Categories EMU Monetary policy ECB introduces negative interest rates Post author By Seamus Coffey Post date June 5, 2014 51 Comments on ECB introduces negative interest rates Summary press release here. More details to follow. Introductory statement by Mario Draghi Why has the ECB introduced a negative interest rate? TLTROs and ABS purchases Related ← Irish Times: Freeze Public Sector Pay for 70 years → Dublin Economics Workshop Annual Conference 51 replies on “ECB introduces negative interest rates” Credit is not getting through to SMEs – deflation is in da house- loads of still bust banks in the core . Europe doesn’t have 30% of people over the age of 60 like Japan – this would appear to be slavish adherence to a dud economic philosophy. They seem to be waiting for the Yanks to raise interest rates to get the euro down – that could take years ! Credit easing targeted at lending to non-financial sector, non-real estate purchase, lending to public sector excluded. Purchases of vanilla ABS – non-financial sector, details to follow. Economic forecasts brought more in line with the back of Gav’s envelope. Why would negative interest rates (or a differential of .1%) make a difference? If the bank keeps the cash itself, then its loss is .1% per year of overnight balances? Hardly a deal breaker, when deciding whether or not to give an ailing SME a five year term loan. What are the different roles between the main refinancing rate and the marginal lending rate? Interest rates “very unlikely” to be lowered further. Translation – that’s it on rates. Regarding ending sterilisation and implications for eventual OMT… OOPS! Draghi & a vice president say they never said OMT would be sterilised. See commitment to fully sterilise here: http://www.ecb.europa.eu/press/pr/date/2012/html/pr120906_1.en.html Trackers set to lose even MORE than 700m per annum for the banks. Could this be the real reason rates were cut? Re Gavin’s envelope Andrew Smithers has a very interesting piece in the FT on nonsense projections http://blogs.ft.com/andrew-smithers/2014/06/janet-yellen-and-hindsight-value/ Its great to be an Irish citizen in the EZ and all the positives that come with that. Where else would you have the anomaly of greeting news of interest rate reduction from the ECB with trepidation. As a recent house buyer in bust Ireland thats exactly how you feel when your realise your variable rate is likely going to increase again in order to offset losses for your friends on trackers. We’re already paying higher taxes to bail out banks…now we got to bail out our mates as well…with friends like this….etc. The people least responsible for the financial crisis continue to be the ones who carry the greatest share of the burden. Evidently, Mario has no interest in the views of Joan Burton. Something in Forbes about negative interest rates from Frances Coppola, she reckons it might be about improving German export competitiveness. http://www.forbes.com/sites/francescoppola/2014/06/04/why-negative-rates-wont-work-in-the-eurozone/ The f-word (fragmentation) successfully avoided throughout. http://blogs.ft.com/money-supply/2014/06/05/qa-the-ecbs-crucial-vote/ Berenberg Economics:” Rates are extremely low anyway, banks have ample liquidity. A cut in all rates and some liquidity injection will not change the medium-term outlook for growth and inflation in a meaningful way… …The major steps to ease the credit crunch for small and medium-sized enterprises are to conclude the asset quality review and stress tests fast and to fix the banks that may need fixing. Once banks have taken these hurdles, they are in a better position to extend more loans. Targeted ECB incentives to step up such lending now will make little difference.” And who is going to pay for the banks that need fixing ? No closer to fine 6 years into the crisis @ colm mccarthy Reassuring news below: Eurozone fragmentation falls to 2011 level, says Moody’s http://on.ft.com/1off0Xc via @fastFT The financial fragmentation of the eurozone has fallen to the lowest since 2011, according to a gauge constructed by Moody’s. The rating agency’s “Euro Financial Fragmentation Index” is based on measures on cross-country dispersion of various financial and economic indicators, such as government bond yields, bank interest rates, deposits and cross-border lending. The gauge remains markedly elevated from its pre-crisis levels, and one crucial component – cross-border bank exposure to the eurozone periphery – remains at the crisis lows. “What are the different roles between the main refinancing rate and the marginal lending rate” The ECB sets three rates a floor (which is always willing to borrow at) i.e. the deposit rate, a ceiling, (which it is always willing to lend at), i.e. the marginal lending rate, and the main refinancing rate (the rate at the periodic auctions of liquidity held by the ECB. Nobody would lend below or borrow above the ceiling or floor. and nobody would borrow at teh ceiling unless it had to @unfeasiblycharming Good to know. @ Seafoid Interesting article. It may take me a couple of goes to grasp it. How has it taken them six years to get rates to this level? @ Gavin Prices are based on future earnings. Smithers is saying that current prices are not justified by what companies will earn in future. @ Michael H The sovereign bond yield compression is an artefact of Draghi’s ‘do what it takes’. That ECB backstop which cannot be sustained on a cost-free basis sine die. T Doubtless you jest 🙂 in the full knowledge that the gauge is about as reliable as a chocolate umbrella. There are always useful idiots about of course so money will be made. @ seafóid Got it. @ paul quigley I was quoting the FT. The confidence fairy needs to do a lot of work including prompting companies to invest/ raise pay. Two local reports today: 477,000 on Live Register + activation programs – 22% of workforce and LR fell just 1,600 in month. 39,000 BLT mortgages in arrears; 70% of BTL mortgages on trackers – surely a bizarre situation given that repayments have plunged since 2008 while Dublin rents are back to boomtime levels? @ Michael I see. The FT was having a laff then 🙂 All the way to the bank….. Minor point: The ECB(undesbanke) is actually NOT a fully functioning Central Bank …. … it is afflicted with a chronic Ordoliberal Disability which renders it impotent at crucial moments. The EZ is in dire need of a fully functioning ECB. The EZ normally runs a BOP surplus on current account and that it is rising (to around 2.5% of GDP) which puts upward pressure on the euro in the FX markets in the absence of capital outflows. The reduction in fragmentation(be it temporary or not) has prompted capital inflows so the euro has not , at least as yet, depreciated this year as most had predicted. As for the lending scheme (TLTRO) the issue for a lot of banks in the periphery is the risk weights on lending to SME’s( the capital held against a loan varies depending on its perceived risk) which means that the lending rate will be higher on that type of loan. Surveys in Ireland also suggest that the main constraint for SME’s is demand, not credit. The scheme limits the initial uptake of funds by banks to 7% of the existing stock of loans to the private sector (ex mortgages) and in Ireland’s case lending to non-financial firms stands at €76bn, so the implication is that over €5bn could be drawn down at the end of the year. “Ah, excellent, Coffey. You arrived safely.” “Of course.” Wizard Coffey, ill at ease whenever he was away from his little Cork mill, was more perturbed than ever at being called to the simply vast basement (he must remember not to call it a dungeon) of Frankfurt Towers, home of the ECB. But when genial Grand Wizard Honohan called how could one refuse? The basement had a very bulky object in it. Wizard Honohan stood in his blue robes and official blue hat with the double-crossed golden E on it. Again Coffey wondered how it must be to serve two masters – was it true, he mused, that they inserted a chip in the back of the neck when you got promoted to the council? Certainly he did not care for the slightly glazed look in Honohan’s eyes. “Now: coffee.” “Yes, I’m here, Grand Wizard.” “No, I meant the coffee has arrived.” A slightly agonized pause passed between the two men. Honohan blinked. “Or would you rather tea?” “Shall we get on with it?” “Of course. Of course.” With that Honohan waved a hand and a cloth the size of several football pitches flew away from a simply enormous bazooka. The biggest bazooka Coffey had ever seen. In letters 12 foot high was written ‘Whatever it Takes’. It was sleek and magnificent. “We’ve modeled it on those things they use at the end of the Champion’s League final that blows golden paper everywhere, only this” Honohan lowered his voice, “is absolutely stuffed with Euro.” “Abandoned the helicopters have we?” “Oh that’s too 1980s. This is a bazooka.” “I see.” “And this is the trigger.” And with a maniacal glint Honohan reached up and pulled the trigger. Coffey’s brain froze. Nothing happened. “Oh don’t worry it doesn’t fire. Have a read of the small print.” On the trigger was a little guard and on the guard was a little piece of paper with writing so small Coffey had to cast a little clarify spell (which he normally used for government accounts). The paper said; ‘within our mandate’. “Ah”, said Coffey. “You see Coffey, the bazooka is very, very big.” “Yes.” “And the writing is very, very small. So we thought….” “Yes.” “…that no one would notice. But they’ve started to notice.” Coffey thought that Honohan looked like the loneliest wizard alive. “I see. And you brought me here because?” “Well you see we’ve pulled the trigger on everything else we have. There’s nothing left. Apart from this.” “And this won’t fire.” “I need you to find wizard Lane.” Strangely Honohan’s voice sounded in Coffey’s mind and the Grand Wizard’s mouth stopped moving. “I’m really not supposed to say it – the warlocks at the Bundesbank you see… I’m being, eh, watched a little… but perhaps you? Anyway, Lane has the brains to sort it out. This thing has to be able to fire or well… you know.” “I know” said Coffey heavily and thought, “why me.” “Oh, because no one pays attention to you.” “Stop reading my mind.” “Well you stop reading mine.” The two wizards stared at each other. “You will do it?” called Honohan. But Coffey was already on his way. @ DoD Spoh on. Weidmann and the rest of the German headbangers are worried though. Deflation is not supposed to happen to the Euro. I’m glad the explanation wasn’t along lines of ‘Negative interest rates would encourage banks to lend out more of this money’ as sometimes floats around. Because there are two types of electronic money and little correlation between the two during a crisis. If I can be a little negative (no pun intended) for a moment though, the system at present works in reverse and so the rate makes little difference. The ECB will ensure an abundance of central-bank money and any effects from negative interest rates don’t effect the payments system. On another nagative note, I think the situation demonstrates how unique this crisis is and how unsustainable the present system is. We have a debt-based system and we can only delay a crisis, not solve it. Money comes from banks loans and disappears as loans are repaid. This ridiculous situation cannot go on forever and we will have to change it over the coming years of supposed recovery. In the future we’ll look back at negative interest rates amid declarations of ‘crisis over’ while striving for exponential growth as an example of how groupthink among experts can be so wrong. Once again, over the coming years we should be in mind that money need not come solely from bank loans, it could come from the ECB. @Kerchav ‘The people least responsible for the financial crisis continue to be the ones who carry the greatest share of the burden.’ How true but not terribly surprising. In most crisis best not to look for solutions or ways out by reverting to those who caused the problems in the first instance – particularly in financial crisis as they’re normally broke aka our banks. The problem with this crisis is that the grace and deference shown to the banking community and those who financed that industry has been far too excessive and too prolonged. Yesterdays announcement is just another step along that road. The true cause of inflation (or deflation) has been debated by economists since the the time of Adam Smith. It still remains the case that there are many theories supporting one cause over another and yet disagreement as to the influence or weighting attached to any single cause. So Draghi attempting to buck the deflationary trend by these measures may be fighting a battle where he doesn’t really know the tactics of his enemy – not a great strategy to go to war with. What is not debatable however in the war against deflation is the known fall in real wage growth over the past decade or so when compared with corporate profits or corporate turnover levels. In other words the winners have been the capital owning classes, the losers, in a major way, the labourers. We know that wages and salaries for the normal Joes as a proportion of corporate turnover has been falling for some time and the crisis has given corporates another excuse to ensure that this trend continues unabated. Large multi national corporates can operate such a regime happy in the knowledge that their cost of capital is almost guaranteed to fall faster than the knock on effect of squeezed demand as a result of falling wages, their friends in the developed Central Banks has ensured that this has become a reality. The effect is never ending super corporate profits. There is however a natural limit to this model and I believe we are getting reasonably close to that tipping point. The tipping point is where turnover or top line growth stalls and reverses. Multi nationals have been able to postpone this phenomenon as their footprint has increased and new customers were harvested. This project now seems to be reaching it natural limits on a couple of fronts – population growth levels on a global basis have stalled and banks ability to stuff more credit down the necks of consumers or more correctly wannabe consumers is on the wane. These latest ECB measures are trying to kick start the latter – it won’t work. Debt levels particularly in Europe are at a point where consumers love affair with debt has shown to be at saturation point. Too much of a bad thing really does make one think and European consumers are deep in thought at the moment. More debt anyone ?? Mais non. @Christy Thanks for that succinct explanation re different interest rates. Looks like banks are borrowing at close to zero. It must be difficult not to make a profit lending if you can borrow at near zero %. Take a real €500,000 genius to keep that engine ticking. @Dan McLoughlin “Surveys in Ireland also suggest that the main constraint for SME’s is demand, not credit.” Absolutely. SMEs like any business are utterly dependent on final demand. The idea that throwing money at SMEs, in Ireland or anywhere else, will solve the demand problem, is for the birds (maybe lemmings). @ yields or bust there is certainly something in what you say and because those (countries) affected by the crisis and riddled with debt could not devalue their currencies to restore competitiveness – they were all told they needed to carry out internal devaluation….so its seems while that agenda has been pursued the deflationary consequences across the group is the outcome…brings to mind lou reids line…your going to reap just what you sow…. ‘The people least responsible for the financial crisis continue to be the ones who carry the greatest share of the burden’…. some of whom tend increasingly often to be the ones who vote anti establishment. Marine Le Pen has been one of the main political beneficiaries of EZ economic policy to date. It’s not just pointless economically speaking… I kind of feel sorry for Weidmann. You know when you are with a group and you are lost and someone takes over and says I’ll bring you there and he’s very sure of himself and he won’t take any advice from anyone because he’s the Alpha male and suddenly it’s 11pm and you are still lost and the pub is about to close . And multiply that for 600 million people. It must be quite embarrassing that in the model designed for 2% inflation there is shag all inflation. And he was so sure and everything. http://www.fxstreet.com/news/forex-news/article.aspx?storyid=fd039c40-9215-48a3-a23b-4d2e9329e514 @seafoid he is not a happy buba… Q1 Mortgage arrears figures published. http://www.centralbank.ie/polstats/stats/mortgagearrears/Documents/2014q1_ie_mortgage_arrears_statistics.pdf Standing out like a sore thumb: (Page 8 onwards) “There were 13,282 (9.2 per cent) residential mortgage accounts for BTL properties in arrears of over 720 days at end-March 2014, up from 12,218 (8.4 per cent) at end-December 2013. The outstanding balance on these accounts at end-March was €4.2 billion…. …There were 502 BTL properties in the banks’ possession at the beginning of Q1 2014. A total of 73 properties were taken into possession by lenders during the quarter, of which 21 were repossessed on foot of a Court Order, while the remaining 52 were voluntarily surrendered or abandoned. During the quarter 42 properties were disposed of.” Yes, that’s a whole 42 ex-BTL properties sold into a rising market in which potential owner occupiers are being priced out, due to lack of supply, by investors. @ Gavin: Thanks for that! @ Kerchav: “(countries) affected by the crisis and riddled with debt could not devalue their currencies to restore competitiveness – they were all told they needed to carry out internal devaluation …” Currency devaluation has zero effect when there are over 1 billion waged-labourers in Chindia who get paid low wages. Forget this competitiveness rubbish. Stuff the westerners, and open your production shop in Chindia. QED. Internal devaluation? Fine, if western waged-labour folk will accept Chindia style wages and work conditions. Which they certainly will not. Their cost base is so much greater. God alone knows what those EU ubercritters are thinking, if they know that what they are doing will definitely solve the crisis. It won’t – so they will have to find someones to blame. The victims are looking good! day that is in it – text from Blind Biddy in Kharkov: June 6 2014 D-Day Propaganda Misses The Soviet Contributions While it is given much emphasis in the “western” view of the second world war Operation Overlord, the invasion on D-Day and the following month of fighting at the Western front, were strategically less important than the Soviet operations on the Eastern front. Without the parallel Soviet Operation Bragation the invasion of fortress Europe in the west would likely have failed. Looking at the numbers of forces involved and German forces destroyed one might even argue that Overlord was just a diversion to keep a few German divisions busy while the Soviet attack in the East destroyed whole German armies. At the Tehran conference in winter of 1943 Churchill, Roosevelt and Stalin aligned their strategies: The declaration issued by the three leaders on conclusion of the conference on 1 December 1943, recorded the following military conclusions: … The cross-channel invasion of France (Operation Overlord) would be launched during May 1944, in conjunction with an operation against southern France. The latter operation would be undertaken in as great a strength as availability of landing-craft permitted. The Conference further took note of Joseph Stalin’s statement that the Soviet forces would launch an offensive at about the same time with the object of preventing the German forces from transferring from the Eastern to the Western Front; Stalin more than kept his promise: The partisan brigades, including many Jewish fighters and concentration-camp escapees, planted 40,000 demolition charges. They devastated the vital rail lines linking German Army Group Centre to its bases in Poland and Eastern Prussia. Three days later, on June 22 1944, the third anniversary of Hitler’s invasion of the Soviet Union, Marshal Zhukov gave the order for the main assault on German front lines. Twenty-six thousand heavy guns pulverised German forward positions. The screams of the Katyusha rockets were followed by the roar of 4,000 tanks and the battle cries (in more than 40 languages) of 1.6 million Soviet soldiers. Thus began Operation Bagration, an assault over a 500-mile-long front. … [T]he Soviet summer offensive was several times larger than Operation Overlord (the invasion of Normandy), both in the scale of forces engaged and the direct cost to the Germans. By the end of summer, the Red army had reached the gates of Warsaw as well as the Carpathian passes commanding the entrance to central Europe. Soviet tanks had caught Army Group Centre in steel pincers and destroyed it. The Germans would lose more than 300,000 men in Belorussia alone. Another huge German army had been encircled and would be annihilated along the Baltic coast. The road to Berlin had been opened. In total some 70-80% of German losses occurred in the East. In June, July and August 1944 alone the Soviets destroyed some 28 German divisions, a bigger German foce than existed on the Western Front on D-Day. It is embarrassing to see how many propaganda lines are spend on D-Day compared to the few acknowledgments of the huge Soviet efforts on the Eastern front. http://www.moonofalabama.org/2014/06/d-day.html [h/t nakedcapitalism The renowned world beating German manufacturing industry is butting up against a China which is now switching emphasis from internal demand expansion to exporting. Japan’s reflation efforts are not producing the results expected so they too must look to renewed efforts to export unemployment. The ECB interest rate cuts although welcome are not going to get the results that would have occurred when China was promoting domestic consumption. With the slowdown in construction in China comes less demand for commodities which negatively affects Brazil, Chile, Australia, Canada, South Africa, Russia and many other countries. Countries like Germany and France are now faced with intense competition from China, Japan and Korea at a time when some of their major markets are in decline or stagnant. In the not too distant future Germany will be begging for massive infrastructure expenditures in their (somewhat) protected market (PIIGS) as a means to reduce unemployment in Germany. Let us not forget that the US is also facing headwinds. Will the PIIGS be willing to engage or will they look the gift horse in the mouth and negotiate a tougher deal than what occurred in the last go round. Apparently Danish and Swiss banks passed on the cost of negative interest rates to their commercial customers. It does not loom large but the cost will be passed down, marked up and passed down again. @ Mickey Deflation in the EZ is very bad news for the Swiss National Bank. They need high interest rates to chill the property market. http://www.hatlicious.com/index.php?route=category/manufacturer&c_id=63&man_id=12 Martin Wolf – http://www.ft.com/intl/cms/s/0/fe042c58-eca1-11e3-a754-00144feabdc0.html “In the first quarter of 2014 the eurozone economy was more than 2 per cent smaller than it was six years earlier, on the eve of the crisis. Nominal gross domestic product rose 4 per cent between the first quarter of 2008 and the last quarter of 2013. Real GDP has stagnated over the three years since the start of 2011. ” David Moyes didn’t get that long Austrian Economic Cycle Theory a la F. Hayek and Ludwig Mises. The bad news is it is written by gold bugs with an axe to grind. The good news is they are Swiss which lends it some credibility. https://www.globalgold.ch/fileadmin/user_upload/Clean_Slate_Reports/The_Clean_Slate_No1_ABCT.pdf It’s central banking reinvented as theatre. They can’t possibly imagine that it will have any significant impact, but are not prepared to do what it takes to be effective, so they decide to put on a performance instead. Ukraine headed to Somalia style destruction. http://www.usatoday.com/story/news/nation/2014/06/05/us-sending-advisers-gear-to-ukraine-/10046845/ @ Mickey Hickey Which side would you prefer, those with balaclavas (an irony of history!) or the regular Ukraine army? A parallel with Somalia does not stand up. @ All Rating agencies grew organically from the need for business to have some guidance on the health of companies and the dominance of the US agencies stems from that. They do not charge for rating sovereign debt. Love ’em, or hate ’em, they are better than having governments rate their own debt. Triple A, anyone? text from NulandiStan … cenre of oligarchic fascism … @docm Victoria says Hi! Frackng great spinning … keep it up! @DOCM It is not a question of preferences. Somalia started as a civil/tribal/clan war, lightly armed with little destructive power, Then came the advisers, arms, intelligence, funds which led to a ratcheting up of destructive power. Inevitably the war dragged on to the present day with no end in sight. Somali became a written language in 1972. The strife started in 1969 with a military coup. The Saudis prompted the US to intervene in the early eighties. The Russians matched them weapon for weapon. The rest is recent history. Remember the downed US military pilot being dragged behind a pick up truck in Mogadishu and the US withdrawal shortly after that. That is what is in store for the Ukrainians. The difference is that Russia will intervene if asymmetric war is used on the Russian-Ukrainians. The response in Russia will be similar to what happened in Ireland after Bloody Sunday. The Kremlin will be surrounded and members of the Duma will not get out alive unless they rescue the Russian Ukrainians. @Mickey Hickey The difference is that Russia will intervene if asymmetric war is used on the Russian-Ukrainians. I am not sure that word means what you think it means, or at least that it should be used in that sense. http://en.wikipedia.org/wiki/Asymmetric_warfare That aside if the Ukranian government continues to prosecute a conventional war against its own citizens then Russia will get pulled in. Unfortunately the US sees an opportunity, not unlike during the Soviet occupation of Afghanistan, to bleed a strategic competitor at a minimal cost and just like in Afghanistan the blow back is likely to be long lasting and terrible. Let’s not forget the starring role that the European Union foreign policy played in turning the Ukraine situation into a diabolical cluster**** either. The EU common security and foreign policy is basically NATO-lite and NATO is an organization looking for a conflict to justify its existence and budget. I hope anybody getting happy clappy about the idea of Ireland cooperating in CFSP remembers this. One bright spot: At least when some grinning idiot thanks the EU for seventy years of peace in Europe you can now an tell them to shut the hell up. text from Paddy Zhukov in Kharkov: @Ms Nuland You might fu*k with the EU madam; you will not fu*k with us! @Mickey, Shay The so called ‘war on terror’ [notwithstanding all those weapons from a destroyed Libya, inc. chemicals to nusra/qaida in Syria] is quite simply ‘not profitable’ enough; hence the resource grab in Ukraine by the corporates backed up by cheyenites and NATO heads seeking to prevent unemployment amongst its ‘strategists'(sic). Fascist ‘Banderites’ used as the front-line … a rapine oligarch ‘elected’ …. Pity the nation; pity Ukraine. Russians have always fought back …. without Stalingrad & Kursk [& 20+ million dead Russians] WWII would have been lost to fascism. Personnally, I’m ratherer fond of the English. D. Lads, Western governments (US, UK, France, Prussia and even Poland) started ‘interfering’ with Russia when the Bolsheviks took control of the Russian Empire, which included Ukraine. Been at it, on and off, since. This is just the latest dreary episode. You can take the Bolshevik (or Soviet) out of the Russian, but that’s as far as you go. The Russian remains. Russians don’t normally do invasions of the west, but woe betide any foreign invader of Russia. They will be ground down relentlessly and without mercy until they retreat in defeat. Makes sense. Its Mother Russia after all. Mothers are kinda precious. The Ukraine is Russia’s back yard. It would most advisable to stay out of it. But our US, UK and EU chumps, being the ‘best and brightest’ persons they are, know otherwise. They will eventually (stuff moves slowly in that vast landscape) learn a quite nasty lesson. And do not for one moment think that we here in Ireland will escape the unpleasant consequences of a irritated bear on the rampage. Not this time. So, unless you want to go back to using turf as your source of cooking and heating, and relying on the Shannon, the Lee and the Erne as your source of electricity, then hurry up and tell those interfering western governments to leave well enough alone. Just let the Ukranians settle their own affairs – and yes it will be murderous and bloody. But that’s how they do things in those vast steppes, endless forests and misty marshes. Comments are closed.