefore be expected to buy the bonds the Spanish government needs to issue to raise the money to bail them out.

Curiouser and curiouser, cried Alice

RE: Vi som är bildade, eller kan söka på Google, vet bakgrunden till detta citat

The wider socio-political question of what to do with a monetary union which seems to condemn its regions to permanent depression would still go unanswered.

If something else doesn’t derail the single currency first, it will soon fall to popular insurgency.

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“The ECB will continue to lending to solvent banks and will keep the liquidity lines active and alive with solvent banks,”
“it’s not our duty, it’s not in our mandate” to “fill the vacuum left by the lack of action by national governments on the fiscal front,”
on “the structural front, and on the governance front.”

ECB President Mario Draghi, Bloomberg 31 May 2012

Draghi said that a union with more centralized supervision would make bank recapitalizations easier, and hinted that he is in favor of using the permanent bailout fund, the European Stability Mechanism, to be used to inject capital into banks.

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Clearly the sugar rush from the ECB's 3-year credit blitz has worn off, leaving behind some very toxic effects.
Why anybody thought that a €1 trillion liquidity blitz through the banks is better than €1 trillion in genuine QE is beyond me.
Ambrose Evans-Pritchard, 30 May 2012

Those banks in Italy and Spain that used the money to play the Sarkozy redemption trade by purchasing sovereign debt – some with ten times leverage – are in serious trouble.

I think the ECB has twisted itself in knots to comply with a dysfunctional mandate, enshrined in the dysfunctional Maastricht treaty.
One error begets another.

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Rather than borrow the 19bn euros from third-party investors in the normal way,
the Spanish government wants to give Bankia 19bn euros of its bonds in return for a majority stake in the bank.

But it is a bit better than that, because of the magnificent rules of central banking.
The point is that Bankia can take those 19bn euros of Spanish government bonds and swap them for cash at the European Central Bank.

Robert Peston, BBC Business editor, 8 May 2012

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A Spanish plan to recapitalise Bankia, the troubled lender,
by indirectly tapping the European Central Bank for cash,
was bluntly rejected as unacceptable by the ECB

Mario Draghi, president of the European Central Bank,
said the EU is at a "crucial moment" in its history.
"We have reached a point in which the process of European integration needs a courageous leap of political imagination in order to survive,"
Ambrose Evans-Pritchard, 24 May 2012

Yet no such leap was in evidence. The eurozone is no closer to equipping itself with federal debt machinery and a genuine lender of last resort.

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"I am sure the euro will oblige us to introduce a new set of economic policy instruments.
It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created."
Romano Prodi, EU Commission President. Financial Times, 4 December 2001


So what is going to happen:
creation of the European superstate and survival of the euro,
or a disastrous monetary and political disintegration?

Robert Peston, BBC Business editor, 17 May 2012

A succession of post-war leaders, whose intentions would be seen by many as honourable, made a series of disastrously ill-timed decisions.

If you had any doubts that we were minutes away from financial and economic catastrophe before Christmas, the European Central Bank does not.

"In the autumn of 2011, the conditions were very dangerous," one of its executive directors, Benoit Coeure, told me.
"European banks were facing severe difficulties to fund themselves, to access finance, and we were very close to having a collapse in the banking system in the euro area,
which would have also led to a collapse in the economy and to deflation. And this is something that the ECB could not accept."
Robert Peston, BBC Business editor, 17 May 2012

So the ECB put 800 European banks on life support, by providing more than a trillion euros of emergency three-year loans to them. As Mr Coeure concedes, this so-called LTRO is a temporary prop, not a solution to the euro's ills.

"It is a pain-killer, a very powerful one... This period of calm has to be used by governments to fix the underlying issues, the fiscal (deficit) issues and the competitiveness issues that European countries are facing."

A sharing of the debt burden requires near revolution in the way the EU is governed, according to a trio of the grand old men of Europe.

"The crisis makes at least one thing obvious and that is we need more of Europe, we need the political union as the only way to save the stability of the euro," the former German chancellor, Gerhard Schroeder, said.
Given that his party, the SPD, could well be in power again next year, we may well see progress towards this political union.

Jean-Claude Trichet - president of the European Central Bank during many of the euro's formative years - made a similar point. "In a single market with a single currency… it seems to me that Europe could go for a federation."

Helmut Schlesinger, another influential central banker who has seen the odd financial crisis at close quarters and was president of the Bundesbank when sterling was forced out of the European Exchange Rate Mechanism in 1992.:
- And I would say that either we get the United States of Europe, that is an actual political union, and then that political union gets its own currency. But then it is no monetary union any longer, but the currency of that new state.

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Federalism - Rome, Habsburg and the European Union

"I am sure the euro will oblige us to introduce a new set of economic policy instruments.
It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created."
Romano Prodi, EU Commission President. Financial Times, 4 December 2001

Top of page - News - Start page

This is the first major revolt by any electorate against the eurozone’s austerity policies,
and it is those policies which have underpinned the willingness of the ECB to use its balance sheet to rescue the banking system.
Gavyn Davies, 16 May 2012

ECB has apparently now said that it won't directly lend to some Greek banks that it judges to be technically "insolvent".
That sounds bad, but the banks that have lost access to direct ECB funding can almost certainly still get money from the Greek central bank, which, of course, is ultimately, getting its cash from the ECB
Stephanie Flanders, BBC Economics editor, 17 May 2012 Last updated at 01:08 GMT

These are banks that have holes in their balance sheets, because, thanks to the restructuring of Greek sovereign debt, they can't now expect to get back all of the money that they lent to the government.

(though unlike the more direct form of ECB liquidity support, all the risk implicit in this so-called ELA lending is, formally at least, borne by the Greeks alone).

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Om att äta kakan, ha den kvar, eller sälja den på kredit till Grekland
Rolf Englund 17 maj 2012

Totalling €1 trillion, it was dubbed a long-term refinancing operation but has proved anything but
In fact, LTRO merely disguised the main problem – the state Spain’s in – while blurring the lines
between whether it’s facing a banking or a sovereign crisis

Alistair Osborne, Telegraph 16 May 2012

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Europeiska centralbanken behöver bidra till att lånekostnaderna sjunker ytterligare
så att krisländerna kan lägga mindre pengar på räntebetalningar

Peter Wolodarski, DN 13 maj 2012

"Its functioning fell short of both expectations and needs"
EFSF, the rescue fund for cash-strapped euro-zone countries, has not been very successful, admitted ECB President Mario Draghi Spanish banks are particularly unsteady. They are sitting on roughly €1 trillion in shaky loans
Der Spiegel 7 May 2012

Time is running out. With the financial crisis now in its fifth year, the banks' problems remain unresolved, and in some countries they are even jeopardizing the stability of the state -- and the future of the European common currency.

The estimates for the cash shortfall range from €50 billion to €200 billion.

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The only solution to the eurozone crisis
Wolfgang Munchau, Financial Times May 6, 2012

The solution can come only from a combination of two instruments
– debt monetisation through the European Central Bank
and default into the European Stability Mechanism, the €500bn rescue fund that becomes operational in July.

In practice, any resolution of the crisis will involve more of the latter than the former.

We have reached the limits of what the ECB will do. I agree with Paul de Grauwe, of the London School of Economics,
that direct purchases of government bonds would have been more effective than the indirect route of long-term refinancing operations.
But the ECB is unlikely to go that far.

Full text

Funding of banks that are not financially sound or against inadequate collateral would shift substantial risks between national taxpayers.
Such implicit transfers are therefore beyond the mandate of the eurozone’s central banks.
not a legalistic obsession: it is key to the acceptance of monetary union by Europe’s citizens
President of the Deutsche Bundesbank, Jens Weidmann, FT May 7, 2012

The ECB’s trillion-euro liquidity operation brought temporary relief, but
only at the cost of increasing Spain’s financial fragility as its banks used the ECB’s loans to buy more of their government’s subsequently downgraded debt.
Bloomberg Editors May 1, 2012

Banks may have to disclose profits from carry trades derived from 1 trillion euros in ECB loans
and exclude the money from bonus pools
Bloomberg May 4, 2012

Bundesbank’s Jens Weidmann is no longer his master’s voice.
Almost a year into his new job as the head of Germany’s Bundesbank, Weidmann, 44,
has matured from Chancellor Angela Merkel’s discreet right-hand man at global economic meetings
into one of the few European policy makers warning that governments are failing to do what’s needed to rescue the euro.
Bloomberg Apr 23, 2012

Spanish banks' borrowing from the ECB almost doubled in March from February to 316 billion euros
as the question whether Spanish banks need to be recapitalized hangs over the sector like the sword of Damocles
In January the Spanish government introduced reforms under which
Spanish banks must increase their provisions for property assets by 52 billion euros.
CNBC 13 April 2012

By promising virtually unlimited liquidity, the ECB may have prevented a Lehman-style meltdown of the banking system.
Yet it also accentuated the underlying problem.Europe can’t accept that the economics of the single currency condemn it to failure

Jeremy Warner Daily Telegraph 12 April 2012

Spanish and Italian banks are trapped with large losses on sovereign bonds bought with ECB funds (LTRO).
Spanish banks used ECB funds to purchase five-year Spanish bonds at yields near 3.5pc in February and 4.5pc in December.
The same bonds were trading at 4.77pc on Wednesday, implying a large loss on the capital value of the bonds.
It is much the same story for Italian banks pressured into buying Italian debt by their own government.
Any further dent to confidence in Italy and Spain over coming weeks could push losses to levels that trigger margin calls on collateral.
Ambrose Evans-Pritchard 11 April 2012

"The banks are deeply underwater. This is turning into a disaster for the eurozone periphery now that the liquidity tap has been turned off," said Mr Roberts. "But given the opposition in Germany, the ECB can't easily do another LTRO until there is a major crisis."

Guy Mandy from Nomura: "What the LTRO has done is concentrate systemic risk even further. If everything now goes wrong, it could go wrong in a hurry."

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Spanien - Italien

A trillion euros is a lot of money. Even in today's many-zeroed world.
The European Central Bank could reasonably expect to get quite a lot of market tranquillity in exchange for all the cheap loans
But, as I and others have pointed out many times, the worries about bank funding are only one piece of the eurozone crisis.
Stephanie Flanders, BBC Economics editor, 11 April 2012

What the financial markets have apparently remembered in the past few days is that, by itself, the official solution to the sovereign debt problem (more and more austerity) makes the real economy problem even worse, at least in the short run. Reading recent press reports, they also seem to have discovered that savage spending cuts and tax rises can make governments really unpopular. Who knew?

The Greek election, which we now know will happen on 6 May, will revive questions about whether Greece can stick with its new programme - or, indeed, the euro.
But the election in France on the same day could prove more consequential.
Why? Because a victory for Francois Hollande in France would re-open the entire debate about austerity and growth, right at the heart of Europe.

The very phrase, President Hollande, could also (whisper it softly) cause investors to wonder whether France - the country with by far the highest government spending as a share of GDP in the eurozone - deserved to be borrowing at less than 3%.

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So much for the miracle cure.
The magnitude of Spain’s debt crisis has now exposed the limits of the European Central Bank’s longer term refinancing operations.
John Plender, FT, April 10, 2012

From November to February, during which the central bank lent more than 1 trillion euros to 800 European banks,
Spanish banks increased their holdings of government securities by 68 billion euros and
Italian banks by 54 billion euros

New York Times 9 April 2012

But while the purchases pushed down national borrowing costs, and have so far helped Spain and Italy avoid asking their European partners for a financial lifeline as Greece did, the effect has been to raise new risks by tying the health of the banks to the fate of their governments.

Full text

Commercial banks have borrowed a total of more than €1 trillion ($1.3 trillion) for a period of three years.
In November some banks barely had any access to the market. That is a situation where, in the opinion of the central banks,
it is justifiable to resort to such measures.

But the system cannot be allowed to get used to such an overabundant supply of money
Joachim Nagel, a member of the board of the Bundesbank, Der Spiegel 19 March 2012

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It’s hard to see how getting European banks to buy bonds from potentially insolvent countries
is going to restore confidence in the system as a whole

Jeremy Warner, DT 1 March 2012

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(ECB) issuing over €1 trillion in short-term loans
What if, instead of holding the European Monetary Union (EMU or Eurozone) together, that actually makes a breakup more likely?
That would certainly fall under the rubric of unintended consequences, and be worth our time to contemplate in this week's letter.
John Mauldin 3 March 2012

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There are growing divisions among ECB leadership about how to handle the euro crisis,
not to mention between the ECB and the Bundesbank, Germany's central bank.
While ECB head Mario Draghi is pleased with his recent decision to flood the markets with cheap money,
Bundesbank President Jens Weidmann warns of the dangers.
Der Spiegel, 6 March 2012

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Mario Draghi’s latest half-trillion blast of credit averts a funding crunch for crippled banks and crippled EMU states,
but raises the ultimate cost to catastrophic levels if the underlying crisis in southern Europe drags on into the middle of the decade.
Ambrose Evans-Pritchard, 29 Feb 2012

"It helps enormously that banks have time to recover. Cheap loans will boost M3 money growth and drive a wider economic recovery this year. Needless to say, the Draghi Bazooka doesn’t solve the external imbalances in the Club Med countries.
They will still have to go through internal devaluations, and the question is whether they can endure the agony," Professor Tim Congdon said.

Professor Charles Wyplosz said the LTROs make things massively more dangerous. The banks borrow cash from the ECB to acquire sovereign bonds. The more the banks accumulate these bonds, the riskier the situation is becoming. The ECB seems to be making a trillion euro bet," he said.
"Should markets conclude that crucial public policy actions are missing, a bad equilibrium will prevail, debt defaults will spread and eurozone banks will fold, imposing such a massive cost to taxpayers that the euro might collapse.

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Det var julafton igen i Frankfurt. Behövande bankdirektörer kunde gå till ECB och
låna precis hur mycket de ville på tre år, till den facila räntan av 1 procent.
Hur friska är ekonomierna vid Medelhavet omtre år när Frankfurt ska ha tillbaka pengarna?
DN-ledare 1 mars 2012

Redan i december plockade hundratals banker hem svindlande 489 miljarder euro tillsammans, och onsdagens påfyllning blev 530 miljarder.

Varför inte, när man kan låna till 1 procents ränta och få ut 5 procent själv?

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Dagens Nyheter om EMU

Frankfurter Allgemeine has the scoop of the day.
It has obtained a letter by Jens Weidmann, (president Bundesbank) to Mario Draghi, (president ECB)
warning about Germany’s Target 2 claims,
and proposing a return to the collateral rules before the crisis

Eurointelligence 1 March 2012

Capital flight
Foreign banks have essentially stopped loaning money to banks in countries like Greece and Portugal,
the payment system among European central banks known as TARGET2.
Whereas the German TARGET2 balance is some €500 billion in the black, Greece has a deficit of €100 billion,
while Italy and Spain each face an imbalance of €200 billion /1.760 miljarder kronor/.
Der Spiegel 29 February 2012

Mario Draghi's longer-term refinancing operation to provide cheap funding to the banks has put an end to fears of a Lehman-style collapse
Italian and Spanish banks have substantially increased their holdings of domestic government debt.
It is acting, albeit indirectly, as a lender of last resort to governments, notwithstanding German reservations.
John Plender, Finnccial Times 29 February 2012

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Lender of last resort

RE: "longer-term refinancing" = 3 years

ECB har lånat ut 529,5 miljarder euro, motsvarande 4.670 miljarder kronor, till 800 banker.
Ungefär samtidigt steg Portugals marknadsräntor på löptider från tre år och med mellan 80 och 100 punkter.
Tioårsräntan hade strax efter 14-tiden stigit till 13,45 procent. Det är den högsta nivån på nästan en månad.
Viktor Munkhammar, DI 29 februari 2012

Att räntor med löptider på tre år och uppåt drar iväg kan bero på att landets banker inte vågar placera på längre löptider än vad de kan låna till i ECB.

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Portugal - Banker

Injecting Cash - Europe's Banks Are Addicted to ECB's Cheap Money
ECB will give European banks another massive round of loans at bargain-basement rates on Tuesday,
with financial institutions expected to borrow up to one trillion euros at 1.0 percent.
Der Spiegel 27/2 2012

The ECB is playing down the risks of providing so much cheap money, but critics say that banks have become too dependent on the flow of easy cash

The offer that the ECB will extend to banks on Tuesday involves loans at 1.0 percent interest and with a maturity of three years.
And the amount that banks can borrow? Virtually unlimited.

ECB President Mario Draghi said that it was only "temporary."
In his view, the financial system faces an emergency situation -- and therefore requires emergency aid.

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U.S. Treasury Secretary Timothy Geithner:
Europe's actions so far have averted potential financial catastrophe
but said it still must put up a sturdier firewall against contagion.
CNBC 26/2 2012

Spanish and Italian borrowing costs have now subsided, amid general sighs of relief.
But this good news was actually a triumph of anti-austerity:
Mario Draghi brushed aside the inflation-worriers and engineered a large expansion of credit

Paul Krugman, New York Times 19 February 2012

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'The Great Squanderland Roof' with BBC's Stephanie Flanders
The eurozone crisis and, along with the Chancellor of Frugalia and
the Head of the European Bank of Common Sense and Stability

an ambitious and unorthodox plan to save Europe, the Markets and the World
BBC Radio 4

Listen here

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The governments of the eurozone have said they will not take any interest on their central banks' holdings of Greek bonds
These sacrifices for central-bank holders of the bonds are being made because the central banks wish to maintain
the curious fiction that they were not taking risks with their own solvency when purchasing government bonds.

They don't want the humiliation of taking direct losses on the bonds and being forced to ask eurozone taxpayers for additional capital to strengthen the ECB's balance sheet.

Robert Peston, BBC Business editor, 21 February 2012

ECB har haft huvudrollen i spelet bakom kulisserna.
Med centralbankens exklusiva rätt att trycka obegränsade mängder pengar har man gjort just det.
Ekot 21 februari 2012

Finansmarknaden har flödats över av krediter.

En förkortning dyker upp när man söker förklaringar, LTRO, long-term refinancing operation på engelska.

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If you have a printing press you don´t go bankrupt
Rolf Englund 7 Nov 2011

Om man har en sedelpress går man inte i konkurs
Rolf Englund 4 Nov 2011

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The deal secured by the ECB for its Greek holdings could undermine its intervention in other eurozone government bond markets,
by raising fears among private sector bondholders that it would also receive preferential treatment in any future bail-out.
It could also trigger legal action by other Greek bondholders arguing the ECB has received unfair treatment
Financial Times 16 February 2012

The ECB has come under pressure from the International Monetary Fund and private investors to contribute towards Greece’s bail-out.
But the Frankfurt-based institution has been determined not to violate the spirit of the European Union ban on “monetary financing”, or central bank funding of governments.

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Why might Germany prefer a defaulted Greece to a rescued Greece?

Eurozone central bankers and the taboo subject of losses
Gillian Tett, FT February 16, 2012

Gillian Tett

The ECB has agreed to exchange the government bonds it purchased in the secondary market last year at a price below face value
provided the debt-restructuring talks have a successful outcome.
The ECB bought the bonds at a discount to face value in a vain effort to support the price of Greek bonds.
Until now, it has insisted it be repaid the full amount.

Its concession means Greece reaps the benefit of the discount, rather than the ECB itself.

WSJ 8/2 2012

A disturbingly large number of credit experts warn that
the ECB life-line is not the "game-changer" that the markets seem to think,
cannot in itself can save Euroland,
and may prove counter-productive – perhaps soon

Ambrose Evans-Pritchard, 31 anuary 2012

Alberto Gallo from RBS said Draghi’s €489bn loans to banks at 1pc for three years (LTRO) is having all kinds of toxic side-effects, which is disturbing given that the Financial Times splashed today that the banks may draw down another €1 trillion at the second LTRO in late February

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The central bank, based in Frankfurt, used typically understated and technical language to describe its actions,
but it appears to have done what its leadership said throughout 2011 that it would not do:
namely, flood the financial markets with euros

New York Times, 20 January 2012

ECB, under its new president, Mario Draghi, quietly began providing emergency loans to European banks — hundreds of billions of dollars of almost interest-free capital that the banks have used to come to the rescue of their national governments.

Fears of a bank collapse — the so-called Lehman Brothers moment, when one financial institution’s failure threatens the stability of the entire system — have subsided.

And Greece appears to be closer to a deal with its creditors to pare back its debt obligations rather than a disorderly default that could plunge the financial system back into chaos.

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Athens had hoped to reach a deal with its creditors on a 50 percent debt haircut,
but banks have now made it clear that efforts to reach an agreement could fail.
Should the country go bankrupt, the European Central Bank stands to lose the most.
Der Spiegel, 13 January 2012

"Investerare misstar sig om de tror att ECB ska kunna lösa skuldkrisen i euroområdet så länge det saknas en politisk union"
Angela Merkel sade att euron introducerades som ett "visionärt steg, men grunden var inte tillräckligt förberedd".
Denna motsättning ska lösas med ökad ekonomisk integration, vilket blir uppdraget de kommande åren.
DI 10 januari 2012

The fact that we can occupy the posts of neither the president or chief economist only
shows even more clearly that Germany is being pushed to the margins of the ECB.
It has been regularly voted down in important decisions since May 2010.
All of the nice talk about how the ECB would function based on the Bundesbank model,
and how Germany would play a special role as the largest country,
have proven to be hollow words.
Hans-Werner Sinn, Der Spiegel, 9 January 2012

"a backdoor bank rescue"
ECB this week splashed out €489 billion ($638 billion) in three-year loans to 523 banks
Draghi has been at pains to point out that this sort of lending to banks is a normal central-bank function.
Wall Street Journal, 24 December 2011

Fine and well. But nobody should think this ECB exercise is cost- or risk-free.

The central bank's 1% lending rate is a long way from Walter Bagehot's penalty rate, and thus amounts to a de facto bank subsidy.

The ECB has also reduced its collateral standards so low — to single-A asset-backed securities in some cases — that it runs the risk of losses down the road.

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ECB’s exposure to weaker eurozone economies has now reached €705bn, up from €444bn in early summer
The ECB's balance sheet is not only far greater than the Fed, at $3.2 trillion compared to $2.9 trillion for Ben Bernanke,
but at 30x leverage, has the same risk as Lehman did at its peak.
Tyler Durdenm, 20 December 2011

However, one major distinction between the Fed and the ECB is that while the Fed continues to be shrouded in almost impenetrable secrecy on an absolute basis, it is transparent as a wet t-shirt competition during Spring Break at Panama City Beach compared to the ECB

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ECB har stängt entrédörren för direktköp av statsobligationer från krisländerna,
ECB har öppnat bakdörren på vid gavel så att de likaledes krisande eurobankerna till låg ränta ska kunna köpa dessa obligationer
och tjäna grova pengar. Detta är rena ”banksterfasoner”.
Per Lindvall, SvD e24, 2011-12-20

Skälet till att ECB inte själv vill köpa dessa obligationer, agera så kallad ”lender of last resort”, är att de anser att det strider mot den så kallade ”no bailout”- klausulen i EU-fördraget

Italienska och andra banker kan låna fritt hos ECB till låg ränta och placera dem i italienska statsobligationer, som pantas hos ECB, till en ränta på närmare 7 procent. Eftersom placeringar i statsobligationer kräver 0 procents kapitaltäckning så har ECB tillhandahållit en ”arbitragemaskin”, som genererar ”riskfria” vinster till de pressade bankerna, vilka samtidigt upprätthåller en efterfrågan på obligationer som ingen annan vill ta i.

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The scale of Wednesday's bail-out for eurozone banks by Draghi's European Central Bank (ECB) should simply confirm worst fears.
European banks face a €600bn tsunami of debt coming due in 2012 (mostly in the first quarter)
and many simply can't pay up because the usual source of refinancing, wholesale money markets, are refusing to lend them any more.
Damian Reece, Daily Telegraph, 21 Dec 2011

One Northern Rock-style collapse after another would have reverberated around the eurozone over the next three months if the ECB hadn't stepped in with unlimited cash costing 1pc.
Almost certainly there would have been a euro-Lehman moment too as a once mighty lender, probably in France, fell over.

Draghi has had to ignore any sense of moral hazard and agree to fund weak banks at the expense of strong.

He has opened a quantitative easing (money printing) exercise of enormous proportions.

Weak banks unable to fund themselves on the open market are now hooked on cheap ECB money.

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Moral Hazard

Eurozone banks have rushed to take out
cheap three-year loans offered by the ECB, borrowing 489bn euros ($643bn)
BBC, 21 December 2011

Bankernas bolånemarginaler har ökat kraftigt.
Själva skyller de på ökade upplåningskostnader.
DN Ekonomi, 19 december 2011

The banks are under massive pressure to raise their core Tier 1 capital ratios to 9pc by next June.
This requires a €2.5 trillion adjustment according to the BIS’s Global Stability Board.
Most of that is going to be done by slashing loan books – deleveraging in the jargon –
since they cannot raise fresh capital at a viable cost and don’t wish to be nationalised.
Ambrose Evans-Pritchard, December 21st, 2011

Divisions in eurozone over ECB bond-buying
One of the ECB’s most senior figures said the bank should not be used to fund national debts and that if it was forced to, it would mean the end of the single currency.
Jonathan Russell, Daily Telegraph, 17 Dec 2011

On Friday, Mario Draghi said “no”.
The president of ECB declared that the eurozone crisis was a crisis in need of a political solution and the ECB would not bail out anybody.
To underline the message, the ECB’s governing council had earlier in the day put up a ceiling of €20bn on its weekly bond purchases.
Wolfgang Münchau, FT 20 Nov 2011

There is no political solution in sight. Angela Merkel, the German chancellor, rejects a eurozone bond. The European financial stability facility is too small to handle countries the size of Italy or Spain, let alone both.

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