Archive for the ‘European Central Bank’ Category
May 2nd 2013, 19:20 by G.I. | WASHINGTON, D.C.
By credit policy (or banking policy or financial policy) I mean anything that affects how the financial system influences aggregate demand. Of course, we’ve always known aggregate demand depends on both the central bank’s policy rate and the spread over that rate paid by households and firms. But before the cirisis the relationship between the policy rate and what borrowers paid was assumed to be either constant, or endogenous to monetary policy or the business cycle.
Sep 6th 2012, 15:23 by G.I. | WASHINGTON
SINCE the euro crisis erupted, the European Central Bank has been torn between its legal and philosophical aversion to financing governments and its duty as lender of last resort. Today, it appears to have reconciled the two, erring on the side of the latter.
At the end of its governing council meeting today, the ECB announced the much-anticipated details of how it would resume intervening in the region’s government bond markets. Using its newly christened Outright Monetary Transactions (OMT), it will buy sovereign bonds of one- to three-year maturity, provided the issuing country has agreed to a fiscal adjustment programme with either the European Financial Stability Facility, or its successor, the European Stability Mechanism. Read the rest of this entry »
Feb 16th 2012, 19:16 by G.I. | WASHINGTON D.C.
Nov 11th 2011, 16:51 by G.I. | WASHINGTON
ASK any pundit why Italy is in crisis and they will mention some combination of Silvio Berlusconi, a towering national debt, and a moribund economy. The explanation resonates since all three have undeniably been enormous negatives for Italy. Today’s market action seems to vindicate the reasoning: with the prospect of a new government under Mario Monti and speedy implementation of a new budget, Italian bond yields have plummeted below 7%, and stocks around the world have rallied.
But these factors are not the root cause of the crisis and as long as Europeans behave as if they are, a resolution will elude them.
Italy has been burdened by Mr Berlusconi, a large national debt and a moribund economy for most of the past decade. As Daniel Gros points out, some of Italy’s key fundamentals—investment, R&D, educational attainment—have actually improved relative to Germany in that time. Yes, its debt remains a problem but, unlike Greece, it did not suddenly spiral out of control and was not, as far as we know, systematically underreported. As recently as 2009 Italy’s debt was 97% of GDP (it’s 100% now) and its deficit was 5% (compared to 4% this year, according to the IMF). Yet that year Italy could borrow at 4%, not much more than Germany, whereas now it must borrow at 6-7%, triple what Germany pays.
What changed is not Italy’s political or economic fundamentals but how investors perceive Italian debt. Read the rest of this entry »
Central-bank lending to government serves a valuable, though risky, purpose
Nov 5th 2011 | from the print edition
[Greg Ip] IT CANNOT be pleasant to start a new job with a continent’s fate resting on your shoulders. On November 1st, Mario Draghi’s first day as president of the European Central Bank (ECB), peripheral-government bond yields shot up and stockmarkets sank on fears that Greeks might reject a rescue plan agreed days earlier. On November 3rd, as The Economist went to press, Mr Draghi was presiding over his first policy meeting. Much is riding on what the ECB decides then and in coming weeks because it alone currently has the means to stem the intensifying crisis. It has bought Greek, Portuguese and Irish debt; since early August, it has also purchased Spanish and Italian bonds. But its purchases have been intermittent and begrudging. Without a firm commitment to buy as much as needed to prevent yields on Italian and Spanish bonds rising so high that both countries become insolvent, investors have less incentive to return. The ECB’s reluctance to make such a commitment is understandable: its legal mandate and doctrinal persuasion bar it from directly supporting governments. Yet throughout history central banks have been lenders of last resort to their governments. In 1694 the English monarchy was broke and in need of a loan so that it could wage war with France. A group of financiers agreed to lend the crown £1.2m in return for a partial monopoly on the issue of currency. Thus was born the Bank of England. Read the rest of this entry »
Oct 7th 2011, 18:37 by G.I. | WASHINGTON
Italian bond yields rise. Credit rating agencies worry that higher yields make Italy’s debt unsustainable. They cut Italy’s bond rating. Italy promises to curtail its deficit (i.e. sell fewer bonds). Italian growth suffers. Investors worry that makes Italy’s debt less sustainable at current interest rates. Demand for Italian bonds falls, their yields rise. You get the picture.
But in case you don’t, look at this one. Read the rest of this entry »
Sep 15th 2011, 16:12 by G.I. | WASHINGTON
[Greg Ip] CENTRAL banks are once again coming to the financial system’s rescue. In a move coordinated with its counterparts in America, Japan, Switzerland and Britain, the European Central Bank today announced it would make special, three-month dollar loans to euro-zone banks to cover funding needs over the year-end.
This has delivered a shot in the arm to European stock markets, and bank stocks in particular. European banks regularly borrow in dollars to make dollar loans and finance dollar-denominated inventory. But concerns about the banks’ solvency should their holdings of peripheral sovereign debt sour have prompted the American money market funds and others who lend to the banks to pull back. European banks have lost access to $700 billion in dollar funding in the last year, according to this excellent analysis in today’s Wall Street Journal.
Today’s operation is a bandage, not a cure. Read the rest of this entry »