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Here's What Happens When Central Banks Go Broke
On Friday, in “Is Mario Draghi About To Go Full-Kuroda? RBS Says ECB Could Buy Stocks,” we took a closer look at what the ECB’s options are when it comes to implementing further easing measures come December.
As a reminder, Mario Draghi telegraphed either another depo rate cut, an expansion of PSPP, or both at Thursday’s ECB presser and now the market is keen to analyze the situation and determine not only what Goldman’s man in Europe is most likely to announce, but what the implications of his announcement are likely to be.
To be sure, further cuts to the depo rate will simply trigger a chain reaction whereby the Riksbank and the SNB will be forced to respond in kind, lest they should lose ground in the global currency war on the way to seeing their inflation targets threatened. This raises the spectre that NIRP may soon come to household deposits, something which, despite the proliferation of negative rates, hasn’t yet occurred.
As for the expansion of PSPP, we looked at a variety of options courtesy of RBS’ Alberto Gallo who notes that Draghi could end up buying corporate bonds, munis, equities, and even individual bank loans before it’s over. Here’s how we summed it up yesterday:
In the end, all that will happen is the EMU's neighbors will be forced further into NIRP and the ECB will end up with a nightmarish balance sheet full of stocks, corporate credit, munis, and God only knows what kind of loans purchased from banks, and all of which will have been bought at or near the top. That sets up the possibility that central banks could end up being forced to operate from a negative equity position. In other words: it sets up the possibility that they'll technically go broke.
There’s been no shortage of coverage over the past several years regarding the idea that central banks can effectively go bankrupt.
There are plenty of commentators who say that’s nonsense because after all, they control the printing press. Of course that argument suffers from the same defect as the argument that providing fiscal stimulus to an economy that isn’t acting the way you want it to is as simple as printing one liability (a government bond) and buying it from yourself with another liability you also print (fiat money). The common thread is this: if it were that simple, then we wouldn’t be having the conversation in the first place.
If a central bank ends up in a negative equity position because the “assets” it purchased at nosebleed valuations decline in value, there are very real consequences both in terms of the ability to effectively conduct policy and in terms of optics. For more, we go back to RBS’ Alberto Gallo.
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Via RBS
What is the endgame of QE? Central bank balance sheets larger than GDP, potential losses or even negative equity capital. Large balance sheets can expose central banks to heavy losses. The SNB, for example, lost CHF52bn or 60% of equity in the first six months of the year, given unfavourable FX movements and price drops in its bond/equity holdings. As we discuss below, there are also other central banks that have accumulated losses and gone into negative equity in the past, including Chile, Czech Republic, Costa Rica and Jamaica. In theory, central banks can take losses and live with negative equity, as suggested by the SNB’s Vice Chairman Thomas Jordan in 2011. The example of the Czech Republic below also shows that central banks can sometimes grow out from negative equity through investment returns, over long periods of time. However, as suggested by the ECB, negative capital can limit central banks’ independence. A BIS paper also argues that significant losses could undermine their credibility, which has already been declining.
A history of central bank losses: towards the limits of balance sheet powers Central Banks could operate with negative net worth, but at the risk of affecting “the credibility of […] monetary policy” according to the ECB. The Chilean and Czech Central Bank are examples of central banks which have operated with negative net worth for a prolonged period (almost continuously since 1982, for Chile). However, while the Czech Central Bank has reduced their negative net worth due to good equity investments, Chile’s central bank has received two recapitalisations from the government since 1982. This dependence on the government brings into question the independence of central banks. The ECB have also previously said that negative net worth would “affect the credibility of the Eurosystem’s monetary policy”.
Negative capital could hinder central banks’ ability to meet their monetary targets. The central bank of Costa Rica suffered from losses for almost 20 consecutive years, leading it to a negative capital balance at the end of 2000. In fear of its balance sheet sustainability, the central bank chose not to lower their target rate of inflation. Jamaica is another example. Estimates show that in 1991 it had a negative net equity of USD 1.5bn. Large losses limited the policy instruments at the bank’s disposal. As a result, the country entered a stage of hyperinflation where CPI exceeded 80%.
Concerns about potential losses could also limit central banks’ policy flexibility. According to an IMF working paper, the market questioned whether Japan’s central bank could continue their purchases of government debt due to the risk of incurring substantial capital losses. According to the paper, because of these concerns, the monetary policy did not have the desired effect and failed to bring interest rates down to the desired levels. In January 2015, the SNB surprised markets by ending its Euro-buying programme because of concerns with Euro devaluation. But this change in monetary policy, which caused the Swiss Franc to strengthen, has also hurt Swiss exports (-3.8% YoY in September).
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So, far from being some trivial problem that can be fixed by pressing "print", central banks operating from a negative equity position face the possibility of i) losing their independence as they have to be recapitalized at the behest of the government, ii) being forced into policy decisions (or, perhaps more appropriately "in"decisions) that they might not otherwise make, and iii) losing the ability to control the narrative, thus heightening market concerns about the loss of omnipotence (or, in Haruhiko Kuroda's words, a failure to believe in Peter Pan).
Also bear in mind that the more focus there is on central banks, the more scrutinized their balance sheets will be. Of course one cannot mark an equity portfolio "held to maturity", which begs the question of what happens when central banks that have bought stocks begin to incur losses. Will they simply print more money to buy more stocks in order to prop up their portfolios in a never-ending loop?
In any event, what the above underscores is that in short order we may move beyond the merely theoretical idea that central banks have "lost credibility" with market participants into a world where there is demonstrable, quantitative evidence that the emperors have no clothes.
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Not the reserve currency backed central banks. Jamaica , Costa Rico....lol What a trash article.
Absoultely. There's a bigger difference in the "Central Bank Chile" & the Federal Reserve than the difference between all men that would pay Magalene "Jabba-the-Hut" Albright to sit on their face and all the men that would pay that not to happen.
However, the ultimate outcome would be the same: Hyper-inflation.
Central banks can't go broke. They have the legal authority to create their own currency at will. This is what makes them so heinous.
Only WE plebs will go "broke" as our spending power diminishes to zero. (Unless you're smart enough to convert some of that paper stuff to physical assets (land, gold, silver, etc...).
Hold on here for a minute. In the spirit of "Bail-ins" if The Fed goes broke, which technically already is, shouldn't its shareholders pay the bill? The Fed is a private corporation owned by the TBTF Banks and others (Presumably Rothschilds and Rockefellas etc, although this is more secret than vitually anything else). These shareholders should be bailed-in. They really shouldn't be able to have it both ways. If they want to be a private corporation and get a guaranteed annual dividend of 6% (As compared to the guaranteed 0% the rest of us get) they should be responsible for the losses and recap costs as well. Although, of course, in the true spirit of "Socialism for the rich, capitalism for the 99%" they probably will not.
But will the Treasuries, the Chancellor of the Exchequer etc be able to sell any bonds after the CB's go broke? That is the whole reason that the CB's are there. There has to be blowback somewhere.
As I understand it the bond market is (was) five times the size of the equity markets. No new money will flow into the bond markets while there is fear. While the CB's are trying to prevent money already in the bond market from getting out the new money will be busy getting into real estate, shares and precious metals. It could be lucrative stockpiling toilet paper.
I n the end it will be a black market of hookers, blow and weed. Maybe it can solve the us obesity problem
Please, when you have a printing press can you ever really go broke? This is print to infinity.
You won't go broke the currency will.
i gave you an up but you are wrong, if you issue more debt than you can service, which at ZIRP is pretty much impossible, and why the fed will never raise rates
Total distortion of all markets, prices,risks and signals.
Favored elites will game the game. Power and wealth will concentrate in small circle of corupt. Below them their dependent estate staff, security forces and managers of the low information masses.
Modern day Wiemar scenario, that's why Gold is a "barbarous relic" and debt is "good".
Abject insanity, but it has enriched a lot of elites and mandarins.
Yeah, they can go broke, even with printing presses.
Ask Zimbabwe. They tried that already.
They had inflation of almost 100% per DAY. Their largest bank note was 100 Trillion Dollars, and that was after they had already chopped off about 20 zeros in 4 previous revaluations.
They were printing so much money, the printing presses eventually broke down from overuse....
And to think the Zim dollar was worth more than the US dollar in 1980.
A 1kg multigrain bread
In 1939, a bread costed 0,5 francs in Belgium.
In 1949, a bread costed 6,9 francs in Belgium.
In 2015, a bread costs 2,7 euro's, that's about 110 old francs.
That's how it will end.
if you got rid of that stupid metric system your bread wouldnt cost so much...!!! a 1lb loaf of bread is cheaper than your 1kg loaf! no wonder these europeans cant get their economies working. they cant freaking use the cheaper measurement system....
If it's cheaper it's because you're buying factory bread you dumbass and that wasn't what I was talking about.
Secondly, our economies are way better in the north then the American economy but you're still so retarted that you think we still live here like we did in that movie saving private ryan that you saw and of which you that was a real life presentation of europe.
The U.S. is the only industrialized nation that has yet to widely convert to the metric system. In fact the refusal to convert your measurements dates back from the beginning of America when the outcasts went to America and didn't have the need to read or write and measurements where done by the things they knew best. Their feet, hands and their ass. And as of today, the people who are civilized could learn it but there's sfill plenty of morons like you who are to retarted and can only measure stuff by feet thumb ass.
And the ass system isn't even the same in the entire country!
When somebody asks for change of a 5 dollar bill to your morther, they get ass in return.
You do that in the cities and they only do that there for a 50.
1] It's retarded.
2] It's were
3] He was being sarcastic
Plus he's wrong about the metric system too. The good Lord gave us a measuring system based on body parts, barley corns and rocks so we are correct in sticking with it!
hannah: That's pretty good. People probably don't always get your humor. That would fit well into a Peter Griffin diatribe.
So what's your point?
Did average income stay the same as in 1939?
Silver was replaced by zinc.
"income" is a coporate profit so I doubt too many people had to much "income". Hwver they may have had compensation or revenue.
"income" is a corporate profit so I doubt too many people had to much "income". However, they may have had compensation or revenue.
germany: no to bailing out greece, yes to ecb buying of DB common, DB bonds, and DB crap assets!
prop up their portfolios in a never-ending loop?
i beg,shoot me now
Sorry, I live in Calfornia and bullets are really hard to come by.
GAAP vs Non GAAP vs the real world.
If there is a banking system left that is plainly not solvent, these small guys are the example.
Inflation, poor exchange rates, and not being in the club makes them (on life support) canaries.
Um they were all broke before I was even born. They are pretty good at hiding it.
Central Banks can't go broke, they can Ctrl+P any amount of money they want.
The only reason they still do accounting is to keep us paying our bills.
Wouldn't the Rothschilds just be required to put in more equity capital?
They can't go broke right - there's nothing to stop the criminal Federal Reserve from expanding their balance sheet from $4.5t (or whatever it is) to $10t, $100t.
This is controlled hyperinflation. Hyperinflation erodes the value of nominal debts.
IMHO, hyperinflation is not a controllable process.
At some point the black market will start pricing assets/services very differently from official prices and circumstances will proceed to deteriorate with increasing velocity...
Counterfeit digital fiat can be utilized prop digitally exchanged equity fiat as it is just a series of computer integers chasing another series of computer integers; but, the Banks can't print energy or calorie.
Schrodinger's Cat gotta eat...
"At some point the black market will start pricing assets/services very differently from official prices and circumstances will proceed to deteriorate with increasing velocity..."
It's fascinating to see how much engineering there's been to make sure that conventional market assets don't hyper-inflate. They've clearly inflated (except for PMs) but not nearly fast enough to keep up with the printing. Meanwhile, yields are plunging and you've got NIRP.
I'm trying to wrap my head around what negative monetary velocity means, but velocity is where all this shit is getting compensated for. and it's been dropping like a rock, with NIRP maybe negative prices come into being at some point and that's how they get there.
The mind boggles at how fucked this system is.
Velocity is an important aspect of value transmission.
IF money isn't 'moving' it cannot reasonably be considered a medium of exchange. The concept of barter presupposes this..
IMHO, negative velocity can be visualized as a non-performing loan which is not extinguished. Zombie debt.
An example would be a mortgage that has not been paid in years that the bank keeps accruing penalties and compunding interest against rather than forclose.
-There are tens if not hundreds of thousands of such mortgages that banks will not forclose on as they will render themselves insolvent by doing so. Suspension of M2M account has allowed the zombie loans/mortgages to sit on the books for years instead of being cleared.
I personally know of someone that has been occupying a home for more than seven years without paying a single mortgage or property tax payment or home insurance payment.
The home is DEEPLY underwater. Serious NEGATIVE equity.
The bank is paying the taxes and the insurance to keep the municipality from stepping in and to protect the property from becoming an even more noticable and aggregious loss if it burned down...
The bank is bleeding profits at a horrendous rate on this mortgage and others like it; but, to divest it will have to book a massive loss, probably well over $400K... IF it can find a buyer!
Imagine this on a massive scale. Look around:
http://www.zillow.com/visuals/negative-equity/#12/40.7004/-74.1098
IMHO, such a zombie mortgage held on the books at face or more while actually incurring costs rationally represents negative velocity.
The losses are only mounting, compounding.
The loans can not/will not be cured.
It is also a perfect example of how crippled the system is by political imperatives and corruption.
Bankers don't want to close up their failed banks and go find work elsewhere, so they extend and pretend.
Politicians don't want to push more bailouts until they are about to leave office; and Obama was re-elected, so the next big round of bank propping and QE or whatever isn't due until next year or early 2017...
Municipalities don't want to have to face the re-valuation of the property in their districts as it will reveal the eggrtegious levels of taxation and mismangement...
The system is indeed seriously fucked.
Haruhiko Kuroda referring to Peter Pan means he's been watching cartoons.So that's where the Japanese got the money printing ideas:
https://www.youtube.com/watch?v=2mf0_-CbihE
The lender of last resort will be knocking on my door. And that's the endgame. Because it's just debt i can sell.
Before the central banks go broke, they and the government will make sure ou will go broke and destitute first.
FACT!
" Draghi could end up buying corporate bonds, munis, equities, and even individual bank loans before it’s over. "
" Of course one cannot mark an equity portfolio "held to maturity", which begs the question of what happens when central banks that have bought stocks begin to incur losses. Will they simply print more money to buy more stocks in order to prop up their portfolios in a never-ending loop? "
Notes to Self:
1. DO NOT SHORT VW OR DB VIA EQUITY SHARES UNDER ANY CIRCUMSTANCES.
2. Email that smart hottie in Bangladesh and assess the situation; it might be time to get as far way from the developed world ghetto/suburban dumbfucks as possible.
Another note to self: Maybe moving to one of the most densely populated countries in the world isn't smart when the zombies start to roam.
I'm looking for a partner in crime and I'm becoming more open minded about where I can find a suitable partner. I don't feel any compuslion to stay where I am and I'm not interested in anyone who does. Mobility. Flexibility.
The urbanites/suburbanites I'm familiar with are dreadfully unsuitable candidates.
Some of these people don't know how to write legibly, are frustrated by simply math and logic, cannot cook a simple meal or sew a button, etc..
No cellular gadget, no atm, no microwave oven, no laudromat drop-off and things are going to get ugly real fast...
What will it take to stop these criminal bankers?
Lamp posts and rope.
The only way a central bank can go broke is if it is actually closed down and replaced with something else.
The best replacement is gold in a fee market.
CBs could hold equities at $xx.xx or until they are actually worth that much'. They are after all CBs and can make their own rules.
I don't think that this article makes the case for the possibility of a CB going broke. The Print option is always there. The smaller and less powerful the CB the more this option will lead to high inflation and devaluation. But that's not the same as going bust.
It's Mark to fantasy accounting.
If the Fed finds itself in a negative equity position (not hard to imagine with $4.3T in assets and only $50-something billion in capital) the Fed would simply stop rebating its "profits" which consist of Treasury interest payments in excess of the Fed's costs until mandated capital levels are restored (I believe the "profit" rebated is currently around $100 billion.)
Obviously this shortfall would balloon the U.S. deficit by an equivalent amount.
"Also bear in mind that the more focus there is on central banks, the more scrutinized their balance sheets will be."
And when will the Fed balance sheet ever be closely scrutinized? The answer is never!
Audit the Federal Reserve Bank!
go broke??? how many zeros on the keyboard? or how many times can they press 0
this article completely ignored the "limiy" that CB;s have.
CBS are limited to printing until their CURRENCY CRASHES and BURNS.
Thats the only thing that limits their printing presses, a currency crisis. They couldnt care less about that false inflation narrative.
The problem today is that ALL countries are printing, so the currencies relatve value holds the same between 2 big printing countries.
Only Gold is true, but it is sold as paper gold these days, a whole new kettleof fish
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As my dear old dad said…
"If you want to swing the axe, you hold the wood."
If the CB's are going to continue to play these games, people will just take their marbles and go home.
They will move their money, go into gold, or something.
The banks are in a perpetual feed-forward loop, to boost stocks and it cannot be stopped.
We've got to and will ride this train until it goes over the cliff as the CB's are now political slaves to their political masters..
The central banks are (as always) "independent" as long as they're doing what the politicians want them to. The politicians are the ones with police forces, jails, judiciaries, armies. The central bankers have diplomas.
"What is the endgame of QE?"
COLLAPSE