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Eurointelligence Daily Briefing: Weidmann says Target 2 imbalances a major concern - calls on Draghi to change collateral rules
Frankfurter Allgemeine has obtained a letter from Jens Weidmann to Mario Draghi, in which the president of the Bundesbank demands a return to pre-crisis collateral rules; Weidmann expresses concern about Germany's Target 2 claims on the eurosystem; he demands that these claims be fully securitised; Weidmann expresses particular concern that bank loans can now act as collateral to central bank funds; 800 banks took part in yesterday's LTRO, tapping a total of €530bn; Hans-Werner Sinn proposes that the Target 2 balances should be securitised through the issue of covered bonds by the euro system; Angelo Baglioni says the LTRO will not trickle through to the real economy; Mark Schieritz calls the LTRO one of the most ingenious moves in the history of central banking; Alexander Hagelücken says Draghi is following in the footsteps of Alan Greenspan (not meant as a compliment); the FT says in an editorial that the LTRO buys time, but in itself will not solve the crisis; the Spanish government is now convinced that the EU is not going to relax the deficit target; Rajoy is planning a dual strategy according to El Pais: he will not make the necessary cuts to achieve the 4.4% this year, but will maintain the 3% target for 2013; bank lending to Greece contracts by 3.3% in January; a Transparency International report says Greece is making insufficient progress in the fight against corruption, which hampers the country's reform process; the Finnish parliament votes in favour of the Greek programme; the European Commission wants Ireland to make further pro-cyclical fiscal cuts if the recession were to deteriorate; Dutch MPs warn about the loss of the Netherlands' AAA-rating; Jean-Claude Juncker says the capital to the ESM should be paid for in two tranches only; Wolfgang Munchau writes that the extension of the ESM is political risky because it is inconceivable that Germany could be liable to a total cross-border transfer of some 20-30% of its GDP; Vittorio Grilli, meanwhile, is full of hope that the fiscal compact will eventually merge into a fiscal union with euro bonds.


There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Carrie (migeru at eurotrib dot com) on Thu Mar 1st, 2012 at 03:28:15 AM EST
[ Parent ]
Frankfurter Allgemeine has the scoop of the day. It has obtained a letter by Jens Weidmann to Mario Draghi, warning about Germany's Target 2 claims, and proposing a return to the collateral rules before the crisis. This is a hugely significantly development, considering also that the Bundesbank has until recently denied the significance of Germany's €500bn Target 2 imbalances. In his letter, Weidmann proposes a securitisation of the ECB's claims against the weaker central banks in the eurosystem, which have reached a level of €800bn. The paper says the proposals are bound to trigger a big controversy inside the ECB, and reflects growing concern inside the Bundesbank, whose own Target 2 claims of €500bn are the single largest item of the total. Weidmann said if these claims were to fall foul, it is possible that the member states may not be able to pay for those losses.

Weidmann is particularly critical about the relaxation of the collateral rules, especially the rule that national central banks can now accept corporate credits as collateral. He demands a return to a standard collateral system. He insists on a review to determine to which extent the risk position of the ECB could be improved through a change of collateral policies. FAZ says Weidmann's criticism might mute positive market reaction t the second LTRO, in which banks acquired €530bn in new liquidity, after €489bn in December. The paper says that Weidmann had not insisted on a time scale for a return to normal collateral policies. In a recent interview with FAZ, Draghi said that the ECB had done, and could not do more even if the situation of the banking sector deteriorated again.

...

Hans-Werner Sinn explain how to fix Target 2 imbalances

Hans Werner Sinn, the man who raised the Target 2 debate, writes in Frankfurter Allgemeine about how to fix the Target 2 imbalances. He said Europe's south-west is now financing its persistent current account deficits through the money presses, as central banks now provide unlimited liquidity to the banking sector. That money, thus created, flows to Germany, where ends up at the Bundesbank as a claim against the eurosystem. He compares the Target 2 balances to equivalent balances in the US, which are much lower, which he says is due to different rules under which the system there operates. He proposes to create covered  bonds - securities on property and other assets - created by the eurosystem to redeem the Target 2 imbalances.

(Note that this proposal appears to have been taken up by Weidmann in his demand to securities the balances.)

Please tell me how the Eurosystem securitizing the Target2 balances is not Eurobonds.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Carrie (migeru at eurotrib dot com) on Thu Mar 1st, 2012 at 03:56:34 AM EST
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FAZ: Fed versus EZB: Wie man Target-Schulden tilgt (Hans-Werner Sinn)
Vom Regen in die Traufe

Die Frage ist freilich, wie man das amerikanische System auf Europa übertragen könnte. Sicherlich wäre es keine Lösung, den Defizitländern die Tilgung mit normalen Staatspapieren aus eigener Herstellung zu erlauben. Dann käme man, wie Jörg Krämer von der Commerzbank richtig feststellt, vom Regen in die Traufe.

Die European Economic Advisory Group at CESifo - acht Ökonomen aus sieben Ländern - hat in ihrem elften Jahresbericht, der jetzt veröffentlicht wird, vorgeschlagen, in der Eurozone ein System von kurzfristigen staatlichen Pfandbriefen (Euro Standard Bills) zu schaffen, die nach einheitlichen Kriterien vom jeweiligen Nationalstaat mit Immobilien oder vorrangigen Ansprüchen auf zukünftige Steuereinnahmen besichert sind. Diese Pfandbriefe können nach Meinung des Rates zur jährlichen Tilgung der Target-Salden verwendet werden.

Eine einfache Minimallösung, die ebenfalls Wirkung entfalten könnte, hat der frühere Bundesbankpräsident Helmut Schlesinger vorgeschlagen. Er will die Target-Salden mit progressiv gestaffelten Strafzinsen belasten, die dann von den Defizitländern an die Überschussländer abgetreten werden. Auf jeden Fall braucht die Eurozone ein System von Stoßdämpfern, welche die extremen Ausschläge bei den Target-Krediten abfedern. Der Überziehungskredit beim privaten Girokonto ist auch nicht beliebig zu haben.

Fed versus ECB: how to cancel target debts
From the pan to the fire

But the question is how to transfer the American system in Europe. Certainly it would be no solution to allow the deficit countries to repay the debts with the issue of normal government securities. Then one would , as Jörg Krämer of Commerzbank notes correctly, be jumping from the pan to the fire.

The European Economic Advisory Group at CESifo - eight economists from seven countries - in its eleventh annual report, which is now published, proposed to create in the Euro zone, a system of short-term government mortgage bonds (Euro Standard Bills), which would be secured with real estate or priority claims on future tax revenues according to standard criteria by each nation state. These mortgage bonds can be used in the opinion of the Council for the annual amortization of the target balances.

A simple minimal solution, which could also be effective, has been proposed by the former Bundesbank President Helmut Schlesinger. He wants to load the target balances with progressively tiered penalty interest, which would then transferred from the deficit countries to surplus countries. In any case, the euro zone needs a system of shock absorbers to cushion the extreme swings in which the target credit. The overdraft facility at the private bank account does not have any.



There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Carrie (migeru at eurotrib dot com) on Thu Mar 1st, 2012 at 04:30:02 AM EST
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On second thought: this has nothing to do with Eurobonds. It is, in fact:

  1. The Greek "Escrow Account" by another name: EU Deficit countries would issue bonds secured by priority claims on tax revenues
  2. The reverse of Keynes' proposal at Bretton Woods: a proposal to pile interest penalties on current account deficits (Sinn does admit that the origin of the Target2 balances is persistent intra-EU current account imbalances) where Keynes proposed to charge interest on current account surpluses

Yee-haw!

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Carrie (migeru at eurotrib dot com) on Thu Mar 1st, 2012 at 04:33:13 AM EST
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Exactly. And it's not even disguised.

Spain would not, by treaties, be allowed to fight her current account deficits. But she must make sure that they will bleed her dry.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Thu Mar 1st, 2012 at 05:08:14 AM EST
[ Parent ]
On Target2, see Making sense of Target imbalances (on VoxEU, by Willem Buiter, Juergen Michels and Ebrahim Rahbari, 6 September 2011)
The fates of sovereign and the banking systems in many Eurozone member countries, and in the Eurozone as a whole, are strongly intertwined, as first the financial crisis and soon after the Eurozone sovereign debt crisis has shown. Despite - or due to - the abundance of problems within the Eurozone, it is important to be careful in presenting and interpreting the facts in an objective way. In that respect, it is important to highlight that TARGET2 imbalances:

  • Cannot be automatically linked to current-account deficits in those countries;
  • Do not automatically reduce central bank credit to commercial banks in other member states (and any reduction of central bank credit should not be interpreted negatively, as implying reduced funding for banks and their customers); and
  • Should not be interpreted as a measure of the risk exposures of the national central banks of TARGET2 creditor countries.

This does not mean that the increase in TARGET2 imbalances cannot be suggestive of serious problems.

* These imbalances may be - and currently likely are - a symptom of the difficulty of banking systems in a number of Eurozone periphery countries have in funding themselves in the markets without public support.

They should therefore primarily be understood as a call to action for policymakers to put the banking systems in the Eurozone periphery and core on a sound footing - a goal that continues to elude them even after almost four years since the onset of the financial crisis.

In any case, if Sinn is right that the Target2 balances represent a funding of current account imbalances, then one possible way to fix the problem is for German actors to buy assets in the periphery directly (or to buy products from the periphery, or to go on vacation in the periphery), something they apparently don't want to do in sufficient amounts. Now, if the German economy is not interested in buying Spanish real estate, what would be gained by Spain selling to the Bundesbank covered bonds backed by state claims on Spanish real estate?

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Carrie (migeru at eurotrib dot com) on Thu Mar 1st, 2012 at 09:30:27 AM EST
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Isn't it all looking like a religious doctrine of transformation?

ECB bond purchases are morally transformed from evil to good, if cleansed by private sector involvement.

And so in this case, the extra layer of state claims is good, because it allows investors to recoup their losses from the Spanish government?

(Or as it is called elsewhere, collective punishment...)

by Metatone (metatone [a|t] gmail (dot) com) on Thu Mar 1st, 2012 at 09:57:42 AM EST
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Isn't it all looking like a religious doctrine of transformation?

Bullseye!

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Thu Mar 1st, 2012 at 10:01:13 AM EST
[ Parent ]
yes.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Carrie (migeru at eurotrib dot com) on Thu Mar 1st, 2012 at 11:22:44 AM EST
[ Parent ]
also
as early as 11 February 2010 our commentary on the crisis homed in on the fact that
What the ECB cannot do is fund a public debt issue, and that makes some sense from certain ideological perspectives.<bblockquote>Because by having passed through the bid-ask spread of a major investment bank, it is suddenly converted from a loan into a monetary instrument?
The last [many] months have been an exercise in teasing out the conequences of that ideological perspective.


There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Carrie (migeru at eurotrib dot com) on Thu Mar 1st, 2012 at 11:26:02 AM EST
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Hans-Werner Sinn:
priority claims on future tax revenues
Luckily, Spain has that covered
This is probably the least ominous reason for the rush to approve this. In fact, most of the provisions of the new Constitutional amendment and impending Organic Law won't take effect immediately. The spending ceiling only becomes binding after 2020 (however, to bring a 9% deficit to 0.40% in 9 years does require reducing it by 1% per year in the middle of a recession, which will require biting austerity with immediate effect). There's only one provision of the proposed New Article 135 (in Spanish) which will have immediate effect:
Los créditos para satisfacer los intereses y el capital de la deuda pública de las Administraciones se entenderán siempre incluidos en el estado de gastos de sus presupuestos y su pago gozará de prioridad absoluta. Estos créditos no podrán ser objeto de enmienda o modificación, mientras se ajusten a las condiciones de la Ley de emisión.
Credits to service interest and principal on the public debt of the various Administrations will be understood to be part of the expense account of their budgets, and their payment will have absolute priority. These credits won't be subject to amendment or modification, as long as they keep to the conditions of the law by which they were issued.
The emphasised text is what's being added by the amendment.


There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Carrie (migeru at eurotrib dot com) on Thu Mar 1st, 2012 at 11:58:26 AM EST
[ Parent ]
Not the sort of Eurobonds I want. If it's merely a matter of shoring up the bank-liquidity operation, then if you call that "eurobonds", you have demonetized the Eurobond brand.

Eurobonds, surely, must be created to fund productive investment in southern Europe.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Thu Mar 1st, 2012 at 04:32:37 AM EST
[ Parent ]
It's not Eurobonds because Sinn is not actually proposing that "the Eurosystem" issue covered bonds, but that each individual deficit country sell covered bonds to the Bundesbank.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Carrie (migeru at eurotrib dot com) on Thu Mar 1st, 2012 at 04:34:21 AM EST
[ Parent ]
I'm worried about the requirement that quality collateral must be used, as this would render LTRO more or less useless. Why is it that whenever ECB gets a somewhat good idea, Bundesbank tries to shoot it down?

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Thu Mar 1st, 2012 at 05:49:26 AM EST
[ Parent ]
Also in today's Eurointelligence Daily Briefing:
Mark Schieritz

Writing in Herdentrieb, Mark Schieritz applauds Mario Draghi's Big Bertha as a masterpiece. He calls it one of the cleverest moves in central banking history.  Draghi managed to establish the ECB as a lender of last resort in a way that satisfies its legal and also the political constraints, especially in Germany. The ECB cannot allocate credits directly - which is the intrinsic job of a banking sector in a free market. The liquidity operations are so big, that the ECB has now replaced the Fed as the world's largest money printing machine. The eurosystem's balance sheet is now close to €2750bn, whereas the Fed's is about half a billion smaller. And there are no indications that the extra money will create inflation.

Of course the Bundesbank is upset.

But also,

Weidmann is particularly critical about the relaxation of the collateral rules, especially the rule that national central banks can now accept corporate credits as collateral. He demands a return to a standard collateral system.
is prima-facie evidence that Weidmann either has not read or has not understood the relevant passages of Minsky's Stabilizing an Unstable Economy. More ominously, it might be evidence that he does not care
Eurointelligence Daily Briefing: Weidmann ascends to the throne
New Bundesbank president Jens Weidman was official enthroned yesterday; indicates his main focus would be to watch over, and comment on, German government's fiscal policy; says price stability must take precedence over financial stability
Oh, dear. And this a day after we're told "Merkel's quid-pro-quo on Draghi" (being the next President of the ECB) is to put a German in charge of the European Financial Stability Board.


There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Carrie (migeru at eurotrib dot com) on Thu Mar 1st, 2012 at 05:55:38 AM EST
[ Parent ]
Reminds me of Pratchetts Auditors of Reality.

"price stability must take precedence over financial stability"

If you use price stability as a hammer, you can achieve financial stability as well! A corpse is, after all, perfectly stable.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Thu Mar 1st, 2012 at 06:02:32 AM EST
[ Parent ]
Maybe the Bundesbank needs some Swiss chocolate coins?

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Carrie (migeru at eurotrib dot com) on Thu Mar 1st, 2012 at 07:59:08 AM EST
[ Parent ]

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