ECB Four-Flush

We already know that the ECB is prepared to use the so-called OMT mechanism to buy on secondary markets government bonds in trouble. The only thing we know is that the ECB is prepared, but specific details have never been revealed to the public. But the rhetoric was so strong that markets calmed down for now. Lower interest rates were introduced two weeks ago. This week some anonymous sources from the ECB have revealed that the ECB is considering introducing negative rates for commercial lenders who park excess cash at the ECB to minus 0.1 % from zero. It would be the first time the central bank has adjusted interest rates by less than a quarter of a percentage point. The truth is that there is no consensus on this policy yet, the sources said. But I still think that it is more rhetoric rather than a real policy decision. The ECB still has another option to intervene on markets, like another round of LTRO, similar to QE policy that we are witnessing in the US, or direct forex interventions, to which the Czech central bank decided two weeks ago. So, we will see. But European leaders must be a little bit desperate, because the news comes with another measure which, simply put, should decrease extensive public debts by creating new ones. Yes, you are reading correctly. The European Union is allegedly considering whether it could encourage countries to make long-term economic changes by offering them loans at below-market rates. Loans would be more suitable for smaller countries which have more difficult access to market sources. The only positive news is that loans for reforms would not be available to countries running excessive macroeconomic imbalances or under bailout.

Bundesbank warned in the report last week that southern European countries, and their banking sectors, are still within the same vicious circle. According to Bundesbank, Italian banks have increased their holdings of Italian public debt from €240bn to €415bn since November 2011 (+ 73pc). Spanish banks have raised their holdings of Spanish debt from €166bn to €299 (+81pc), Irish banks are up 60pc and Portuguese banks are up 51pc. And one consequence, apart from OMT mechanism, can only be the question why yields on sovereign debts are still on sustainable levels. But this state is definitely not a sing of a healthy banking system.  It is still working, but not for long.

Definitely, the best example of the “effectiveness of the EU” is moving parliamentary sessions from Brussels to Strasbourg. It is such a good idea that also Members of the European Parliament are tired of the monthly move from Brussels to Strasbourg for a week of plenary sessions. France, on the other hand, vetoes any change. After MPs tried to merge two plenary sessions into one week last year to cut down on traveling time, France took the case to the Court of Justice of the European Union. What do you think happened? They won. So, now MPs are trying to change their strategy. They proposed that in the future MPs should be allowed to choose the seat of their institution themselves – with no mention of Strasbourg or Brussels.  We will see if they succeed.

As we always emphasize, it is not only about public debt. The extension of the debt of the whole western society is enormous. And public debt is only one part of it. It is very likely that much of private debt, as well as the public one, is not effective.  The situation is quite serious in the UK. Total personal debt in the UK has reached a record high – 1.4 trillion pounds. It means that households owed 94 % of UK’s economic output last year, and an average household debt is now about 54,000 pounds. It is almost twice the level of that a decade ago. What is also more dangerous is that indebted households in the poorest 10 % of the population have average debts of more than four times their annual income. So, it is not very surprising that more than 130K people declare personal bankruptcy each year.

Globally, 86% of companies do not plan to hire employees in 2014. It is the output from a global survey among 11,000 companies around the world. Only 33 % of them are optimistic about the economic future for the next year. Among the most optimistic ones are US companies, because 41 % of them presuppose better economic conditions in 2014, and only 19 % of them stated that they do not plan to hire anybody in 2014.

As we have mentioned many times, China is preparing to enter the world currencies sphere. One piece of evidence is its vast activities in currency swaps with many countries, or the alleged increase in their official gold holdings. Another step within this policy was last week’s clarification of what the People’s Bank of China is going to do. There are two interesting points. Firstly, PBOC said the country does not benefit any more from the increases in its foreign-currency holdings. It means that the bank will very probably rein in dollar purchases as well. Secondly, China’s central bank will “basically” end normal intervention in the currency market, and will increase the role of market exchange rates and broaden yuan’s daily trading limit. So, do we see the step by step rise of a new reserve currency? From my point of view, yes.

FED´s minutes revealed a dispute among members of the monetary committee whether they are prepared to tapper their easy-money policy within a few coming months. I still do not believe in that, because it is not only about the unemployment rate, which is – if not manipulated – at least managed according to some allegations that the last unemployment report before election in 2012 was manipulated. It is also about the structure of the unemployment which is very bad. But who knows. On the other hand, Bernanke said last week that if FED tappers, the policy of low interest rates remains for a longer period of time. It is clear evidence that nothing has been changed; and one trillion of US dollars from FED do not really help the economy. Otherwise, we would see at least some speculation about higher interest rates, which also Keynesians consider a healthy state of economy.

Matus Posvanc