Thursday, June 12, 2014

Whatever-It-Takes In Action (excerpt)

Last Thursday, the ECB lowered its official interest rate by 10bps to 0.15%. The rate paid on bank reserves was lowered to minus 0.1%. There isn’t much firepower in these lame actions. In addition, the ECB announced that cheap loans, possibly worth up to €400 billion, would be made available to banks under a program of “targeted long-term refinancing operations.” This TLTRO is aimed at providing more credit to small businesses. The 6/9 FT notes that it will take some time for this program to “provide an economic stimulus to those parts of the eurozone most at risk of falling into a dangerous deflationary spiral.” I agree.

Of course, the ECB also hoped that its new policy package would lower the foreign exchange value of the euro. So far, it hasn’t done much. The euro is down from a recent high of $1.39 to $1.35 currently. On July 26, 2012, ECB President Mario Draghi pledged to do whatever it takes to defend the euro. He succeeded all too well because now he is struggling to weaken it.

He also succeeded in stabilizing the banks. His 2012 pledge gave the banks the confidence to load up on sovereign bonds, especially those of the peripheral Eurozone countries. As a result, bond yields plunged, with the Spanish 10-year yield now equal to the 10-year US Treasury yield. Unfortunately, while the banks have been loading up on bonds, they’ve reduced their loan portfolios. That’s because they are subjected to regular stress tests that make government bonds more attractive than loans.

Today's Morning Briefing: Credibility Issue. (1) The first lesson in investment school. (2) Another record for stocks. (3) Bazookas turning into Pea Shooters? (4) ECB’s latest package isn’t “whatever-it-takes.” (5) Euro remains strong. (6) PBOC using rifle rather than shotgun. (7) Is deflation moderating in China? (8) BOJ’s QQE may be losing its effectiveness. So pensions will buy shares. (9) Is the Fed on the right or wrong side of inflation? (10) Feldstein’s warning. (11) Four reasons why stocks fell yesterday, and why they matter. (More for subscribers.)

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