Daily: The ECB’s sovereign debt monetisation

The big theme in today’s links is the ECB yet again. With the interview with Joerg Asmussen out, backing Mario Draghi’s previous statements, it is now more clear than ever where this is headed in Europe. The lead story here from Ambrose Evans-Pritchard gets at the broad strokes and dovetails well with what I wrote earlier today. The key concept is “convertibility” or “redenomination” risk. The ECB will use this rationale to buy sovereign debt in concert with the European bailout funds in potentially unlimited quantities.

That’s where this is now headed irrespective of what the Bundesbank thinks, especially because Angela Merkel agrees that this is the right course. I would call this monetisation because the ECB will not just expand its balance sheet but also do so in an unsterilized manner.

Europe

Germany backs Draghi bond plan against Bundesbank – Telegraph

“The choice of wording is crucial. If it can be shown that the ECB is acting to avert EMU break-up – known as “convertibility risk” – bond purchases would no longer be deemed a bail-out for Italy and Spain.”

EconoMonitor : The Wilder View » Dutch domestic demand dragging real home values

“In real terms and indexed to 2005, home values are down 10.1% over the year in July and dropped 21.3% since the August 2007 peak.”

European Central Bank May Set Yield Targets for Bond Purchases – SPIEGEL ONLINE

This is the article that set off a firestorm regarding the ECB. Again, I think this article is wrong. The ECB is contingency planning but they don’t plan to target yields anytime soon. Rather the ECB will buy bonds in the secondary market while the European bailout fund buys them in the primary market.

FT Alphaville » Asmussen backs Draghi

“Here’s the interview with German ECB director Jörg Asmussen which was helping to compress Spanish and Italian sovereign yields further on Tuesday. His words are being hailed by some (such as the Telegraph’s Ambrose Evans-Pritchard, as a “crucial turning point” in the eurozone crisis.”

Schuldenkrise: Bankenkrise erfasst Sloweniens Realwirtschaft | FTD.de

Slovenia’s problems have increased and at the beginning of the last week the yield on its 10-year debt reached 7.5%. The likely outcome here is aid from the Troika. Supposedly the Slovenes were model eastern Europeans during the pre-crisis days. Now they look like a basket case with huge amounts of bad loans on bank boos – 17-25% of GDP. This German language article goes into all this and more. The bailouts are everywhere.

Spain Out of Options « naked capitalism

“Spanish depositors were pushed to convert their deposits into preference shares, which they were told were just as safe. This was a simple desperation move by the banks to save their own skins, customers be damned, by raising equity from the most unsophisticated source to which they had access. And now that that gambit failed, these shareholders are due to have those investments wiped out unless the Spanish authorities can cut a deal to spare them. Don’t hold your breath.”

Yanis Varoufakis: How the ECB is Complicit in a Macro-Financial Debacle « naked capitalism

“The European Central Bank (ECB) is the only serious institution that the Eurozone has. It was meant to be the guardian of the euro’s credibility but, alas, during both periods (Ponzi growth and Ponzi austerity), the ECB proved incapable of playing this role. When toxic capital flowed disastrously into the Periphery, the ECB whistled in the wind. When it flowed out, causing the collapse that then gave rise to the Ponzi austerity, the ECB was part and parcel of this crime against the peoples and the spirit of Europe. Now that the chickens are coming home to roost, the ECB is pledging to do “all it takes” to save the euro, but fails to back up such strong words with deeds.”

ECB Capping Rates on PIIGS? Wait Till Traders Call Its Bluff | EconMatters

This analysis is all wrong. It relies on non-existent bond vigilantes as a way of forcing a central bank that prints money to do what they want. How many times are we going to hear this palaver about the UK, the US and other countries. Hello? The CB prints money. How can bond vigilantes force it to do anything? We may not like the central banks’ policies but they are monopolists, central planners and they have control. As soon as you hear people saying otherwise and pointing to the bond vigilantes, you know they are all wrong.

ECB mulling interest rate threshold for bond buys: magazine | Reuters

Here is Reuters’ reporting of the ECB bond buying rumour. The FT and the WSJ have carried columns debunking this via ECB spokespeople.

Italiens Banken stark auf die EZB angewiesen – NZZ.ch, 17.08.2012

This Swiss German-language article says that Italian banks are preparing to offload dogy loans as collateral onto the ECB in order to help pretty up their balance sheets. At the end of July, Italian banks had 283.3 billion in loans outstanding to the ECB.

Schuldenkrise: Spanien: EZB soll unbegrenzt Staatsanleihen aufkaufen – Wirtschaft – FAZ

Before the whole ECB “unlimited” liquidity brouhaha blew up via Der Spiegel there were the Spanish economy minister comments about the same. Luis de Guindos said at the end of last week that Spain needed the ECB to commit to unlimited liquidity. Here is the FAZ in Germany reporting his comments.

ECB limited and conditional lending is not ‘what it takes’ | vox

“In principle, the ECB can eliminate this risk by acting as lender of last resort and capping yields at a level that ensures solvency (unless things turn out badly in terms of economics or policy effort). The ‘target’ yield would need to be sufficiently low to be consistent with debt sustainability but sufficiently high to maintain the incentives to undertake domestic reforms. This would theoretically eliminate (or at least reduce massively) the risk of default and start a virtuous cycle. However, in order to be ‘successful’, the ECB would need to be credible that it is going to defend its desired target rate.”

US economy

Buffett cancelled municipal debt bet 5 years early: WSJ | Reuters

“the early termination is deepening questions among some investors about the risks of buying debt issued by cities, states and other public entities.”

Banks Use $1.77 Trillion to Double Treasury Purchases – Bloomberg

“The gap between U.S. bank deposits and loans is growing at the fastest pace in two years, providing lenders with more funds to buy bonds and temper the biggest sell-off in Treasuries since 2010.”

Self-Fulfilling Prophecies – Tim Duy’s Fed Watch

Tim Duy thinks monetary policy can still do more. I disagree but I do think this is worthy of a read.

As a Harvard Alum, I Apologize – James Fallows – The Atlantic

“The big claims and conclusions Ferguson has offered in recent years, with the extra authority of his academic standing, have been attention-getting and mostly wrong.”

Technology

Misleading and incomplete coverage of Apple’s ‘record’ value (CORRECTED) : CJR

“Microsoft’s peak market cap in 1999 was actually about $856 billion in constant dollars, $235 billion more than Apple’s current market cap.”

Motorola’s New Patent Lawsuit Against Apple: The Details | TechCrunch

a quick run-down of the patents involved in the Motorola Mobility/Google suit against Apple. This has to do with wireless communication patents and covers not just mobile devices but also computers with Wi-fi.

Out, Damned Stock! Web 2.0 IPOs Hope for an Amazon Ending. – Kara Swisher – News – AllThingsD

Other links

Progressive’s #Fail in Social Media May Be Warning to Insurers – Deal Journal – WSJ

“Progressive Corp. was trying to save $75,000. Instead, it unleashed a flurry of social-media rage against the company.”

In U.S., Majority Overweight or Obese in All 50 States

“Nearly seven in 10 adults in West Virginia, Mississippi, and Kentucky are either overweight or obese — more than in any other state in the first half of 2012. At the other end of the scale is Colorado, the least overweight state in the union, but even there, 55.1% of residents are overweight or obese.”

BBC News – Belize misses $23m interest payment as default looms

“Belize is in danger of defaulting on its debt after it missed a $23m (£14.6m) bond payment due on Monday.”