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An ECB Negative Deposit Rate? Don't Hold Your Breath, Says Citi
While the FOMC Minutes due out in less than an hour is what everyone is looking forward to, the big surprise announcement of the day was the repeat of a rumor released initially 6 months ago, namely that the ECB is considering negative deposit rates - a concept we first speculated about back in June of 2012. Alas, just like last time, the latest incarnation of the NIRP rumor appears to be merely more hot air (and certainly will be exposed as such once the non-compliant mostly German ECB members hit the tape). One person who says not to hold your breath for an ECB negative rate, is Citi's Valentin Marino, who says not only is a negative deposit rate unlikely before the results of the AQR and stress tests as it would accelerate bank deleveraging, but that it "could worsen the pervasive credit crunch and add to the growth headwinds and deflation risks in in the currency block. It would erode investors’ confidence in Eurozone’s financial institutions and accentuate their relative underperformance."
Which of course makes sense: just like in the summer of 2011 when the ECB was leaking rumors left and right just to gauge which would have the highest market impact and be the most sticky (a plan subsequently adopted by Japan in late 2012 and early2013), this is just a "market test" by the ECB to see how much credibility its jawboning still has with the market, and how much of an impact it could derive should it truly go down this unprecedented path (which by the way would incinerate the European money market and crush short-dated funding).
But for now, following today's 100 pip drop in the EURUSD, it appears to have saved European corporations for at least one more day (recall earlier today we reported just how crushed European corporate profits have been as a result of the soaring Euro). Tomorrow is another day.
Finally, there is another issue: should the ECB overshoot and send the Euro plunging, then that scary spectre of the summer of 2012, redenomination risk, would promptly arise again, setting off a chain reaction that would necessitate the "use" of that non-existant ECB deus ex machina, the OMT - something absolutely nobody in the ECB would be willing to risk, especially not with the German constitutional court decision still pending.
Full note from Citi:
EUR and the ECB – this time may mean business
Recent media reports indicated that the ECB is considering introducing negative rates of 0.1% on banks’ excess cash. The measure remains highly controversial ahead of the Eurozone banks’ AQR and stress tests. The headlines do highlight the resolve of the Governing Council to respond to persistent disinflation on the back currency appreciation. This should keep EUR under pressure going into the December policy meeting.
EUR came under selling pressure following media reports that the ECB is deliberating negative rates of -0.1%on the banks excess cash. If confirmed the policy should be seen as very negative for EUR with investors effectively being paid to spend EUR cash. Weaker EUR could help stimulate Eurozone exports and growth.
The above being said, we suspect that the measure remains highly controversial given concerns about the impact of the measure on banks’ profitability and willingness to lend. The amount of excess liquidity in the Eurozone is EUR174bn at present which implies losses of more than EUR170mn (Figure 1).
A potential penalty could lead to accelerated deleveraging by Eurozone banks ahead of the Asset Quality Review (AQR) and stress tests next year. The measure could worsen the pervasive credit crunch and add to the growth headwinds and deflation risks in in the currency block. It would erode investors’ confidence in Eurozone’s financial institutions and accentuate their relative underperformance. All that could reflect badly on EUR (Figure 2).
We think that the ECB may want to wait for the outcome of AQR and the stress tests for the Eurozone banks before considering the negative deposit rate measure. Going into the December meeting the Governing Council may consider some of the options below. All that should keep the cyclical headwinds for EUR firmly in place:
1/ LTRO - the Governing Council could indicate it is working on a long-term refinancing program that will help anchor rate expectations, alleviate any liquidity pressures in the Eurozone banking sector ahead of AQR and stress tests and avoid renewed funding tensions in the periphery. So far the Governing Council has been rather vague about any new long-term liquidity measures so that the timing of the announcement could come as a dovish surprise and could weigh on euro.
2/ QE - Indications that the Governing Council is looking into more aggressive policy options like QE and negative deposit rates. Recent comments by ECB’s chief economist Peter Praet signaled that such measures could be considered. Media reports over the summer seemed to suggest that the ECB may be looking into buying GDP-weighted amounts of Eurozone bonds potentially in the same way it purchased bonds under the SMP program. Indications by President Draghi that QE is among the options considered alongside LTRO could be perceived as quite dovish and send EUR lower.
3/ A refi or depo rate cut or indications that the ECB deliberated more cuts of refi or deposit rate. If the experience of the FOMC or the SNB is anything to go by, the Governing council may opt to introduce a band for the refi rate between zero and 25bp. Negative deposit rates seem less likely to us for the time being. The ECB may want to wait for the outcome of AQR and the stress tests for the Eurozone banks before considering the measure. Signals that more rate cuts are coming could also keep cyclical headwinds in place for the euro.
4/ FX market intervention – with the EUR TWI index close to multi-year highs some clients were discussing the possibility of unilateral or concerted intervention in the euro. The ECB engaged in concerted interventions in the FX markets to arrest the sharp EUR depreciation in 2000. The actions came on the back of decisions by Eurozone finance and economy ministers. An FX intervention seems less likely at present given that the G20 countries have agreed to refrain from actions that could target exchange rates. What is more, G20 central banks have agreed to pursue domestic goals (fighting disinflation) by using domestic instruments (no Forex). We suspect that it would take excessive EUR appreciation in combination with severe escalation in market volatility for FX interventions to be considered.
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Bullard tells Bloomberg the Taper is coming next month..
Maybe next month Bullard will see a dentist ? - Video http://hedge.ly/1aFzhdJ
ZH has referred to the recently touted negative excess reserve rate as NIRP in the broader sense in its headlines multiple times now, and this is highly misleading/inaccurate.
The ECB has, to be precise, discussed charging commercial banks to park excess reserves with the ECB, should they choose not to lend such fiat out in the form of commercial & consumer loans.
This will not happen there for the same reason it won't happen here (in the U.S.) - it is illogical to presume that the banks will lend out more fiat given terrible credit worthiness of any prospective borrowers, terrible "business models" of any prospective uses of such borrowed fiat given the terrible economic conditions (i.e. lack of aggregate end demand for goods and services), and the fact that commercial banks will simply return excess reserves to the ECB if such a mandate was implemented.
As it stands now, loan quality portfolio conditions at U.S. and EU banks continue to deteriorate, so it would make no sense to try and prompt them to loan out additional fiat during such a time.
The only reason such a scheme would be proposed there or here would be to "wind down" the aggregate amount of excess reserves banks are and have been sitting on or years now, which were provided to them in the first place in order to ensure that they had enough liquidity on hand to be able to offset losses from traditional banking model activities & due to the fact that their balance sheets were, and in many cases are still, septic.
In other words, the ECB was hedging against massive banking system failure via plowing excess reserves into the system.
The only purpose to charge these same banks for said excess reserves would be to see them wi d down their artificial & unnatural levels of central bank provided liquidity.
Such a change in policy or new mandate by the ECB or Federal Reserve, if anything, would be implemented in order to induce a sharp & steep contraction of the money supply.
"(i.e. lack of aggregate end demand for goods and services)" -
7+ billion and growing, all competing for a better standard of living. I see plenty of demand.
There will always be some baseline demand, especially for non-discretionary goods/services; it's the ability to pay for said goods/services (or repay the loans acquired to pay for them) that's the fly in the ointment.
"Pay", pay with what? money is an illusion, the calories required to actually do anything are not...
It will be a free-for-all unless the monetary system is reattached to reality.
Well, to cite but one example, calories, at least in terms of those expended in the form of human labor, are in a deflationary down draft due to lack of demand, which partially explains not only a portion of the root cause of the economic malaise in the developed world, but both China's and India's growing economic crises.
How will people whose labor calories are unwanted find the calories they need to consume, no matter how great their hunger?
0% is good but -.1% would hurt investor confidence. So the line has been drawn at free moony for megabanks and nothing more.
"could worsen the pervasive credit crunch (NOTHING WILL STOP THIS) and add to the growth headwinds (NOTHING WILL STOP THIS) and deflation risks in the currency block. (NOTHING WILL STOP THIS) It would erode investors’ confidence in Eurozone’s financial institutions (ABSOLUTELY NOTHING WILL STOP THIS) and accentuate their relative underperformance." (NOBODY GIVES A FUCK ABOUT THIS).
ANY money deposited with a bank is the property of the bank. I am NOT being sarcastic.
http://wiki.answers.com/Q/Is_deposit_of_money_in_bank_a_bailment
Mrs. Watanabe goes to EU for new carry trade away.
I like the way you think.
Honestly ECB, we don't give a fuck about your lack of under capitalization to subsidize your new failed progressive ideas. Find your best method to commit suicide.
Let’s just keep printing money on belief of the MMT (monetary money theory)
Joy Division - Leaders of Men
Does anyone else hear that? It sounds like the beating of millions of wings upon the air? It sounds like Capital Flight.
The ultimate thumb nosing by the CB to proclaim in essence the new Krugmanist mantra that assets and debt are the same thing.
"Yes they are" says the CB. Either we devalue debt by debasing interest rates and money or we die. So its debasement "forever" has to be the new mantra...hahaha...
Only problem : the collateral damage is that the real economy will NEVER recover with easy money and fiat baloney fed on CB QE of this nature.
So...how many angels can we sit on the pin head of a needle?
When you find the answer to that question you'll know its the end of capitalism as we know it.
What are the rates in Cypriot banks?
Apparently, Denmark (non-euro currency) has been experimenting with negative interest on central bank reserves. The Swiss (also non-euro) have been talking about it, along with actually using administrative barriers to the entrance of hot money. Their experience should be evaluated before reaching any conclusions. Europe's income distribution distortion is less severe than the US' but it nevertheless faces reduced consumer demand due to a stagnant population and saturation with expensive toys. Europeans already enjoy more liesure time than most Americans. Perhaps the long-term solution would be a shorter work week to enable the unemployed to go back to work.