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Draghi: ECB to purchase asset-backed securities
Katy Barnato | Katrina Bishop
9 Hours Ago
CNBC.com


The European Central Bank (ECB) surprised investors and markets on Thursday by cutting interest rates to record lows and announcing a bond-buying program.
From September 10, the rate on the main refinancing operations will be decreased by 10 basis points to a new low of 0.05 percent. The rate on the marginal lending facility will be decreased by 10 basis points to 0.30 percent and the rate on the deposit facility will be cut still further into negative territory, to -0.20 percent.
The euro fell by over 1 percent against the dollar to under $1.30 after the rate announcement, before paring some losses. European stocks traded sharply higher.

Mario Draghi
Krisztian Bocsi | Bloomberg | Getty Images
Mario Draghi
In his regular press conference at 1:30 p.m., Draghi announced the ECB would purchase asset-backed securities (ABS) and covered bonds to boost the economy and boost inflation.

"This is quite complex package of measures," Draghi told assembled journalists.

"The purpose is very different from previous programs... the aim is to increase the measures that produce credit-easing… and also to significantly stir the size of our balance sheet towards the dimensions it used to have at the beginning of 2012."

Some economists had predicted ABS purchases, given the ECB's announcement in August that it had hired Blackrock to advise on a possible ABS-buying program.

Under such a program, euro zone banks would sell the ECB their loans and other types of credit that have been packaged together. Draghi said the ECB would only purchase less risky senior tranches of securitized debts and loans, as well as mezzanine tranches with guarantees.

Purchases will include both newly created and existing ABS, as well as residential mortgage-backed securities (RMBS).

Another policy option open to the ECB would have been "full-blown" QE, like the U.S. Federal Reserve, where the central bank buys sovereign debt from lenders. This would have been a controversial move —not least because there are no common euro zone bonds.
However, some analysts do expect the next step to be a QE program. Nick Beecroft. chairman and senior market analyst at Saxo Capital Markets UK thinks there would be a launch by the end of the year "but feel the ECB, and specifically the (German) Bundesbank, will have to be dragged kicking and screaming to this".

Nonetheless, Beecroft believes, the program could be facilitated by a combination of three conditions: stubbornly high euro, even lower growth, and even lower actual observed inflation or a decline in key measures of inflation expectations.

Draghi said that the ECB had discussed "full-blown" purchases of its sovereign debt at its latest meeting, and that some members had been in favor.

"Some of our governing council members were in favor of doing more than just presented and some were in favor of doing less. So our proposal strikes the middle road," he told journalists.
A "comfortable majority" were in favor of the "middle road" with which the ECB has decided to proceed, Draghi said.

Concerns about growth-sapping low inflation have already seen the ECB unveil a host of measures designed to give the euro zone's recovery a boost in June.

Read MoreEurozone growth stagnates, Germany contracts
Since then, economic data for the region have continued to disappoint. Euro zone inflation fell to a worrying 0.3 percent in August, heightening fears that the region could be heading towards a period of deflation.The ECB now forecasts inflation will come in at 0.6 percent this year and will not start accelerating until 2015.

Meanwhile, euro zone economy grew by just 0.2 percent in the second quarter of 2014, and the closely-watched composite Purchasing Managers' Index— which measures business activity in the euro zone—slipped in August, coming in below forecasts.

On Thursday, Draghi said the ECB had downgraded its euro zone growth forecasts for 2014 and 2015, to 0.9 percent and 1.6 percent respectively.

Draghi added that growth in the second quarter had been weaker than expected and that incoming third-quarter data suggested slowing economic recovery.

He also said the ECB did not intend to cut interest rates any further.

Marc Chandler, head of currency strategy at BBH, forecast non-euro zone European countries would follow the ECB's lead in decreasing rates.

"Denmark is the most likely candidate to follow the ECB in cutting rates. Poland has also signaled it will cut rates shortly," he said in a research note published while Draghi was speaking.

Chandler said it was a "tougher call" to predict what action the Swiss National Bank (SNB) would take after its meeting on September 18.

"The euro had edged closer to the SNB's floor. There has been no sign of intervention, but this would seem to be the first line of defense."

Finance experts back Draghi's vision

European stimulus
507 words
6 Sep 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
The European Central Bank's latest ­rescue strategy for the troubled region has earned the approval of financial markets, delivering favourable moves in currency and bond trading in the aftermath of President Mario Draghi's surprise package.

The ECB went beyond expectations by pledging everything but outright bond purchases in its highly anticipated policy meeting on Thursday in Brussels. The central bank cut the interest earned on deposits to minus 0.2 per cent; cut the main lending rate to 0.05 per cent; and, critically, revealed plans to buy covered bonds issued by European banks as well as asset-backed securities.

The euro fell sharply to the lowest level in a year, fetching $US1.29 late on Friday. Bonds rallied, except in Germany where yields inched higher. Europe's key equity markets rose, with a 1 per cent gain in Germany's Dax and a 1.8 per cent rise for the Euro Stoxx 50.

Experts voiced their confidence in Mr Draghi's plan even if a consensus within the ECB is not apparent.

Platinum Asset Management founder and billionaire investor Kerr Neilson weighed in on the new chapter for global liquidity, saying: "It enhances the existing easing mode taking place in China and Japan – versus a move towards tightening in the United States and United Kingdom. There are interesting implications for currencies and national competitiveness."

BlackRock Australia head of fixed income Stephen Miller said that "by European standards" it was a timely response. "It could stimulate lending, improve confidence and potentially encourage exports via a lower euro. Along with the Bank of Japan, the ECB could potentially become an alternative source of global liquidity as the US Fed's balance sheet expansion comes to an end."

However, Mr Miller echoed Mr Draghi's urging that members of the union "should not unravel the progress made with fiscal consolidation".

"As Draghi said at Jackson Hole, the ECB needs to be supported by structural reform and 'smart' fiscal easing; the refrain that 'monetary policy can only do so much' is becoming increasingly common among the world's central banks – including the Reserve Bank of Australia," Mr Miller said.

Although the ECB did not adopt a shock-and-awe QE program in the same vein as the Fed and the Bank of Japan, Domenico Giuliano of Magellan Asset Management said it would have a similar effect.

"The central bank's plan to purchase asset-backed securities and covered bonds is actually quantitative easing, as it will be financed by money creation," he said. "Markets now pro­ject lower interest rates in Europe, along with more liquidity, which could encourage global investors to seek out higher- yielding investments including ­Australian assets.

"That might have consequences for an appreciating Aussie dollar against the euro, along with possible further compression in Australian bond yields and higher valuation multiples on Australian stocks."

The Australian dollar advanced against the euro to €0.72; it was trading as low as €0.64 in January.


Fairfax Media Management Pty Limited

Document AFNR000020140905ea960001t

ECB stumps up more than expected

Philip Baker
737 words
6 Sep 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
Philip Baker

Three numbers told investors the European Central Bank had stumped up with much more than financial markets had been expecting.

One. Two. Nine.

That's the level the euro dropped to against the US dollar in its worst trading session in almost three years.

Just three months ago the euro was closer to $US1.40 but for the past few years the ECB has needed the euro, the region's common currency, to be lower.

Much lower. At around $US1.29 it's a start.

A higher euro militates against an export-led recovery and helps to push inflation lower, which is exactly what the ECB doesn't want.

The central bank is trying to avert a round of deflation in the region.

Ironically, at this meeting the president of the ECB, Mario Draghi, seemed to point to the high level of unemployment as a reason for inflation when in the past he has blamed the currency.

That's probably a hint to policymakers that he can't do too much more on the monetary policy front and maybe they'd like to come to the party with an idea or three.

Draghi made it clear that "interest rates are now at their lower bound" and although buying around €1 trillion ($1.39 trillion) of assets will help, the region has bank assets of €40 trillion so you wonder what sort of impact that has on the ability for credit to grow.

The ECB's balance sheet stands at around €2 trillion. That's the same level it was in 2009. It expanded to €3 trillion in 2012 and now Draghi wants it back at that sort of level.

Still, that pales against what others have done.

The Bank of England, for example, has increased its assets 70 per cent, the Federal Reserve has doubled, and the Bank of Japan has done even more. More is needed

More is needed – but a technical version of QE looks like it remains in the hip pocket for a true emergency.

For some reason, buying asset-backed securities is seen as a form of unconventional policy but not the real deal.

Still, it's a great result for all those bankers that came up with the idea of slicing and dicing all sorts of loans with all sorts of problems and then selling them on to investors.

They helped cause the financial crisis and now they'll be snapped up by the ECB.

Although the ECB will look at what Mr Draghi called a "broad portfolio of simple and transparent asset-backed securities", the fact that the central bank will be a cornerstone investor in the sector does wonders for the entire securitisation business.

On the subject of interest rates, it was a shock they were cut. Just six out of 57 economists surveyed by Bloomberg picked it.

But unless banks are made solvent or can deliver credit growth, investors might worry that cutting rates won't have too much of an impact.

Given that it's more than likely this will be the last rate cut by the ECB, it won't be too long before investors will worry if what the bank has announced will indeed work.

It's not the same as the US Federal Reserve's quantitative easing program, because they won't be buying government bonds.

But it will have the same effect in pumping cash into the economy, forcing investors from relatively low-risk investments to riskier ones, which in theory will lower the cost, and improve the availability, of funding throughout the economy.

But as Glenn Stevens, governor of the Reserve Bank of Australia, has found, rates can be low but if the "animal spirits" aren't there then it doesn't matter how low rates are.

"Don't fight the ECB" might be the catch-cry right now, but is it as catchy as its Federal Reserve brethren?

Wall Street ignored the announcement that saw the German sharemarket rise by 1 per cent. Friday night's payroll numbers are clearly viewed as more important.

But even in the US, where quantitative easing has been hailed as a success, thanks to the gains on Wall Street and the official unemployment rate being close to 6 per cent, there are still doubts over the success it has had on Main Street.


Fairfax Media Management Pty Limited

Document AFNR000020140905ea960001f

http://www.cnbc.com/id/101977452

Unlimited liquidity risks asset bubbles: Trichet
Reporting by Steve Sedgwick, writing by Antonia Matthews
3 Hours Ago
CNBC.com

Supplying unlimited amounts of liquidity at interest rates close to zero has "unintended counterproductive consequences," former European Central Bank President Jean-Claude Trichet warned on Saturday.

"It's true that new bubbles are necessarily created when you deliver unlimited supply of liquidity at zero rates," Trichet told CNBC in an interview at the Ambrosetti Forum in Italy.

The European Central Bank (ECB) surprised investors and markets on Thursday by cutting interest rates to record lows and announcing a bond-buying program.
The rate on the main refinancing operations was cut to a new low of 0.05 percent. The rate on the marginal lending facility was lowered to 0.30 percent and the rate on the deposit facility was cut still further into negative territory, to -0.20 percent.

Read MoreDraghi: ECB to purchase asset-backed securities


Pier Marco Tacca | Getty Images News | Getty Images
ECB President Mario Draghi also announced the ECB would purchase asset-backed securities (ABS) and covered bonds to boost the economy and boost inflation.

Trichet said he trusted the move to purchase ABS and said it was "very very important".

Under such a program, euro zone banks sell the ECB their loans and other types of credit that have been packaged together. Draghi said the ECB would only purchase less risky senior tranches of securitized debt and loans, as well as mezzanine tranches with guarantees.


"So I trust really,that as far as purchases of credible securities are concerned, the ECB is right to concentrate on where you have a problem, namely, the private tradable securities," Trichet said.
"On top of that, of course you have the monetary policy decision, and historically very very low rates, which confirms that the is ECB taking very seriously this very low inflation which characterizes the euro area.
Concerns about growth-sapping low inflation had already seen the ECB unveil a host of measures designed to give the euro zone's recovery a boost in June.
Former European Central Bank executive board member Jörg Asmussen, now a minister in the German government, said the ECB was right to do whatever it could within its mandate. He said the bank should not "change the rules", echoing comments by other German policymakers who have challenged the legality of the ECB's as yet untested sovereign bond buying program.
Newswires, citing sources, reported that Bundesbank President Jens Weidmann had opposed the ECB's latest policy measures.

Asmussen warned that the euro zone debt crisis was not over but "dormant".

"And the risk for catastrophic events have clearly diminished. But this is why I try to say on the fiscal policy side, it's extremely important – especially for countries with high public debt levels – to stick with the agreed framework."
He warned that structural reforms could not be replaced by monetary policy. "Monetary policy is not an all- purpose weapon to all kinds of economic problems."


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BoE's Carney signals Spring rate hike

DOW JONES NEWSWIRES SEPTEMBER 09, 2014 9:30PM

The Bank of England will likely meet its inflation and jobs goals if it starts to raise its benchmark interest rate early next year, Governor Mark Carney said on Tuesday in his clearest statement yet on the probable timing of a first move towards unwinding crisis-era stimulus.

In a speech to labor union members in Liverpool, Mr Carney said the rate at which wages rise over coming months will be key to the exact timing of the first move, and repeated his assurance that a rise in the benchmark rate will be "gradual and limited."

Mr Carney said the UK's economic recovery has "exceeded all expectations" and "has momentum." Against that background he said the time for interest rates to "normalize" is nearing, and that in recent months the decision on whether to raise or leave policy unchanged "has become more balanced."

Most investors expect the BOE to raise its benchmark interest rate from a 320-year low of 0.5 per cent in the first quarter of 2015, and Mr Carney appeared to validate that expectation.

"Our latest forecasts show that, if interest rates were to follow the path expected by markets -- that is, beginning to increase by the Spring and thereafter rising very gradually -- inflation would settle at around 2 per cent by the end of the forecast and a further 1.2 million jobs would have been created," he said. "In other words, we would achieve our mandate."

Should it raise its benchmark interest rate early next year, the BOE would likely become the first major central bank to start to remove the unprecedented levels of stimulus provided to the economy since the financial crisis struck in late 2008. The US Federal Reserve is expected to start to raise its key rate later in the year, while the European Central bank Thursday provided additional stimulus in the form of rate cuts and new bond buying programs. With the Japanese economy struggling to recover from an April hike in the sales tax, the Bank of Japan may yet provide more stimulus.

Mr Carney told union members that British workers had played a key role in ensuring the economic recovery had been strong enough to allow the central bank to contemplate a return to more normal monetary policy settings.

He said the pace at which wages rise will be key to the central bank's decision, and indicated policy makers will have enough evidence of a pick-up in pay deals early in the new year.

"We will be closely monitoring pay settlements that are bunched around the turn of the year and taking a steer from the pay of new hires as a potential leading indicator of broader pay pressures," he said.

The central bank has long been puzzled by an apparently inexplicable decline in the rate of UK productivity growth, which has been weaker than in other developed economies. But Mr Carney Tuesday presented that as the consequence of a "supply shock" that could be positive for the long-run growth prospects of the UK economy.

He said that Britons had responded to the financial crisis by cutting the price at which they were prepared to work, and seeking to work more in order to prepare for retirement and reduce their high debt levels. As a consequence, businesses had invested little in new equipment, instead hiring additional workers and reducing productivity growth as a result.

The big shock to the GBP may come next week when Scottish voters will decide if Scotland will say yes or no to devolution. The polls forecast the yes and no votes are evenly matched.

If so, Italy’s public debt will spiral to dangerous levels next year, ever further beyond the point of no return for a country without its own sovereign currency and central bank.

“This is catastrophic for the finances of the country. We’re heading for a debt ratio of 145pc next year,” said Antonio Guglielmi, global strategist for Mediobanca.

“Who knows the maximum number that the market will tolerate? The number is already scary, but for the time being Draghi’s poker game is proving successful, and there is now the smell of QE keep the game going for a bit longer.”


Only a monetary 'nuclear bomb' can save Italy now, says Mediobanca
http://blogs.telegraph.co.uk/finance/amb...ediobanca/

Eurozone wage growth picks up in Q2
DOW JONES NEWSWIRES SEPTEMBER 16, 2014 7:45PM

Wage growth across the 18 countries that share the euro picked up in the three months to June, as did total labor costs, both signs that inflationary pressures in the eurozone may be set to pick up.

Figures also released by the European Union's statistics agency Tuesday showed the job vacancy rate was unchanged at 1.7 per cent, suggesting that the unemployment rate is unlikely to fall significantly in coming months.

Eurostat said workers' pay was 1.2 per cent higher in the second quarter than in the same period of 2013, having risen by 1.0 per cent in the three months to March. Total labor costs -- which include tax and other costs to employers -- rose 1.2 per cent, having increased by 0.6 per cent in the previous period.

Wage growth outpaced the rise in consumer prices during the second quarter, a development easing a squeeze on household finances that has undermined the currency area's prospects for a strong economic recovery.

The pickup in wages and total labor costs will give some encouragement to members of the European Central Bank's governing council, since it suggests underlying inflationary pressures may be on the rise, albeit slowly. The eurozone's annual rate of inflation fell to 0.3 per cent in August from 0.4 per cent in July, taking it further below the ECB's target of just below 2 per cent.

Modest wage rises reflect the fact that unemployment across the currency area remains close to record highs, while varying widely between countries and regions. The unemployment rate was unchanged at 11.5 per cent in July, and business surveys point to only modest further drops in the months ahead.

A number of eurozone members recorded wage declines during the second quarter. Cyprus recorded the largest drop, with wages down 4.5 per cent, but there were also falls in Ireland, Italy and the Netherlands. Wages rose 1.6 per cent in Germany, and slightly less rapidly in Spain.

That suggests that the eurozone continues to rebalance through different rates of wage growth. Deprived of the ability to devalue their currency, troubled eurozone members have tried to regain competitiveness lost in the years running up to the financial crisis by cutting their labor costs relative to stronger northern European economies, a process known as "internal devaluation."

However, the Organisation for Economic Cooperation and Development earlier this month warned that strategy may now be proving counterproductive, failing to create new jobs while reducing overall demand and contributing to the problem of very low inflation.

Eurozone inflation remains at record low
SEPTEMBER 17, 2014 11:00PM

The annual rate of inflation in the 18 countries that use the euro was unchanged at 0.4 per cent in August, as the European Union's statistics agency revised a previous estimate that recorded a decline to 0.3 per cent

However, the annual rate of inflation in the eurozone remained at the lowest level since Oct 2009.

The latest figures released by Eurostat also showed that the annual rate of inflation across the 28-member EU fell to its lowest level since October 2009 in July, and was unchanged in August, an indication that very muted price rises threaten the economic recovery beyond the borders of the eurozone.

The EU's statistics agency Wednesday said consumer prices in the eurozone were 0.1 per cent higher than in July, and 0.4 per cent higher than in August 2013. That revised the preliminary estimate for the annual rate of inflation of 0.3 per cent released late last month.

Eurostat also said the annual rate of inflation in the broader EU -- which includes 10 countries that don't use the euro -- was unchanged at 0.5 per cent in August, having been revised lower to that figure in July from a first estimate of 0.6 per cent.

Eurostat's figures show that six eurozone members experienced declines in prices in the 12 months through August, while two members of the EU that don't use the euro shared the same experience. But other members were on the cusp, with three eurozone members recording inflation rates below 0.5 per cent, as did five EU members that don't use the common currency.

The slowdown in inflation is a mixed blessing. While it has helped boost real incomes at a time of weak wage growth, it also makes it more difficult for governments and households to cut their high debt levels, a particular problem in southern Europe, where unemployment is also very high.

More worryingly for policy makers, there is a risk that an unanticipated economic setback could push some economies into deflation -- a sustained and self-reinforcing fall in prices -- gjven the very low levels of inflation.

Earlier this month, the ECB responded to inflation rates that seem likely to remain well below its target of just below 2.0 per cent by cutting its key interest rates and announcing two new programs to asset-backed securities and covered bonds.

However, the Organisation for Economic Cooperation and Development Monday said that may not be enough to boost growth and inflation, and called on the ECB to launch a program of large scale asset purchases, including government bonds.

"Recent ECB action is welcome but further measures, including quantitative easing, are warranted," said Rintaro Tamaki, the OECD's acting chief economist.

Faced with similar problems, other European central banks also seem likely to maintain easy monetary policies in coming months. Sweden's Riksbank cut its benchmark interest rate in July, and although it left policy unchanged earlier this month, also indicated that rate won't be raised for about a year.

Poland's central bank has indicated it is likely to cut its benchmark interest rate, possibly as soon as its next meeting in October. The Czech National Bank has said it would extend its weak-koruna policy well into 2016 to tackle low inflation, while Hungary's central bank cut its key interest each month for two years through July, and now intends to keep borrowing costs low for a long time.

European version of QE pending?

ECB to dish out first round new ultra-long loans to boost lending

FRANKFURT - The European Central Bank will hand out the first round of its new four-year loans on Thursday, the flagship tool in a new stimulus package it hopes will stave off deflation and revive the ailing euro zone economy.

The new targeted funds, or TLTROs, will be tied to lending to the mostly smaller firms that are the 18-country euro zone's economic backbone.

Markets will be watching an announcement on the total amount of the loans allotted, due at around 4.15 a.m. ET, to gauge banks' appetite for the funds as they try to assess how effective the measure will be in getting banks to lend more to companies.

Banks can potentially borrow up to 400 billion euros at tenders this week and in December, at a slight premium to the ECB's regular funding operations, with opportunities to take additional loans running through to mid-2016.
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http://www.todayonline.com/business/ecb-...st-lending