The ECOFIN and ECB Packages Post author By Philip Lane Post date May 10, 2010 Here is the press release detailing the funding strategy decided by ECOFIN. Here is the press release explaining the ECB decision. Categories In EMU, Fiscal Policy Tags ECOFIN, euro funding 25 Comments on The ECOFIN and ECB Packages ← Bernanke on The Economics of Happiness → InterTrade Economic Forum 25 replies on “The ECOFIN and ECB Packages” Here’s the ECB’s press release. http://www.ecb.europa.eu/press/pr/date/2010/html/pr100510.en.html ECB is already using its new mandate. Aggressively buying PIIGS this morning. Greek 2yr 1400bps tighter this morning already! Ireland in 175bps, Portugal 150bps, Spain 70bps, Italy 80bps. SHOCK and AWE from the EU and ECB here. These dramatic emergency measures are against a positive global economic backdrop and we’ve had an example this morning of Germany’s export prowess with emerging economies: German exports ex-EU up 34.7% in March; total exports in month up 11%. Is the NPRF pension fund not on the hook for around €9bn after the weekend…..instead of the mere €500m contribution to the Greek Bailout that we were tapped for in March or April ????? 🙁 @Michael: and there are good industrial output numbers from France this morning. World trade has been recovering rapidly, and if the euro stays relatively weak the eurozone can benefit from this to a greater extent than it has done to date. So buying time in this manner is hugely helpful. @2pack – is there anything left in the NPRF? Anyway, let’s wait for the initial shock and awe euphoria to die away and then go and short something. That’s a shedload of money the EU is putting up and I’ve no doubt ‘the markets’ are only asking themselves one question this morning: “How can we get a big pile of it to come our way?” I love these headline grabbing figures such as €600bn, $1trillion, etc. They make such good copy. (posted this on the other thread) The key to this is that IMF style cuts have to be a condition of accessing the fund. Civil service pensioners – your time is coming. Re NPRF the previous 110bn for Greece was an actual cash loan, this will just be a guarantee, so it’ll be more like a contingent liability on the sovereign proper, rather than on the NPRF, i think. Bank of Finland and Bundebank have both just confirmed they are buying government bonds this morning, Bank of Finland said “all Eurozone central banks will be involved”… @Sarah Carey – “Civil service pensioners – your time is coming.” Assuming that Ireland needs to access this funding? Surely to do so (i.e. ask for a bail out) would be a terrible and overt admission of failure by our dear leaders? Especially as Brian has been telling all and sundry about how well we are viewed by the international markets blah blah blah because we have taken all the right steps and turned the corner etc. A bit hard to see how they won’t though given the blinding difference between how much we spend and how much we have coming in – and it ain’t all going to be made up by cuts alone. The bottom line to me though is we (everywhere) are all living beyond our means and the ‘correction(s)’ yet to come will be tough all round; regardless of any steps taken so far. It wouldn’t just be the CS pensioners suffering (why did you single them out?). I heard a call for journalistos to be given a pay cut the other day. ‘Share the pain’ and all that. And some people still seem to think that consumer spending will recover. I still see future corrective measures (cuts, taxes, privatisation, more job losses, int’l companies moving out of the Eurozone, etc.) squeezing economies and causing double-dips. I see Italian manufacturing output is down. Forgive me, but this article in today’s IT seems to be a bleaker assessment than the trend here, in fact buying time as a strategy might be read as counter-productive? Or is the power of the ECB and the Central Banks buying gov bonds enough to counter the trends Krugman refers to? If not, this could get very expensive! http://www.irishtimes.com/newspaper/opinion/2010/0510/1224270049610.html @Highway61 – Krugman has put that view forward on a number of occasions. I think he is right on the impossible situation Greece finds itself in. Regardless of what else happens they will have to impose massive cuts. However, I cant see competitiveness doing much for them – currently they have a trade deficit of about 13% of GDP. They have little to export other than olives and holidays. They appear to have figured out that their tourism product needs to be developed but that takes time. Other indigenous sectors do not appear to be up to too much and one can’t expect a wave of FDI, so that leaves them not being able to exploit the benefits of enhanced competitiveness. In other words, leaving the Euro is not going to solve their problem – their standard of living is going to decline and I can’t see abig recovery any time soon. They will need to restructure their debt. (Yes it is possible to be bleaker than Krugman). It is important to remeber that Greece is not Ireland though!! If the measures agreed over the weekend work, and I think they will, that will buy us (and other PIIS) time to get our boat in order (I wonder about the cost-benefit though). We are ahead of the others in that respect. A world recovery will then lift our boat. If others can’t get their boat in order there will be another storm down the line but hopefully we will be well out of the eye of the storm. If I get this right the ECB will not buy Sovereign Bonds directly from the states but will bid for them in the secondary markets? The effect being that the likes of the NTMA can issue a bond safe in the knowledge that the institutional investors will buy it as they are safe in the knowledge that the ECB will purchase it from them?? Is this correct, if so it seems a little crazy as, once again, the bond markets are getting risk free investments and will may a nice safe profit. The link above doesn’t seem to work. This one does: http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/114324.pdf CNBC are saying that 4bn of purchases of eurozone debt was made. The euro has give back its ‘gains’ against the dollar and is back trading down. The 440 bn appears to be guarantees 😕 What is this? Some sort of bogus bluff? With the real solution hiding behind the curtain? This will go the way of TARP I in the US… @ Killian the only thing is that the primary market buyers (ie banks/insurance companies) dont know which specific bonds will be bought by the central banks, or at what levels the central banks will enter the market at. What they can be assured of is that their is a large buyer to support the market, but they do not know where, when and at what price that buyer will emerge. So not “risk free”, but simply “limited loss” on these. @Killian “Is this correct, if so it seems a little crazy as, once again, the bond markets are getting risk free investments and will may a nice safe profit.” I was just thinking that. As yoganmahew is saying..its more like a guarantee than anything else… @Edgar Krugman’s “politically implausible” option no2, large scale debt purchasing is now underway. If it works it will buy us time as you said but we still face a massive structural deficit. Given that we have a serious competitiveness problem and that labour costs are politically difficult to reduce, would you agree with the view that one potential area worth exploring by Govt. is the issue of energy cost? We have an advantage over Eastern European economies in this area as we are further down the road of weaning our selves away from carbon and on to renewables. This seems to me to offer a chance to impact on our competitiveness and possibly open potential for energy export. @Highway61 – labour costs are adjusting in both the public and private sectors, so this is helping. Yes energy costs need to be tackled along with other issues. Great…. A state body given a blank cheque with a vague mission statement and vaguer goals. Seriously though: What kind of supervision will come into place and when? So far it seems that officials are free to use their own judgement in deciding when to buy and at what price. That kind of uncertainty cannot be good for anyone. & introducing a price floor…… A price floor will guarantee that there will be a level of new supply. Now we have a pricefloor for bad debt. Lovely idea of making sure we’ll keep producing bad debts 🙁 A crisis was seen where no crisis was and this was done to ensure that time seemed short. Now we bought time because we were told we didn’t have any. Time to do what? Well since the time has been paid for, I’m guessing whatever it is, it will have to be done post haste as otherwise we overpaid for time we didn’t need. What exactly will be done with the time that has been bought? & why wasn’t it done sooner or why couldn’t it wait? Joseph said at 9.58 a.m. “That’s a shedload of money the EU is putting up and I’ve no doubt the markets are only asking themselves one question this morning: ‘ How can we get a big pile of it to come our way ‘ ” Merryn Somerset-Webb addressed this question two days ago in her Saturday column in the FT’s nylon-shirted, cheap-watch-wearing “Money” section for small investors (not yet on ft.com). Her advice was to pile into big European companies with global franchises, as soon as the EU starts Quantitive Easing. She didn’t name names, but how about Philips? Danone? Surely not CRH, as I don’t think they actually export much of their stuff outside Europe due to its bulk and weight, but perhaps a rising tide would raise all boats including CRH. Anyone got any suggestions? I ask this because poor old civil servants like me are just going to have to make our savings work harder (take a bit more risk?), now that everyone including IBEC and Sarah Carey wants to cut our pensions. By the way, for any other civil servants reading this, there is, according to Merryn’s FT article, another good bet during troubled times, namely spread- betting on the VIX (the volatility index) . There’s a convenient ad, right beside Merryn’s column, from one of the spread-betting companies, offering £200 free spread-betting for two weeks with a guarantee of no downside. @ DavidC “Surely not CRH, as I don’t think they actually export much of their stuff outside Europe” Eh, their business is split roughly 50/50 between Europe and the US. @ Eoin Bond I’m a bit doubtful about CRH. I read somewhere last week that their sales dropped 25% since the same period last year. Also, I’m not sure that CRH sales in the US will hold up after the present huge stimulus peters out. Also, markets seem to be expecting that the euro will continue to fall against the dollar, despite the ECB and the IMF. If so, wouldn’t that mean that every dollar CRH earns in the US is worth less in euros, as their sales are all through US manufacturing subsidiaries, i.e. the stuff isn’t being exported from Ireland. If it were exported from Ireland, CRH would benefit from a weaker euro. Also, the Polish competition case is still hanging in the air. Finally, CRH is still essentially a cyclical stock. CRH’s wide geographical spread used to mean that a recovering economy in one country or countries could compensate for a downturn in other countries. But the the only growing countries now are India and China, where CRH has relatively recently established relatively small joint ventures. By the way, I sold my small holding of CRH earlier this year and am probably being influenced by that “cognitive bias” which seeks to justify past actions. @ DavidC “the euro will continue to fall against the dollar, despite the ECB and the IMF. If so, wouldn’t that mean that every dollar CRH earns in the US is worth less in euros” Eh, that would actually mean that every Dollar earned in the US is worth MORE in Euros…you’re mixing up Euro exports being “cheaper” for US people to buy and US-earned profits being more “valuable” for Euro-domiciled companies… @Eoin Bond Thanks, you’re quite right! But I still don’t like CRH at the moment. As far as European shares are concerned, I’ll be thinking about and keeping an eye on Philips. They seem to have cornered the market in high-end lighting, particularly LEDs, which have a “Green” angle due to low energy usage and very long life. The colour rendering of LEDs is a bit unfriendly for domestic use, but there is good potential in floodlighting and emergency lighting. Comments are closed.