Sunday, May 09, 2010
They Changed The Timing
Calculated Risk will probably have some good coverage. As predicted, the Fed was tapped. Fed info here:
In response to the re-emergence of strains in U.S. dollar short-term funding markets in Europe, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing the re-establishment of temporary U.S. dollar liquidity swap facilities.This goes through January of 2011. ECB:
The Governing Council of the ECB decided to reactivate, in coordination with other central banks, the temporary liquidity swap lines with the Federal Reserve, and resume US dollar liquidity-providing operations at terms of 7 and 84 days. These operations will take the form of repurchase operations against ECB-eligible collateral and will be carried out as fixed rate tenders with full allotment. The first operation will be carried out on 11 May 2010.
From the press conference "IMF will provide at least half as much as the member states." So major IMF funding (up to 250 billion Euro according to Salgado). The major chunk - the 400 odd billion Euros - will be in a SPV (special purpose vehicle) guaranteed by the member states. Bloomberg article about ECB operations.
The EU council link now shows 19:30, which ought to be 3:30 PM EST - unless it's not Brussels time, but I think it is. If all that's in there is what has been reported, they might as well not bother.
Okay, I checked Calculated Risk and a commenter over there posted a link that claimed the German Finance Minister went to the hospital and is being replaced by the German Interior Minister. So that explains the delay.
So I guess the only question remaining is whether the ECB is going to get a credit line from the Fed and do anything? ECB here. Fed here. Me, I'm taking a nap, and it's not the financial or diplomatic flu. It's just a nap. Gotta be fresh for the morning fireworks. [Hey, and let's not leave out the IMF!]
Now showing 22:00.... No, now 23:00.... Now a statement "Exact starting time of the conference is not known."
If this is correct, 60 billion from governments, borrowing 500 billion more on the market. At a guess, the phones are ringing everywhere as they want to announce borrowings at the conference. Also, one must believe that somehow the Fed will be tapped.
Note: This article is speculating 350 billion from Europeans and 150 billion from the IMF, so the US would be anteing up some real money this time. Now we will see US grumpiness, but this would be a significant draw:
Die genaue Aufteilung der Mittel stand zunächst noch nicht fest, im Gespräch war ein Anteil von etwa 350 Milliarden Euro für die Euro-Staaten und von 150 Milliarden Euro für den IWF. Auf die Bundesregierung könnten damit Bürgschaften in Höhe von bis zu 100 Milliarden Euro zukommen.The exact distribution of the bailout are not yet fixed, but a share of about 350 billion Euro for the Euro states and 150 billion for the IMF was under discussion. The German government might be liable for about 100 billion Euros through [bonds/guarantees].
The ECB statement also said the ECB would initiate a temporary liquidity swap with the U.S. Federal Reserve and also inject more liquidity via a six-month, long-term refinancing operation.
Great. So now the Fed is lender of last resort against the Euro, too. Talk about your quagmires.
That strong private sector growth will offset the debt overhang, and Public sector austerity, in a timely fashion seems improbable to me as things stand.
Ireland has been far more proactive in reining in government finances, and yet has little to show for it in terms of the economy's return to normalcy.
Don't see how the outcome will be any different with the PIGS.
Band-Aid, yes; But this isn't just a flesh wound. That disconnect bothers me.
Some say religion is the utopia of the masses. I say it's the central banks.
A Carrot only works when there's a stick behind. Say good bye to the stick.
After a whole lot of coffee and some log-splitting, plus watching oil prices, I'd say that the EU has successfully changed its crash to a crumble. However the banks are not secure yet; fixing them will require the ECB to acquire several hundred billion worth of sovereign bonds.
The takeaway here is that the big pot of money, if used, will be carried in a Special Purpose Vehicle, a la the vehicles that were such a scourge to the banks earlier.
Now in this light it is germane that the Europeans have not implemented anything like FAS 166/167 as our FASB did, so apparently the EU is getting into the equivalent of oil bonds. However not carrying it on a balance sheet does not make the debt go away. The SPV bonds will be guaranteed by the participating countries, so in effect, Germany and a few others are directly transferring the debt to their own balance sheets by means of guarantees a la Freddie and Fannie - they are just pretending otherwise.
So my bottom line is that the immediate impact depends on just how much of the bad bonds the ECB really buys. In theory all these countries are going to pay their debts. In practice, they will not be able to do so. Therefore the bonds are bad, and the banks are in jeopardy, and only moving this stuff off their balance sheets can really correct the situation.
So really it is up to the ECB, and I think everyone will be very leery of lending to banks until we find out where the bonds are.
For the time being, the dollar facility will allow the ECB to give the banks money so they don't have to borrow. But by January, the ECB is going to have to have bought a lot of those bonds or the banks will take a major hit.
Along with this program comes an austerity mandate to Spain and Portugal. If they tap the big pot (220 billion from IMF, 220 billion from Europe) they are going to be getting a Greek-like deal. The money would be used if no one will buy their bonds, so it would replace their borrowing.
But the logic of all this mandates that now government spending must drop in these three countries, and taxation must rise. Further, one would expect this to force Italy to be much more careful.
Therefore, the portion of EU growth that was substantially funded by massive debt generation has been knocked out.
This lives EU trend somewhere around 50 basis points annually.
Logically that should mean that these countries can barely borrow, and it should cause bond rates to rise. Deferring the day of reckoning three years in the future is not comforting under these circumstances.
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