Today the ECB will once again push new boundaries in the provision of market liquidity by offering loan of three years (with option to repay after one year). The market is expecting nearly EUR 300bln to be taken up, in return for suitable collateral form the participating banks.
It’s been pointed out before that this will aid the liquidity crisis, but not the solvency crisis that Europe is currently facing. It was certainly the case when the ECB started offering substantial long-term liquidity in ’09, there was something of an ECB carry trade going on, with banks borrowing cheap funds and investing elsewhere. Video:
Of course, back then, there were plenty of under-valued assets around after the impact of the late ’08 credit crisis. This time around, it is less so the case and many will argue against putting eurozone peripheral debt into this category. Banks have huge re-financing needs over this 3yr period, so the hope is that the money is used to improve balance sheets via more prudent methods.
Guest post by FxPro
Commentary
British isolation from Europe. One of the surprise elements of the EU Summit a little over a week ago was that European leaders rushed through an agreement to contribute funds to the IMF. Although this proposal had been mooted in the run-up to the Summit, it was widely felt that much more work needed to be done. Unclear at that stage was exactly who was going to be coughing up what for this EUR 200bln IMF contribution. Yesterday’s meeting of European officials brought some clarity, but it still disappointed. Instead of EUR 200bln, only EUR 150bn will be sent to the IMF. The Bundesbank has supported the proposal, but with the strict proviso that the funds not be specifically earmarked for Europe. France has committed EUR 31.4bln, Spain EUR 14.9bln, and Italy EUR 23.5bln. The UK has not committed to contributing just yet, promising to make an announcement early next year. Only four of the ten euro-out countries agreed to contribute: the Czech Republic, Denmark, Poland and Sweden. As with so many aspects of Europe’s response to this crisis, this IMF proposal looks like yet another fraying at the edges.
No respite for the Aussie consumer. Evident all through this year has been a much more circumspect consumer down under. This is not remotely surprising – the international backdrop has become much more uncertain, especially in Europe, and now in Asia as well, and the unemployment rate has been edging higher. However, it is the historically over-leveraged balance sheet of the household sector and the declining value of financial assets held that is really weighing like an albatross on spending behaviour. It turns out that household liabilities relative to GDP in Australia are higher than in both the US and the UK. Relative to assets, household liabilities are up near 25%, almost double where they were twenty years ago. House prices are very expensive relative to both income and rents and, as such, are well above fair value. So it is little wonder that consumers have been saving a lot more out of current income, such that the saving ratio is now above 10%. With both overseas and domestic demand under threat, the Aussie economy is likely to hobble along again in 2012. As a result, we can expect further rate cuts from the RBA which has already lowered the cash rate twice since the start of November. This is not a great scenario for the currency, which has been one of the star performers since the global financial crisis of 2008.
Justifiable American optimism. As suggested by Fed Governor Kocherlakota yesterday, there is more to like about the nature of the American economy these days. Indeed, Kocherlakota claimed that growth next year could reach a punchy 3%. Based on recent evidence, this cannot be ruled out, notwithstanding the economic car-crash in Europe and the marked slowing in Asia. The US consumer is spending, albeit cautiously, business investment is relatively healthy, and jobs’ growth has improved. There is still a very long way to go however; for instance, the level of employment in the United States is still 7m below the peak prior to the GFC. Kocherlakota for one clearly does not favour any more QE at this stage as he worries that the inflation trade-off may be too great. Still, if he is right on US growth next year, then it will certainly be something to celebrate. There is no better time for the world’s largest economy to deliver on growth.
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