The ECB Has a Huge Dilemma: Price stability or Bail Out Nations

Link: https://mishtalk.com/economics/the-ecb-has-a-huge-dilemma-price-stability-or-bail-out-nations

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The spreads between German government bonds and those of the PIGS (Portugal, Italy, Greece, and Spain) have skyrocketed in recent weeks. 

This comes while Eurozone inflation is at a record high 8.1 percent. 

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On June 16, Bloomberg reported Lagarde Tells Ministers ECB Plans for Limit on Bond Spreads

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There is no single interest rate that makes any sense for Germany, Greece, Spain, Italy, and Portugal. 

The Fed is struggling to find the neutral rate, and I believe will overshoot, but at least there is a neutral rate. 

Lagarde is on Mission Impossible with 19 countries in the Eurozone, all with a different neutral. 

In theory, the sovereign bonds of Germany and Greece are the same. Default risks are the same.

In practice this is total nonsense, and for the third time the idea is being tested. 

Author(s): Mike Shedlock

Publication Date: 20 Jun 2022

Publication Site: Mish Talk

Diversity At the Fed and ECB? There is None, It’s a Big Self-Serving Lie

Link: https://mishtalk.com/economics/diversity-at-the-fed-and-ecb-there-is-none-its-a-big-self-serving-lie

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At the ECB, you better be gung-ho pro-EU. You better believe negative interest rates are a good idea. And you must back the idea that targeting 2% inflation makes sense.

Finally, if somehow you find yourself at the ECB disagreeing with any of those things, you are expected to shut your mouth so the consensus view never shows any dissent.

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At FRBNY, I recall the people who ran Treasury markets, money markets, etc. literally had no relevant experience or expertise. The job of staff was to make them appear competent, but it didn’t really matter what they did because Fed can’t fail and they can’t get fired.  

This creates a culture where anyone with talent or ambition GTFO ASAP. There are exceptions, but those who rise tend to be those who have no where else go. It’s a weird structure where the higher you go, the more incompetent you are.

So it’s no surprise Fed is failing

Author(s): Mike Shedlock

Publication Date: 13 May 2022

Publication Site: Mish Talk

Omicron Is an Economic Threat, but Inflation Is Worse, Central Bankers Say

Link:https://www.nytimes.com/2021/12/16/business/economy/omicron-inflation.html

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Facing surging inflation, three of the world’s most influential central banks — the Federal Reserve, Bank of England and European Central Bank — took decisive steps within 24 hours of each other to look past Omicron’s economic uncertainty.

On Thursday, Britain’s central bank unexpectedly raised interest rates for the first time in more than three years as a way to curb inflation that has reached a 10-year high. The eurozone’s central bank confirmed it would stop purchases under a bond-buying program in March. The day before, the Fed projected three interest rate increases next year and said it would accelerate the wind down of its own bond-buying program.

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Aside from Omicron, the central banks were running out of reasons to continue emergency levels of monetary stimulus designed to keep money flowing through financial markets and to keep lending to businesses and households robust throughout the pandemic. The drastic measures of the past two years had done the job — and then some: Inflation is at a nearly 40-year high in the United States; in the eurozone it is the highest since records began in 1997; and price rises in Britain have consistently exceeded expectations.

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The Federal Reserve and Bank of England are worried about the persistence of high inflation. For the European Central Bank, inflation in the medium term is too low, not too high. It is still forecasting inflation to be below its 2 percent target in 2023 and 2024. To help reach that target in coming years, the central bank will increase the size of an older bond-buying program beginning in April, after purchases end in the larger, pandemic-era program. This is to avoid “a brutal transition,” Ms. Lagarde said.

Author(s): Eshe Nelson

Publication Date: 16 Dec 2021

Publication Site: New York Times

Flood of Cash Pushes Borrowing Costs to Unusual Lows in Europe

Link: https://www.wsj.com/articles/flood-of-cash-pushes-borrowing-costs-to-unusual-lows-in-europe-11612780202

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Italy’s Enel SpA, one of Europe’s biggest electricity producers, has short-term commercial paper that recently offered an annualized yield of minus 0.61%, according to FactSet: That is 0.11 percentage point lower than the ECB’s deposit rate of minus 0.5%.

When interest rates are negative, borrowers pay back less than they were lent when their debt comes due. At Enel’s rate, if it borrowed $100 for a year, it would pay back $99.39. For the lender, in this case the money-market funds that buy commercial paper, the opposite is true. They get back less money.

“It took a couple of years for clients to get their heads around the idea that they’d have to pay to leave money in a safe spot,” said Kim Hochfeld, global head of State Street’s cash business. State Street’s EUR Liquidity LVNAV Fund — worth 6.6 billion euros, equivalent to $7.9 billion — yields minus 0.68% after fees, but that compares with total costs on large bank deposits of up to 1%, she added.

Author(s): Paul J. Davies

Publication Date: 8 February 2021

Publication Site: Wall Street Journal

Banks in Germany Tell Customers to Take Deposits Elsewhere

Link: https://www.wsj.com/articles/banks-in-germany-tell-customers-to-take-deposits-elsewhere-11614594601?mod=djemwhatsnews

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Germany’s biggest lenders, Deutsche Bank AG and Commerzbank AG , have told new customers since last year to pay a 0.5% annual rate to keep large sums of money with them. The banks say they can no longer absorb the negative interest rates the European Central Bank charges them. The more customer deposits banks have, the more they have to park with the central bank.

That is creating an unusual incentive, where banks that usually want deposits as an inexpensive form of financing, are essentially telling customers to go away. Banks are even providing new online tools to help customers take their deposits elsewhere.

Banks in Europe resisted passing negative rates on to customers when the ECB first introduced them in 2014, fearing backlash. Some did it only with corporate depositors, who were less likely to complain to local politicians. The banks resorted to other ways to pass on the costs of negative rates, charging higher fees, for instance.

Author(s): Patricia Kowsmann

Publication Date: 1 March 2021

Publication Site: Wall Street Journal