Via Mint's Bill Blain's Morning Porridge who wonderfully commemorates today's date
”A common mistake when trying to design something completely fool-proof is to underestimate the ingenuity of complete fools..”
First day of a new quarter, and it feels like we have an answer to the all-important question of the modern age: how many Euro 100 notes can you squeeze into a Chinook (a very big and noisy helicopter). The second part of the question is – what’s the right height to optimally helicopter drop an economy? I discern a disturbance in the force as a mounting number of learned articles discuss these critical issues.
Yet, the answer may be extraordinarily simple.
For the last couple of months rumours have been circulating of “extraordinary” monetary policy discussions within the bowels of the ECB. We’ve been told “radical” new measures will build upon, and complete, the work already achieved over the last 5-yrs by the ECB in supporting European stability and growth. (Growth? Really?)
We’ve heard it all before: the ECB promises much and delivers less..
However, yesterday’s widely circulated leaks from within the Frankfurt behemoth suggest the ECB’s new secured consumer lending programme could be transformational. Yesterday’s ECB leak highlights the gnomes of Frankfurt may have stumbled on the ultimate truth of helicopter economics – you don’t actually need a helicopter.
Apparently, Draghi has even secured grudging support from Wolfgang Schauble for the proposed extension to their Asset Purchase programmes. The leaked preamble guffs about how it “build on the measures announced at the last meeting”. The rest suggests the new consumer asset backed asset purchase programme, CABAPP, will be announced by Draghi following the April 21 meeting – but probably won’t be enacted until early Q4.
While efforts to stimulate lending to Europe’s SME sector through securitisation programmes have proved difficult because of the blocks imposed by regulators on ABS, its certain borrowers will be more receptive to the much simpler new consumer lending finance package.
Following yesterday’s leaks, ECB spokesperson Vabara Hasiin declined to provide further details of the ECB’s plan to directly buy secured consumer lending assets originated through European banks and platform lenders - but by then the cat was out the proverbial bag.
Yesterday’s leaks confirm the ECB’s plans will effectively give Europe’s consumer lenders access to unlimited zero-cost finance – going far further than the free money showered on them by the multiple previous TLTRO financial packages.
Under the proposed scheme, European banks have the option to issue their clients a new branded European Banking Union debit card – which will have a raised ECB logo to make it meet EU regulations for visually-impaired users. Although these will still bear the names and logos of the “originating banks”, these will be directly financed from the ECB on a pass-thru basis. Banks will be paid a minimal fee for “labelling” and originating the new ECB debit cards.
At first glance, it looks like European retail repayment risk goes straight onto the ECB’s books – which would be “extraordinary” indeed. But, one of the cornerstones of the new CABAPP policy will be credit loss control.
While banks will be free to choose the rate they charge new card holders, the actual interest rate will be close to zero. The ECB will make it clear to banks they are expected to stimulate consumer spending through the lowest possible personal lending rates. One earlier proposal was for the ECB to issue its own debit cards off a new Fin-Tech lending platform, but this was opposed by French and Italian regulators on the basis of protecting existing European retail institutions.
German objections to the ECB effectively taking long-dated consumer lending risk were overcome via two points. Firstly, losses will be transferred off the ECB’s balance sheet by the ECB itself buying NPLs off the programme and holding these to maturity on the bank’s banking book. The ECB could then write these off at a stroke of a pen on their imaginary cheque book as an inflation management tool. The second concession to Berlin is the establishment of a new EU-wide Financial Recovery and Advisory Group to be based in Berlin: FRAG.
Of course the ECB’s true genius lies in the creation of digital helicopter money. By making the fixed interest rate on the cards effectively zero, the duration of the debit card loans effectively perpetual, and giving borrowers an interest only repayment option… well… there will effectively be no substantial losses.
The net effect of the new CABAPP policy will be unlimited cheap retail financing for consumers across the EU area. Although we were hoping for the sound of fully-loaded Chinooks and Augustas across Europes, the only sound we’ll hear will be the cha’ching of retail tills.
Although rates will effectively be zero, spending on the cards will be carefully controlled via variable drawdown limits, set on a tiered system. The lowest limits will be set on blue cards which will be available to the bulk of the population, silver cards to those in gainful employment within the Eurozone, gold cards to higher earners and spenders, while the top level Black Cards will be reserved for the EU nomenklatura and their families.
An additional positive effect for the EU is card holders being linked directly to the ECB, creating political advantages by forging close links between Europe’s population closely to their central bank. The leaked documents show a new slogan: “One Europe, One Euro, One Bank, One Banking Union” will be used to market the programme.
Another refinement of the scheme is that it won’t only be open to banks – but also to consumer lending platforms across the EU. This is seen as an effective way of reaching the swathes of European residents not covered by conventional banking. New immigrants will be encouraged to apply for EBU Debit Cards at their entry point – the basis being “high-spending asylum seekers should contribute to Europe’s growth through increased consumption”, according to yesterday’s ECB leak.
The new cards will not be available in the UK.
The Bank of England said ask Boris or Nigel why not. Only joking.. they were miffed they hadn’t thought of it themselves..