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Did Mario Draghi Just Leak The Bazooka? Two-Tiered NIRP System May Presage Big Rate Cut
Back in September (and on several subsequent occasions), we discussed the implications of a further cut to the ECB’s depo rate. A plunge further into NIRP-dom would have serious consequences for the Riksbank, the SNB, the Nationalbank, and the Norges Bank.
In a world dominated by beggar-thy-neighbor monetary policy, one cut begets another in a race to the bottom as everyone scrambles to, i) keep their currency from soaring and ii) keep the inflationary impulse alive.
As Barclays explained in great detail several months ago, another ECB depo rate cut would have an outsized effect of the franc:
A cut in the ECB’s deposit rate further into negative territory likely would have a significant impact on the EURCHF exchange rate and provoke a more immediate response from the SNB. Indeed, we expect that a cut in the ECB’s deposit rate may have a greater effect on EURCHF than on other EUR crosses. Switzerland applies its negative deposit rate to only a fraction of reserves, currently about 1/3rd of sight deposits by our calculation. In contrast, negative deposit rates apply to all reserves held at the ECB, Riksbank and Denmark’s Nationalbank. Consequently, a cut to the ECB’s deposit rate likely has a larger impact both on the economy and on the exchange rate than a proportionate cut by the SNB.
Now, it appears Mario Draghi may be about to go the Swiss route by introducing a tiered system for the application of negative rates. As Reuters reports, “Euro zone central bank officials are considering options such as whether to stagger charges on banks hoarding cash ahead of the next European Central Bank meeting, according to officials.”
“Officials are discussing a split-level rate,” Reuters goes on to note, adding that the “contested step would impose a higher charge on banks depending on the amount of cash they deposit with the ECB.”
"It could be combined with a ceiling, so that from a certain point onwards liquidity can only be parked overnight at a stronger rate," an unnamed official said. "Whether and how to shape a deposit rate cut in December is in discussion."
The idea would be to mitigate the effect of a more negative rate on the institutions (German and French banks for instance) that park the most cash with the ECB.
One problem with driving rates further into negative territory is that at a certain point, banks will be forced to pass along the cost to retail deposits. So far, banks have been able to avoid charging depositors by making up the cost through fees and, in what amounts to a perversion of ZIRP/NIRP, higher mortgage rates.

But, as we saw earlier this week with The Alternative Bank Schweiz, there's only so long lenders can hold out under the NIRP regime and sooner or later, negative rates will make their way to depositors. That, in turn, has the potential to cause a revolt (i.e. a bank run).
Creating a system of exemptions forestalls the application of negative rates to individual accounts and indeed, it may be the only thing keeping Swiss banks from applying NIRP across the board. As Barclays put it, "a removal of domestic banks’ exemption from negative deposit rates likely would force Swiss banks to pass on negative deposit rates as it would increase the proportion of assets charged negative rates to over 20%."
The ECB's plan "sounds like the introduction of allowances similar to that of SNB or in Denmark," Commerzbank’s Head of Fixed Rate Strategy Christoph Rieger told Bloomberg in e-mailed comments. "If allowances are set properly, the measure should fully impact rates, while still helping banks," he added.
The interesting thing about the suggestion that the ECB will adopted a tiered system is that Draghi could be telegraphing a larger (i.e. more than 10bps) depo cut. That is, if you figure out a way to mitigate the effect on banks while preserving the "boom" factor vis-a-vis rates, you'll have hit the sweet spot wherein markets will be pleasantly surprised, and banks will be able to tolerate the push further into NIRP.
"[It] allows scope for a deposit rate to be cut even more aggressively in coming months," Mizuho’s Head of Rates Strategy Peter Chatwell told Bloomberg.

"I think this could be similar to a proposal from the IMF when they were discussing negative rates for Switzerland. In essence, the ECB will have to distinguish between retail banks and the rest. They could penalize the retail banks that fund themselves via deposits a bit less so that this does not trigger a deposit flight. They could be penalizing wholesale banks a bit more given that the threat of deposit flight is less there," Credit Agricole adds.
Here's Citi's Josh O'Byrne:
Sourced indications the ECB is considering a two-tiered approach to further depo cuts suggests to us bigger cuts are being considered than Citi Economists’ 10bp base case. As we find, changing in rates are having a bigger impact on FX than they did when rates were positive. The coefficients we back out suggest a 20bp cut to a -40bp depo could take EURUSD closer to 1.04.
Worth keeping in mind here, through asset purchases there’s still about 500bn EUR of liquidity to come before now and September 2016. Increasing the term to mid-2017 would make this 1tn and increasing the pace at the same time to 80bn would put it closer to 1.5tn. Even at a -20bp depo that represents 3bn EUR of losses to the extent negative rates are not passed on to depositors and banks reduce margins.
A system which exempts a degree of deposits isn’t necessarily new and we have seen in Switzerland almost 65% of deposits exempt from negative rates using a multiple of minimum reserves. Still, CHF LIBOR has been fixing close to the -75bp, move to -80bp since expectations of ECB ease picked up. Following the very dovish speech from President Draghi last week, targeting higher inflation as quickly as possible, an ECB overwhelm looks on the cards.

Yes, an ECB "overwhelm" looks likely and that's not good news for the SNB. In a separate piece out Wednesday, Reuters notes that the Swiss are backed up against the wall. "More ECB easing would be the latest challenge in the SNB's four-year battle to shield the export-reliant economy from the strong franc," Reuters says. "I think the SNB would act if the ECB cuts rates but the room for maneuver is limited," Zuercher Kantonalbank's foreign exchange head Bernd Roth warns. The SNB's options:
- It could push three-month interbank offered rates CHLBOR=ECI, where the target range is between -1.25 and -0.25 percent,further into negative territory to maintain a spread to euro interest rates,
- it could charge more than 0.75 percent on some sight deposits at the SNB.
But Reuters leaves out the "nuclear option": removing all exemptions from the negative deposit rate. That would mean individual accounts are in danger of NIRP and it would set the stage for the proliferation of negative rates to individual depositors, a dangerous precedent to be sure.
Meanwhile, analysts are already looking at the domino effect that we've been keen on outlining since the ECB's September meeting. Nordea's Niels Christensen says "Denmark will be forced to cut below -0.75 percent" if the SNB moves after Draghi while Nomura's Yujiro Goto, Jordan Rochester contend that the Riksbank is more likely that the SNB to cut. "The Riksbank will likely to be proactive after expected ECB decision to cut deposit rate further [and there's a] high possibility of 10-15bps Riksbank rate cut," Goto said in a note on Wedensday. And let's not forget about the Norges Bank who, at +0.75 still has some room to go before NIRP if Oeystein Olsen wants to use monetary policy to combat an economy struggling with "lower for longer" crude.
So as you can see, the currency wars are alive and well and the race to the bottom (or, more appropriately, "below" the bottom) is on with the ECB set to kick off a new phase in competitive European devaluations.
It's worth noting that if the SNB's exemptions mean an ECB depo cut under the current regime would have an outsized effect of the EURCHF cross versus other euro pairs, then by definition that should mean that if Draghi introduces a tiered system, the decreased divergence between how the ECB and the SNB apply NIRP should mean less upward pressure on the franc than would have been the case with no tiered system. So consider that as well.
Finally, because all of the above was a bit technical in nature, we'll close with some comic relief courtesy of sheer central bank lunacy (via Reuters):
Another possibility raised among officials was the idea of buying bank loans at risk of non-payment. One person familiar with the matter said these could be packaged with more creditworthy loans before being put up for sale. "You could buy rebundled non-performing loans, combined with good loans," said the person. "If we get to that, then things are very bad."
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Pure panic moves.
It's all Bullshit!!! Rally on....nothing here. Holiday low volume ramp the rest of the week. Closed tomorrow and half a day on Friday.
Well.. gag me with a mouthful of 500 Euro notes…
..so who has the details of the secret Fed swaps??????
Talking about gagging. Here's how the foodstamps are wasted in Obama's hood.
LOL
http://goo.gl/uy3kKE
Why are you disguising porn links?
When it all fails, use policy steal from people who have no control. The banksters will keep pushing until the people push back.
Fiat? Fuhgetiboutit. Gold bitches!
Two-Tiered NIRP System May Presage Big Rate Cut
If a little is good.....more is better.
Armstrong..
"Governments have embraced Marx & Keynes because they argued that government had the RIGHT and the CAPACITY to manipulate society by the economy creating Utopia eliminating the business cycle. They create economic disasters, blame others, and then start wars to get out the mess. It is never our interests at stake – only their’s. The Free Market always wins and this age of Socialism where they decide how to spend your money (usually on themselves), is coming to an abrupt end just as did communism. This balancing act has been a disaster because they assumed they had the power to control something they have no clue about how it even functions. Sorry but Smith and Schumpeter win."
Crackhead Bob says "Dits Tarty dime!"
Love your hair.
https://www.youtube.com/watch?v=kasGRkfkiPM
Right back at ya!
You whacky doppelgangers!
All men to their battle stations. on the count of 3, everyone unload all their ammo.
Unload it on who? I'm confused; bankers, ISIS, government, Turks, racists, collegians, who, who?
There are now reports of thug armies moving down WABASH and making their way to places that sell craft beer and have busty women.
The fires of the dead light up the Chicago skyline.
The people in Europe are flat ass broke. What good does any of this action do stimulate the economy? Retail loans on furniture are at 8.5% for example. Car loans are in the 4s.
People aren't buying more or taking on more debt.
Germans in particular aren't upgrading their houses to bigger ones with bigger mortgages just because the mortgages are cheap. Nevermind the uncertainty of the invasion. 180,000 came so far in November alone.
Who the fuck is Draghi kidding?
The Euro buys less and less. Prices are going up everywhere. Guys who have money are buying and buying fast and overpaying on land deals for example because they know the money is worth shit.
Merkel and Draghi are both prime candidates for the insane ayslum.
Germans? Last time I looked, 60% of them live in... rent. Think about it: a "homeowner quota" of 40%. In certain countries, this would be seen as a sign of doom
"The Euro buys less and less. Prices are going up everywhere" where? links and numbers?
the eurozone CPIs include energy and food, btw. methinks you are projecting
The eurozone CPI has nothing to do with real inflation, they can manipulate the weighting as they please. I don't feel like the poor are going to feel the impact of cheaper fuel, but it's weighted pretty high still. Also, they invented some kind of system on how to push inflation numbers even further down by counting improvements in utility as value. So they tell you this: If your new TV cost double your old, it's OK because it also has double the size and better colors.
We might be actually seeing negative price inflation, because this new TV has amazing contrast so it's OK to cost double and we multiply price with lets say 0.3 to count in gained utility from technological advancement. Now even though I paid double the price they'd tell me TVs got cheaper, lets fuken print more.
I would't trust their numbers or any of the shit they spout
you do know that each CPI, as for all statistical numbers in the eu and eurozone, are national numbers, i.e. each member computes it's own, to be aggregated by EUROSTAT
again, any examples? rents, bread, meat, beer, wine, baby formula, whatever?
yes, the US does some funny tricks. but thinking that 19 or 28 other countries do that in the exact same fashion is imho... projection
Congrats on slowly creating the next group of terrorists.
Everything Walküre says is absolutely fucking true. It is even worse because of the tax increases and the idiotic health system (think Obamacare 10 years down the road). Nobody really does shit about the madmen running the ECB. Just show protests. Weidmann is too much of a wimp to push Draghi out of office. Merkel merkelt. Goldman will have its €/$ paity targt reached soon enough. Who did Draghi work for before? Nevermind.
Merkel is toast. Possibly gone before Christmas.
When Merkel goes, Schengen will fall.
Then the Euro will be reversed and national currencies reestablished.
France will vote Marie Le Pen and start the next chapter in European revolutions. There have been smaller and quieter revolutions already in Hungary, Austria and Poland.
France will be the big one. Germany will follow France and vote a nationalist government.
Only then can the EU work like the example of the United States. The governor of Texas makes politics first and foremost for Texans and doesn't give a rats ass about Nevada or California.
We need to allow individual EU States to achieve some semblance of self governance again.
First individual Europeans need to assert their own personal self governance.
Europeans have had what little sense of entitlement to liberty they hadbrainwashed right out of them. No hope.
You think the slave owners will let the slaves go without spilling a drop of blood? Keep dreaming.
"When Merkel goes, Schengen will fall."
IF Merkel goes, then it's most probably because the federated "Länder" push for a cap on refugees, each one it's own number, self chosen. And IF Germany pushes for such a solution, the others would be very happy to follow. And IF all this happens, then Schengen... well, then there is no reason for change anymore
as such the "Schengen issue being captive on refugees" is quite... polemical. Schengen is meant to be for legit crossers of inter-Schengen borders
(as a side remark, it's the US and UK that have a thing about borders. on the european continent - since Napoleon - we have plenty of internal checks, starting with mandatory IDs, papers issued by authorities for this or for that, etc. etc. It's the US and UK, both with an insular attitude, that resemble beehives where all checks are done only at the borders and then it's easy to pretend to be someone else. example: "Identity Theft". Try to explain a continental european what that is, in most cases he'll probably think you are drunk)
yes, "revolutions", minor and sometimes even majors, are a commonplace, in Europe. Italy is even changing it's constitution. a healthy thing to do, all in all. When did your country change it's constitution, last time? In the case of the UK... well, is it even written down, somewhere?
"Only then can the EU work like the example of the United States". Eh? WTF? Thanks, but no, thanks. That's a purely American way of looking at the EU. Why should be even contemplate to follow the "example of the US"?
Texas is not sending a carrier to Syria, for example, while France is. so much for "semblance of self governance"
actually, why isn't Texas sending a carrier called "Friend of Big Oil" to Syria? so much for projection of own issues on others
And if all of this happens, then Catalonia will separate from Spain. It will not be pretty.
Catalonia? 50% of Catalonians want to exit their national union with Spain, 50% want to stay. Roughly 20% want to exit the EU, though. Just saying
Yes, operation "Clown in Charge" was again launched in the EU following the criminality in France and Syria. We all know that more of the same is alwasy the answer for the Goldman plant!
Hyperinflation here we come.
Draghi will force the SNB to expand their balance sheet like there is no tomorrow (and ultimately maybe even force them into the Euro?).
What a nightmare scenario for Switzerland.
Agreed, imagine the Swiss had voted in favour of the gold backing initiative one year ago? While it would have been a much cleverer decision in the long term, it would have been near impossible to weaken the franc in the race to the bottom in the short term, thus breaking its export economy.
The only way out of this mess if you do not want to participate in the race of total currency devaluation would be imposing reverse capital controls (preventing inflows), something quite unthinkable for an open economy like the Swiss one.
Oh yes, I was hoping so much for it to happen. But this was absolutely impossible for the TBTB, BIS and NWO to let it happen. I bet they triplechecked and put the necessary measures in place so that the election results came out as needed just in case.
Imagine: With the demand for Francs going through the roof, they would have been forced to keep printing CHF and simultaneously buy physical gold at an insane pace.
I'm not sure if I'm right, but IMHO the Swiss gold backing initiative would have brought down the worldwide financial system within weeks, so there would have been no more crazy ex-GS-central bankers to deal with.
That would have been quite interesting...
Well, they managed to move the pin on the US discount rate to .12%:
http://finance.yahoo.com/bonds
I know what Draghi needs to do. Call a press conference and just say one word. 'Unicorn'
THose archons/evil aliens/demons (whatever you want to call them) who are controlling the central banks from Switzerland may be beyond their depth... and when they figure it out, they will probably just bomb the hell out of everyone and just start over.
... so much for being super-geniuses.
yes he did. just say no to shopping electronically
"in race to the bottom"
am I the only one who misses the "good 'ol days" when there actually was a bottom?
Right. And when you see the financial contortions of "mother Europe" trying to make it work, then think of Greece, it becomes a "no bottom too far" situation.
You can bet your sweet ass all the CB's are going to go.... FULL RETARD!
Wait till Jack Yellen and crew, get the signal from above and jump....NIRP!
like the income tax..incremental implementation follows the publicly acceptable divisive first step.
Inflation is the bastard offspring of fractional banking.
As long as Oligarchy greed is kept in check and productivity and wage growth can be shared across the political / class platform, fractional banking interest demands can be paid and in fact the overall economy can grow to the benefit of all. But once greed sets in and the oligarchy becomes obsessed with having it all, interest payments cannot be managed and hence bubbles and inflation have to be established to subsidize the debt payments. In extreme desperation savers are sacrificed at the alter of inflation creation seeing their savings yield no interest all the while helplessly watching as their purchasing power evaporates. That's where we are now.
With the massive amount of debt worldwide, we will have to trudge deeper into this swamp to keep the ponzi alive, dragging the middle class and retired deep into the quagmire. In short this will not end well.
Just the tip
Kudos to Victor on the Draghi artwork. When I first looked at the Draghi rendering, the typical impression of such a wardrobe would be someone wearing white gloves. But he's got him with rubber gloves on. Perfect!
This is not the liquidity trap you were looking for. /JEDI mind trick.
Why would any investor buy "non-perfoming" loans?
b/c moody's rated them aaa & they're fully insured by aig of course!
Somewhat relevant: "Inside Job" https://archive.org/details/cpb20120505a
Story of the 2008 financial collapse. Complete with appearances by your favorite central bankers. Have your list ready and something to take the edge off.
One problem with driving rates further into negative territory is that at a certain point, banks will be forced to pass along the cost to retail deposits. So far, banks have been able to avoid charging depositors by making up the cost through fees and, in what amounts to a perversion of ZIRP/NIRP, higher mortgage rates.
this is nothing new..."fees, transaction fees" whatever you want to call it it's NIRP for us little guys and has been. This is not panic....its only re-branding to a more realistic name, to make the banning of physical money seem logical and natural...
Banks cannot credit peoples accounts with company tokens - they can only debit your life force
"[It] allows scope for a deposit rate to be cut even more aggressively in coming months," Mizuho’s Head of Rates Strategy Peter Chatwell told Bloomberg.
It would appear that Mr. CHATWELL hasn't mastered the use of the English language. Most of the time you only see journalists adding words from an interview for athletes and morons.
The one constant is their stupidity. No matter how badly they screw up, they always manage to do worse the next time.
"Banks passing their NIRP cost to higher mortgage rate" , good luck to flight deflation Mario
I've got some Tulip Fuckwit Bonds I am just printing off, maybe I could package those with some sub prime Regurgitated Jizz Auto loans and some Jam Me Fulloshit Education Student Loans and sell those too to the ever more fucking gullible retarded cocksuckers who line up to buy this festering shit.
Like you 401 k manager.
I can promise you my Tulip Fuckwit bonds are elgible because I guarantee they are non performing too.
Like the fucking brains of these cunts
Buy the dip...always works. Fed (and now the ECB) have your back. Easy money.
Shaysus I just realized...the banks have been EATING the NIRP on deposits. If they stop, don't we just get a run on the banking system basically when people withdraw cash and store it at home?
Control freaks playing with fire. I imagine people being shocked when they write the book in a few years on the calamity caused by the mass delusion of central bankers. Everyone will wonder what they were thinking and why no one stopped them.