Jurgen Stark on ECB Operations

Here‘s an interesting speech from ECB Executive Board member Jurgen Stark about the plan for an exit strategy from the current non-standard operational framework.  Two quotes stand out for me:

As regards our area of responsibility, we are well prepared to phase out the measures we took in response to the crisis. The way these measures were implemented provides us with reasonable flexibility in unwinding them. For example, unless we decide otherwise, the maturity and size of our operations will automatically decrease, starting next year.

And, more interestingly,

It is therefore crucial to monitor the sources of funding constraints for banks. We need to judge whether these funding constraints relate to individual banks rather than to the functioning of the money market and the banking system as a whole. Our operational framework is not designed to counter funding problems at the individual bank level. Rather, our funding support is designed to alleviate funding risk to the extent that it is systemic.

13 thoughts on “Jurgen Stark on ECB Operations”

  1. Interesting article.
    “From a fiscal policy point of view, it should be noted that although the exit from monetary measures will be uniform across the euro area, it is likely to have asymmetric fiscal impacts given the current substantial heterogeneity of fiscal positions. A potential increase in market interest rates will have a much stronger impact on highly indebted countries, in particular those with outstanding government bonds with short maturities. The need for fiscal flexibility under a single monetary policy places a clear premium on timely and credible fiscal consolidation in all euro area member countries.”
    Is this a signal of the potential dangers of the proposed funding mechanism
    for the bank bailout.

  2. @ Karl,

    “Our operational framework is not designed to counter funding problems at the individual bank level. Rather, our funding support is designed to alleviate funding risk to the extent that it is systemic.”

    Ha Ha

    The truth will set you free,

    Did Willie O’Dea get the memo?

  3. @ Karl,

    Does Jurgen not speak the absolute truth?

    Like the Fed and faced with the collapse of fiat money they had no choice but to create faith.

    Bernanke & Trichet replaced fiat with faith.

    The order (fiat) was destroyed by greed and was replaced by faith (in the ability of politicians to maintain order).

    Money is a funny thing Karl.

    It seems to me it’s getting funnier every day.

    Are we now in the land of funny money where debts cannot be repaid by plain and honest economic activity and where the answer is to print more money?

    Jurgen knows.

    Willie doesn’t.

  4. p.odubhlain Says:
    September 22nd, 2009 at 11:46 pm

    It means the ECB is the IMF.

    Now be good boys and girls.

    Pay off your Anglo Iriah debt and accept the rule.

  5. The whole article is astonishing. Everyone has their favourite bits, mine is:
    “From a fiscal policy point of view, it should be noted that although the exit from monetary measures will be uniform across the euro area, it is likely to have asymmetric fiscal impacts given the current substantial heterogeneity of fiscal positions. A potential increase in market interest rates will have a much stronger impact on highly indebted countries, in particular those with outstanding government bonds with short maturities.”
    With circa 20 bn in t-bills/commercial paper and a plan to issue 54 bn more (or 40+% of 2010 GDP), he wouldn’t be talking about lil ole us would he?

  6. I think the ECB may have started to get a little annoyed at Irish officials claiming that they were loaning us the money for NAMA at a “very low rate” of 1.5%.

  7. @yoganmahew

    “A potential increase in market interest rates will have a much stronger impact on highly indebted countries, in particular those with outstanding government bonds with short maturities.”

    Not leaving the namaphiles much wriggle room, is he?

    @DE

    Commentary from Irish financial community “free lunch from the ECB!”, and “quantitative easing for irish banks!” doesn’t merely annoy he ECB. Central bankers find this deeply, deeply insulting.

    You would think we have enough self-inflicted wounds already.

  8. @bg
    Not really. No doubt we will have people who are just looking at the words telling us that Ireland is not mentioned in a single paragraph so obviously this doesn’t apply to us, but I think there should be little doubt that it is directed at us, Spain and, I think, Portugal.

    The ECB is warning us that we should gird our loins; the wolves are on the way and someone is going to be thrown. It isn’t going to be Germany or France…

  9. More taxes are inevitable. 77% was the highest Irish rate in the seventies. In the UK it was 95%!

    Lovely! Of course all the winners will leave but GS the IMF and EU will all applaud!

    Of course, following the Republicans in the USA, by keeping a persistently high deficit, FF will make it incumbent on the next crowd to raise taxes. So FF can be the party of low taxes! Doncha love politics?

    What is a tumbril?

  10. It is clear that the ECB wants to clean up the extraordinary liquidity made available to distressed banks including Anglo and presumably INBS. I presume NAMA fits into this as it replaces Government guaranteed deposits with sovereign bonds eligible for Repo operations. I note that the Minister recently referred to the ECB funding for Anglo (through ECB deposits I presume) as emergency funding that had to be repaid.

    On the nature of the Irish bonds, I expect that the confusion over the bonds arises from the fact that the ECB has not yet guaranteed that such bonds will be guaranteed to have access to ECB repo operations for the next 10 years. Until the NTMA get clarity on what type of bonds it can issue the details cannot be announced. One wonders how close we are to getting clarity on the matter and what might be holding it up.

  11. When I was a garsun in short pants I remember sitting on my Nana’s knee as she the told me in graphic terms what happened after the US and the UK slammed the gates on Irish goods. Limerick ham was the first casualty, this was cured and smoked ham which sold well mostly in the US. The second casualty was beef which sold mostly to the UK. Overnight in 1932 40% + penalties on imports from Ireland were imposed first in the US quickly followed by the UK and other countries.
    Farmers’ were reduced to butchering their own pigs and putting them in salt barrels, the alternative was to kill them and bury them. Months down the road they simply gave away the salted bacon in return for a few spuds or whatever people had to barter with. Beef was even worse, at the cattle market every second Wednesday the jobbers bought cattle for a pittance. They then drove the cattle down to the bank of the Feale river beside the bridge on the road to Tralee, skinned them and threw the carcass into the river. In a nutshell the only market was for cattle skins which could be turned into leather, the rest of the animal was worthless. The family had a wood turning business, implement handles, wagon wheels and so on, business dropped over 90%, mostly repairs to previously sold goods. The lesson I learned from the people who lived through the dirty thirties was that Ireland is extremely vulnerable to the trade policies adopted by our trading partners and that protectionism can break out without advance notice. I hope this fleshes out the meaning of protectionism.

  12. I moved my previous post to O’Rourke- Protectionism which is where i should have put it in the first place. If someone can cancel it here please do so.
    Thanks

  13. The issue raised by the Stark speech is surely whether there is in fact in the ECB’s operations an element of ex ante quasi-fiscal subsidies to the commercial banking sector – whether Irish or elsewhere in the euro area; and indeed whether other central banks may also be so engaged in such activities. The implication to be taken from various pronouncements by government ministers relating to this topic is that there is some kind of subsidy/bail-out going on. If this were the case it would raise interesting questions about such activity vis a vis EU competition law and also state aids policy.

    However Willem Buiter has been blogging on the issue of QE and ex ante quasi fiscal subsidy on his FT blog site:

    http://blogs.ft.com/maverecon/

    see in particular his series of blogs commencing on 20 September last under the heading “Is there a case for a further co-ordinated global fiscal stimulus?”.

    “All leading central banks now accept as collateral in repos, at the discount window and for any of their wide range of ad-hoc facilities created for the crisis, private collateral. The ECB, for instance, did a very large-scale repos operation on June 24, 2009, when it lent €442 billion for a one-year maturity at 1.00 percent against its usual wide range of eligible collateral. Although central banks steadfastly refuse to provide the information required to value the illiquid collateral they have accepted (and continue to accept), we cannot be certain that the rate of return to the central bank on these operations includes an appropriate risk premium rewarding them for the private credit risk they are taking on. Even the profits recently reported by the Fed and the ECB on some of their liquidity operations don’t provide sufficient information to determine whether these central banks have been handing out ex-ante quasi-fiscal subsidies to their commercial bank counterparties during the past two years.

    “With neither the borrowing banks nor most of the collateral offered free of default risk, the ECB’s massive operation on June 24, 2009, was probably aimed at more objectives than just influencing the one-year risk-free rate. The operation is likely to have involved a quasi-fiscal subsidy to the participating banks and may have encouraged banks to lend more at somewhat longer maturities, where private borrowing and lending rates are likely to still include a material liquidity premium. Nevertheless, the uncapped (fixed-rate) repo did also provide a strong hint, almost a commitment, that the official policy rate would not be raised from its present level during the coming 12 months.”

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