ECB Policy Responsibilities and Banking System Fragmentation

The Eurozone banking system is not working properly due to fragmentation between core and peripheral banking systems. In a recent speech, the president of the ECB, Mario Draghi, has acknowledged this, but argues that fixing this problem is someone else’s responsibility. The ECB has the tools to address this crucial flaw in the Eurozone system, and over the medium term horizon there is no other Eurozone institution that can. The ECB should use the tools available to fix this market fragmentation, in particular, the ECB should engage in aggressive, long-term asset refinancing on sufficiently generous terms to encourage bank participation.

The causes of the bank system fragmentation between the Eurozone core and periphery are well understood. The risk of bank runs, capital controls, deposit haircuts or national euro exit pushes bank deposits and other bank funding out of peripheral-nation banking systems and into core states. Peripheral-nation banks are aware of these overhanging risks, and this awareness further limits bank managements’ appetite for new lending. The implicit required return on bank lending in peripheral Eurozone markets has detached from the core (see figure below). This fragmentation of the banking system reflects a deep flaw in the Euro system’s design.

It is useful to compare the current fragmentation in the Eurozone bank lending market to the US market dislocation at the beginning of the 2007-8 credit-liquidity crisis. The flashpoint of that earlier crisis was the freezing of three interlinked securities markets in the USA: the markets for collateralized mortgage obligations (CMOs), credit default swaps on CMOs (CDS-CMOs), and commercial paper (CP). Note that these three markets are not particularly large on the global stage; all three are limited mostly to the USA. The shocks from this US market dislocation spread to the interbank lending market, which is important worldwide, and triggered the worldwide crash and Great Recession. The crisis spread to the U.K. and Europe, where none of these three problem markets are significant, but where the interbank borrowing market is crucial. The US authorities can be faulted for lax regulatory oversight which helped set the stage for the worldwide crash, but at least they took aggressive actions to correct this particular market dislocation. US authorities, both in the US Treasury and Federal Reserve, acted decisively, at considerable risk. They engaged in aggressive quantitative easing to relieve the exorbitant required returns in these markets by direct purchase of assets from banks (see figure below). This is a simplified description of the TARP and QE programs in the USA, but captures the essence.

The bank lending market dislocation in the Eurozone is arguably more severe than the CMO, CMO-CDS, CP market dislocation which sparked the 2007-8 credit-liquidity crisis. The response of the ECB has been hesitant and rule-bound. See Mario Draghi’s recent speech mentioned above. Draghi argues that given the shortage of bank lending for business investment, peripheral economies should instead improve their economic performance by greater focus on competitiveness and structural reform. He argues that national governments need to tighten their fiscal paths to improve investor confidence, which might possibly help to prevent capital flight. National governments are also welcome to inject more equity capital into their banks (within their fiscal constraints), or perhaps some supranational EU institution can do that at some hazy date in the future, after the planned bank resolution system is negotiated, passed by member states, and enacted. The ECB will only provide bank asset refinancing on tightly-controlled terms to ensure that there is no positive value transfer in the transaction. Given the distorted incentives of peripheral area banks, this mean-spirited offer of zero-net-present-value refinancing ensures that the peripheral economies remain starved of credit.

It is true that many banks in peripheral markets have tight equity capital constraints. This is a consequence rather than a cause of unstable credit flows in the Eurozone. It is not clear that publicly-funded equity capital injections will improve outcomes. An equity capital injection into a zombie bank does not automatically change it into a well-functioning bank; it might just become a zombie bank with more equity capital to waste. Asset refinancing by the ECB on generous terms, of good quality loan assets, goes directly to the heart of the problem without wasting taxpayer-funded equity capital.

The ECB has acknowledged that there is a serious flaw in monetary policy transmission in the Eurozone due to the fragmentation between core and periphery banking markets. It argues that fixing the monetary transmission mechanism is some else’s problem; its only responsibility is implementing monetary policy whether it works or not. No other EU body has the tools to deal with banking system fragmentation over the medium term. The ECB cannot hide from its responsibility by an overly legalistic interpretation of its badly-flawed charter. As the central bank of a major world market it has a responsibility to use quickly and aggressively the tools available to it.

43 replies on “ECB Policy Responsibilities and Banking System Fragmentation”

Thank you, Gregory. Well presented.

This reminds me that my absolute favourite annual Report has just been published: The ECB’s annual Report on Financial Integration in Europe (available at

It has the best preface ever written—and clearly identifies the ECB’s responsibilities in this area:

The ECB’s annual report on financial integration in Europe contributes to the advancement of the European financial integration process by analysing its development and the related policies. The Eurosystem has a keen interest in the integration and efficient functioning of the financial system in Europe, especially in the euro area, as reflected in the Eurosystem’s mission statement. Financial integration fosters a smooth and balanced transmission of monetary policy throughout the euro area. In addition, it is relevant for financial stability and is among the reasons behind the Eurosystem’s task of promoting well-functioning payment systems. Without prejudice to price stability, the Eurosystem also supports the objective of completing the EU Single Market, of which financial integration is a key aspect.

Absolute balderdash!


A case cannot be built on the annual reports produced by EU institutions. They are invariably required under some basic piece of legislation and left as a routine task to those capable of writing the appropriate balderdash.

Great post Greg. A quick and dirty summary is that the problem of euro area banks is as much a funding problem as a capital problem.

The ECB might respond by pointing to the LRTOs. I would be interested in your view of how much further you think they should go in terms of maturity, collateral haircuts, etc. Also, how do you think greater secured lending by the ECB would affect the willingness of potential unsecured funders to lend?

There has been broad welcome for the moves towards a banking union and especially plans for a SRM. It is hard to argue with the proposed end point of a US-style least-cost resolution process with depositor preference. The Cyprus experience shows that this can effectively implemented on an accelerated basis where required, though the relevance of the Cyprus precedent is of course debated. One question with the new regime is what it will do to bank funding during the transition out of the crisis. There is a danger it could amplify the credit crunch through the funding mechanisms you mention. The improved depositor ranking should help to solidify that source of funding, but the implementation of captial controls is likely to also make depositors skitish, notwithstanding their improved ranking.


It seems to me that the ECB responded to the fragmentation problem quite strongly with fixed rate full allotment refinancing, widened collateral, the former covered bond purchase programs, VLTRO and OMT announcement.

There’s still a high level of fragmentation in euro area financial market but the momentum to de-fragmentation is there. This dynamic even survive the italian election stalemate and the Cyprus debacle. Political tension around the banking union is of course another risk.

In my opinion, the next phase as to deal with the asset side of weak european banks. Banks cannot reduce leverage and increase loans at the same time. I agree with you, equity capital injections are not a panacea. It’s not a lack of equity capital that prevent banks from lending, it’s a lack of bank management attention.

That does not mean that ECB is powerless. For instance she could use differentiated collateral haircut in order to reduce the home bias in euro area financial system.

I think it is only a matter of time before the ECB is tested on its OMT “confidence trick” as one commentator called it to day. Austerity is dead in the water with France and Italy agreeing today to push for growth policies.
Already Italian policy is called into question with Berlusconi saying he will only continue to support Letta if the property tax is rescinded and last years payment refunded.
Apparently that would leave an 8b hole in the budget. So how would the ECB apply strict conditionality to Sovereign bond buying to support Italy. It seems the ECB OMT policy was a bluff that worked up to now..but for how long more?

@John McHale
“It is hard to argue with the proposed end point of a US-style least-cost resolution process with depositor preference. The Cyprus experience shows that this can effectively implemented on an accelerated basis where required, though the relevance of the Cyprus precedent is of course debated. One question with the new regime is what it will do to bank funding during the transition out of the crisis. ”

As US deposits are insured up to 250,000 per account isn’t it likely that any European deposit scheme will result in a similar situation as that pertaining in the US where people avoid having any amount over the limit in any particular bank. I don’t understand the reference to accelerated basis…aka Cyprus. The FDIC always moves on an accelerated basis usually over a weekend and your deposits are available on Monday morning.

well, 41 days left, until the Bundesverfassungsgericht might put an end to OMT, or define the conditions.

The obvious solution is, that countries stick to the treaties they signed, reduce their deficits, and restore their country credibility.

I dont see any way, anybody could argue a way around strict conditionality in those 6 weeks left.

And backwards tax reduction is such a gross nonsense, violating obligations even backwards, a classical Berlusconi : – )
I dont think they would even have to send one page to the ESM, to get a 2 character answer : – )

@John McHale – A problem with the LTRO is that is mostly structured for banks purchasing peripheral sovereign debt and re-po’ing that at a small “profit” (but with small offsetting risk of course) to the ECB. The ECB needs to refinance pools of loan assets not sovereign bonds to really have an impact – or in some other way get funding into peripheral economy loan assets, particularly business loans. The scarcity of business lending is a big drag on recovery and can be traced back in part to this lending market fragmentation between core and periphery. I hold out no hope that the problem will be solved quickly via a single regulatory mechanism, and that is only a step on the way to a solution. There is cheap talk about centralized equity capital injection, but that will not come quickly and I am not sure it is even a good policy.

@ francis

Given its record hitherto, it seems unlikely that the Bfvg will be the institution to be held responsible by history for pulling the rug from under the euro, especially two months before a federal elction.

The Handelsblatt coverage has a great similiarity to that of the FT!

Did Merkel’s intervention mean that she was against a rate cut or that she was preparing the German electorate for the need for one, even if it was not ideal for Germany? Weidmann spoke of “changed circumstances”. Do these include the imminent downturn in the German economy?

An EA “Funding for Lending” on the UK model seems one probable option to tackle the problem of fragmentation and its impact on SMEs.


1. what I find fascinating, is that you see the decision of a supreme court in purely tactical terms. They have to decide about constitution, and whether certain actions would be in agreement.

2. Merkel just formulated the classical economist One the one hand, on the other hand, stating the obvious. Should she talk about the weather on a (local, little) banker meeting? Or about her potato soup?

3. The Handelsblatt also writes a lot of nonsense, especially the standard phrases. Germany is running close to the limit, 3.9% unemployment in the south, and a little softening (“weil der Aufschwung in Deutschland lahmt.“) should be of any local concern ??? Häh ? This could double, and we wouldn’t blink on principles.

Well, we will see, what tomorrow brings, but I feel more and more , especially after the exchange with that Cyprus guy here, a tough hard currency is just not made for these people.

Why torture people with studying physics, if they can become happier and probably richer running some hotel?

@Francis/ DOCM
Larry Elliot has a good take on the current situation…

“Monetary policy works only with a lag, so whatever the ECB does on Thursday will be too late to prevent the recession deepening. Angela Merkel has made it clear that she does not want to see a cut in the cost of borrowing, but it is time for the ECB to show its independence and act in the interests of all eurozone citizens, not just the one seeking re-election in the German polls this autumn.”

@Paul Quigley

Try arguing that with our guys.

In addition to the Draghi speech, this presentation by ECB VP Vítor Constâncio provides a pretty clear example of the ECB perspective — yes we see the fragmentation, no it’s not our problem.

In the US, funding for most startups comes via bank loans, credit cards and family/friends. Venture capital is the exception, not the norm, as a funding source for startups and fewer than 1% of US companies have raised capital from VCs.

Easy to see then that without security, in troubled markets, getting any funding for startups is a challenge.

Look no further than Dublin for the feast and famine routine.

Most loans need central approval and those doing the approval may never have even met the customer’s bank manager.

The past flexibility provided by an overdraft facility has also ended with limits now tied to monthly receipts.

Again in Ireland with so many SME facilities banjaxed because of links with buy-to-let, hotel investments etc., some businesses with potential are at risk. Sorting out this mess would seem to be a first step.

Another problem is that an Irish Credit Bureau record remains active until a debt is repaid. If there are not plans to change this, it should be done after a period.

As for high interest margins in some countries, again that is related to banjaxed banks.

Governments could subside rates but then they are banjaxed as well.

I wish I could be as optimistic as Michael D Higgins!

Very interesting analysis. But I wonder whether the observation you make (increased fragmentation of banks) is reflective of a much bigger institutional asymmetry at the heart of the Eurozone. Monetary policy remains Europeanised yet the institutions to transmit this to the real economy remain national. The same story with fiscal, wage, social and labour market policies. The attempt to join together very different varieties of capitalism (or political economies if you wish) into a single currency is recognised as one of the fundamental sources of the crisis. It seems to me that any attempt to develop a one-size-fits all solution to overcome the fragmentation will fail. Whilst the ECB can certainly do more (not least by providing more flexibility for member-states to tackle their own specific problems) they are probably right that getting the transmisson effect to work requires innovation at the local sub-national level. All in all what we are witnessing is the complexity of decision making in a milti-level polity in hard economic times.

@ paul quigley,

learning about things and people like Richard Posner, makes it worth to read and engage in blogs like this.

Thank you!

The guy knows a lot, and talks even more : – ) not that I would ever do that, like my postings here : – )

but when you take a look at his wiki, at what he is actually doing, than you see, that

a) he is not a Supreme Court Judge

b) never will be

c) certainly not in mainlaind Europe

d) and is following rules very closely, e.g. his decision in the 1997 case State Oil Co. v. Khan

@ Michael Hennigan

This VC business has since 13 years miserable performance.

e.g. google Kaserer TU Municvh

Except for a small part of the folks at Menlo Park

Fragments from behind a paywall far enough removed to be objective. I am quite encouraged for the first time since 2008. Although I must say the highway interchange project announced a few days ago was a ray of sunshine.

While the ECB cutting its refinancing rate from 0.75% to 0.5%, marginal lending rate (overnight) to banks from 1.5% to 1%, keeping its deposit rate at 0% are welcome moves. As Mr Draghi said easing of monetary policy is not reaching the weak economies that need it most.

“To ensure adequate transmission of monetary policy, it is essential that the fragmentation of euro-area credit markets continue to decline further,” Mr. Draghi said.

By itself, the rate cut “will do little to improve growth prospects in the region, with the effective overnight rate already so low,” Mr. Grantham said. “To greatly change growth prospects, we will need to see countries lift off on fiscal tightening or for the ECB to pursue more aggressive monetary policy aimed at longer-dated peripheral yields.”

The interest-rate cut “mainly provides support for peripheral banks and could boost confidence marginally.” ING economist Carsten Brzeski wrote in a note. “Today’s meeting confirms that the bright minds in the eurotower are still working hard to come up with a new magic bullet. In the meantime, the only thing Draghi found in his toolkit was an old tool and a chill-pill to keep markets happy in the waiting room.”

“Our monetary policy will remain accommodative for as long as needed,” Mr. Draghi said. The central bank will keep the lending taps to the region’s distressed banks wide open for at least another year and is looking at ways “to promote a functioning market for asset-backed securities collateralized by loans to non-financial corporations,” Mr. Draghi added.

It is a clear signal that the ECB, like the Federal Reserve, is committed to keeping monetary policy as loose as possible until the economic ship is righted, even as it performs the tough balancing act of producing a one-size-fits-all policy for the stronger economies and those facing increasingly dire circumstances.

More surprising was Mr. Draghi’s comment that the ECB has not closed the door to negative deposit rates to spur banks to put their capital to use in the economy rather than parking it at the central bank.

“On the deposit facility rate, we said it in the past, we are technically ready. …” Mr. Draghi said. “And we will again look at this with an open mind and we stand ready to act.”

The comment had an immediate impact in currency markets, driving the euro lower, which can’t hurt economies struggling to boost exports.

Moving to negative interest rates on deposits kept at the ECB is no guarantee that the banks would boost lending. They already have access to essentially cost-free money and there is little demand for loans. Still, it would send a signal that the ECB, like the Federal Reserve, is committed to keeping monetary policy as loose as possible until the euro ship is righted.

It also could steer the central bank closer to more aggressive quantitative easing or other unconventional measures to spur lending and investment.

But getting Bundesbank officials and other key hawks on board negative rates, bond-buying or any of the other measures would almost certainly require a further dramatic decline in the euro zone’s economic fortunes and a continuing trend toward lower inflation.

@ Mickey

Soros is a well known active speculator.

He just talks his book, lives off gullible followers, who buy what he wants to sell, and vice versa

Everybody knows that : – )


George Soros gave Germany a policy ultimatum: he said the country ought to agree to “Eurobonds”

Read more:

is hilarious.

One the purposes of the ESM is, to bankrupt Soros, Paulson.
They got very substantial discretion to do this.

And one of the purposes of the BVErfG rulings was, that the german taxpayer is not liable beyond any Bundestag approved limits, no matter what happens along the way : – )

@ francis

I agree with you to the extent that Soros may be talented at making money but has little grasp of what motivates politicians. They do not like stark choices such as that presented by him.

“Eurobonds” are, nevertheless, the answer! The ease with which the EFSF and now the ESM raise money in the markets is proof of this. Merkel some time ago echoed Roosevelt (when he stated in his inaugural address “The Only Thing We Have to Fear Is Fear Itself”) when she referred to “jumping over one’s own shadow” (or whatever the equivalent is in German).

Unfortunately, she is no Roosevelt.

@ all,

1. coming back to the original topic “fragmentation”
Most people here see those interest rates of 5% for SME not as fragmentation, but as a plain recognition of the risk, especially country risk.
And the solution to this is of course not any more ECB action, but governments finally behaving responsible.

2., just to give you some taste of what might come this summer,
there is a list out ( of 30 out of 187 MP in bavaria, just in time for getting new nominees in place : – ) on charges of hiring family, pretty petty charges in most other countries. Not really illegal so far, but smelling. I think the resignations now count to 5. Please be patient with me, why I bring some very local stuff up.

And my Barbara Stamm, in irm blaua Kläadla, (running gag since 28 years) telling folks : Just sue me : -)

3. Cyprus depth charge

In the discussion with the Cyprus guy here, Zachariadis, I brought up the idea, that this was working the way it worked, not because there was confusion or inability, but because the money on the run could be very carefully traced. Latvia was told to sit tight, where else does it try to go?

The US broke up the swiss secrecy one year ago, and took the information to brake up Liechtenstein as well.

Luxembourg followed suit, a few days ago, and today (all?) UK and carribean tax havens followed suit for complete data exchange.

I do not know, who of you understands how much of submarine warfare.
70 years ago, the german subs had their black may, wiki it up!

Watch “Das Boot” Directors cut. It is worth it.

4. tax haven money

I think, it was eureka who pointed out here, that all the tax haven money could cover all the public debt. Maybe eureka comments on her numbers, and evidence to that ?

It has become pretty clear, that there is plenty of money around, to solve all those petty public debt problems, you just have to get at it.

And these attempts, that poor taxpayers should enrich rich tax cheaters even more, have come to a boiling point now.

The Soros kind is making a huge gamble, and they will lose it. Just because he broke the bank of England caused his hubris, that he can do the same to the Bundesbank. Hubris comes before the fall.

5. Riot speculation (a little bit diabolic, but I am in that mood now : – )

a) Ireland: Michael Higgins, the poet, was today talking in the FT about social upheaval.

b) Greece: ekatherimi (I believe, could have been the BBC) pointed out, that Greece had its 20th general strike yesterday. Question is, from where do they count, my impression is, they have at least one every year, since they do not have ottoman rule. I do not like Pasok nor ND.

c) France: Hollande is no deGaulle. He managed for record unpopularity in written history of all of the 5 republics.

d) England: Cameron is no Churchill, and that guy got voted out of office 26 July 1945 too. And no Maggie either.

e) Italy: I have checked the program of Beppe Grillo, nothing wrong with that, could be a CDU member. And Berlusconi belongs into an Italian jail.

f) Spain: Rajoy’s party sold Banxia junior shares to gullible pensioners. Do I like such behavior?

g) Cyprus: enough said already : – )

Everybody seems to think, that he can threaten to rock the boat, and gets me frightened? Hugh?

Germany is the heaviest member, and sits right smack in the center of the boat. Who would go overboard first? Maybe we also start rocking the boat a little bit. Just to keep the neighborhood suitably entertained?

Our good neighbor Poland calls us the “indispensable nation”.
The Pew research in May 2012 listed Merkel as more popular than the local leaders, except Greece.

Maybe some folks trying to drum up the local nationalist hate mongering against Germany keep in mind that the sword of the mob in the streets can very quickly cut multiple ways, once it is drawn?

Just saying . Not that I would ever be as verbose and outspoken as Richard Posner : – )

@ francis

Germany is not sitting in the middle of the boat but in the stern and having a major destabilising impact because of the weight of its current account surplus; to such an extent that it risks swamping the euro boat and going down with the rest of the passengers and crew (the latter, admittedly, not a very impressive bunch).

The one point where the author of this article may be wrong is in underestimating the role played by the legal right of employers and employees in Germany to fix wages, intervention by the government being, I understand, in theory at least, excluded.

I agree that the debate often deteriorates into Germany bashing, usually as a effort to shift more of the responsibility for the crisis than is currently justified and avoid the reform measures that are required domestically. This certainly holds true of the French Socialist Party with regard to its recent draft paper with intemperate criticism of Merkel. But Germany must be open to criticism as well.

A monetary union and persistent major current account imbalances are incompatible.

@ francis

In the article I linked to above, the author, Dan O’Brien, comments that Germany makes up one-third of the EA. Germany and France combined, of course, make up more than half. If the two countries cannot get their violins in tune, the prospects for the euro are bleak. It seems, however, that we will have to wait until September before the real tuning up begins.

cf. link to this WSJ article (h/t Eurointelligence).

Meanwhile, on the secondary ECB front, this extract from Draghi’s speech is of considerable relevance (h/t also Eurointelligence).

“On the deposit facility rate, we said it in the past – we are technically ready. There are several unintended consequences that may stem from this measure. We will address and cope with these consequences if we decide to act. And we will again look at this with an open mind and we stand ready to act if needed.”

How one can be ready for “unintended consequences” is a bit of a mystery to me. However, the impact on the euro would be to push it down, it seems, and this would hardly be welcome news to Germany. The other aspect is that the rate cut was not a unanimous decision.

“Question: Was the decision to cut interest rates unanimous?

Draghi: I was just wondering how long it would take to get this question. There was a very strong prevailing consensus towards an interest rate cut, and within that, there was a prevailing consensus for a cut of only 25 basis points.”

It seems that the Bundesbank representative may be on his own!

Banks are massive, MASSIVE, multipliers. But history, unlike economists teachings, shows that it can act negatively as well as positively. Usually after long periods of positivity……

Europe has yet to experience the full extent of the austerity that is inescapable, once QE ceases.

The deflation will last decades and eventually people will once again, fear inflation, until the banker weapon is once again deployed, to bring “growth”.

Do you not feel any sense of responsibility for denying this?

@ Francis

Fragmentation – Draghi gave a lovely example of a bank issuing a bond in Italy, and the exact same bank issuing a near identical bond in Munich, under its German trading name, and there being a 2% difference in the yield.

Soros – people respect him because he’s generally right. The fact that he makes money doing this really isnt the issue.

Riots – Greece has a strike every year, Germany tries to conquer someone every 30. Not sure what ur point was, other than that countries tend to repeat past behaviour? Churchill was elected to stop such actions, when he had completed his task he was voted out of office. Ditto Maggie and the Ruskies. We need someone like them again today.

Treaties and sticking to them – Germany signed one in Versailles. Didn’t work out well for anyone involved. If a Treaty doesnt make sense, we should seek to change it to one that does.

Two sentences following each other:

“An equity capital injection into a zombie bank does not automatically change it into a well-functioning bank; it might just become a zombie bank with more equity capital to waste. Asset refinancing by the ECB on generous terms, of good quality loan assets, goes directly to the heart of the problem without wasting taxpayer-funded equity capital.”

First sentence is easy to agree with, injecting equity into a zombie-bank does not automatically change it into a well-functioning bank.

Second sentence is a bit trickier to interpret. I read it as: Provide liquidity to a zombie-bank and it will become well-functioning. I don’t see how that can be. Well performing assets in banks in the periphery will continue to subsidise poorly performing assets and the gap ‘(market dislocation’) will persist.

Creditor rights and personal bankruptcy legislation vary across Europe, therefore credit-risk varies across Europe. The size of the risk-premium can be discussed and possibly maybe be vaguely estimated. A bank-union with different creditor rights and personal bankruptcy legislation is close to being impossible.

@Jesper — There is some small risk that liquidity support by the ECB will not be paid back, but it has highest priority in the case of insolvency. Publicly-funded equity capital has the lowest priority of any liability (or at least it is supposed to legally) and can be wasted more easily. So ECB asset refinancing is a high-priority claim and taxpayer funded equity capital is the lowest-priority claim.

@ All

Interestingly, according to the FT, it was Asmussen, the German member of the Executive Board, who voted against, not Weidmann. The honour of German central banking orthodoxy is safe.


the claim/problem appears to be that the low refinancing rates aren’t being passed on to bank customers in the periphery – in other words there is liquidity but bank customers have to pay a premium in the periphery to access the liquidity. Excess cost for customer -> Excess profit for bank.

Banks in the periphery aren’t passing on the cheap rates and banks are not very profitable. Where does the profit go?

As an example: In Ireland I believe it will go towards paying for what I consider to be a very generous bankruptcy regime.


Weidmann voted for a cut because its standard monetary policy, in response to very obvious economic weakness at an EZ level (inflation 1.2%). BuBa has no problem with that. The problem is ultimately that the limits of standard monetary policy have long since been reached, and the impact of this cut will be minimal. Therefore non-standard monetary policies are required. Thats where the BuBa has the problem. They think OMT will elicit the worst parts of Faust and lead to hyperinflation. If the alternative is a deflationary depression and the potential for a Eurozone breakup, then so be it.


I think the situation is a bit more subtle than that. With regard to non-standard monetary policies, as ever, Alphaville appears to have the inside track (h/t Eurointelligence).

Especially the bit highlighted by Eurointelligence (Alan Ruskin of Deutsche Bank).

“The crucial question is: how will a negative depo rate help the real economy?Let me jump to the conclusion: primarily through the exchange rate (the relative price of money), less through the absolute price of money (interest rates), and much much less through the quantity of money (credit/money supply). Draghi knew exactly what he was doing and it is very likely that keeping the door open on negative deposit rates, was more than a way of saying we are keeping all our policy options open, and was one of the few ways Draghi could significantly impact the EUR.”

What appears to be going on is complicated crossfire between the main players, the main point of struggle being the efforts being made to get the Merkel/Schaeuble double act to shift position on banking union prior to the elections. Hollande in his WSJ interview said as much. What Draghi is demonstrating is the power of the ECB to influence the level of the euro and in a manner independent of Berlin as Germany now has few allies left. (The Netherlands is in deep difficulty and the intention is clearly to hold the feet of the Austrians – the last holdouts – to the fire on the issue of banking secrecy at the meeting of the special meeting of the European Council on 22 May devoted to the issue of tax evasion). A unanimous decision (i.e. both German representatives agreeing) would have been a negotiating misstep in this context.

To be continued…..


The penultimate sentence refers, of course, to the ECB decision on rates.

An explanation why I consider the Irish personal insolvency legislation to be very generous.

The amount a Swede gets to keep while bankrupt:

4683 SEK/month + cost of accomodation for a single adult. Approx 550 EUR + cost of accomodation.

In Ireland? I’ve read that the amount is close to 900 EUR + cost of accomodation.

If that is true then it means that Irish banks will recover less of bad debts and that is likely to lead to a couple of things:

1. Less lending in Ireland.
2. Higher interest charged in Ireland.

Insolvency legislation is likely to explain at least part of the difference in interest charged in different Euro-countries -> Unless the legislation is standardised across the Euro-zone there will be different interest rates in the Euro-zone.

This report has me somewhat perplexed…..
“As part of the liquidation of the bank, the Central Bank exchanged promissory notes previously held by IBRC for €25 billion in Irish government bonds.
As a result Ireland’s total outstanding long-term government debt increased by €25.1 billion, or by 27.8 per cent, from January to €115.4 billion in February, according to latest figures from the Central Bank.”

If we have GDP of about 166b then a total indebtnesss of 115b would give a ratio of about 70% rather than the 120% widely quoted. Have I got it entirely wrong?


Fragmentation – Draghi gave a lovely example of a bank issuing a bond in Italy, and the exact same bank issuing a near identical bond in Munich, under its German trading name, and there being a 2% difference in the yield.

It’s a nice example but I thought it seemed a bit odd that the example that stuck with MD was Unicredit (for by description it must be Unicredit) rather than the issue of SME, housing loans etc.

“Asset refinancing by the ECB on generous terms, of good quality loan assets, goes directly to the heart of the problem without wasting taxpayer-funded equity capital.” This is really a wild claim without much evidence provided that this is true. “Generous” refinancing operations of the ECB, of course, also imply putting taxpayer money at risk. And given that the losses will be shared among national central banks they imply a financial transfer between countries.
This is why the comparison with the US is not very insightful.

Moreover, arguing that it is funding problems that are holding back bank lending -and not inadequate capital – is hard to believe given a) the broadened collateral requirements (including the ability of NCB to accept performing credit claims), b) debt issuance of peripheral banks c) the decline in Target2 imbalances, 3) no sign of deposit flight in the periphery despite Cyprus.

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