Central Banks Stepping Up Interventions

by: Acting Man

In recent days, several central banks have made news with new intervention measures. Among them was the Swiss National Bank, which tried to stem the relentless rise of the Swiss franc by cutting rates 'as close to zero as possible,' buying foreign currencies and vastly increasing Swiss franc liquidity in the system. It worked for exactly one day.

The Bank of Japan has been luckier - so far anyway. After the ministry of finance clubbed the yen, it pulled forward its scheduled meeting and announced an expansion of its total asset purchase program. However, this was only a mild increase in the program from 40 trillion to 50 trillion yen ($630 billion) and analysts declared themselves doubtful that it would make much of a difference. We thought that Japan might wait for a trend change before intervening, but the action was possibly triggered by the SNB's intervention one day earlier.

We would however point out that both the CHF and the yen currently sport an enormous bullish consensus. In fact, Swiss franc bulls recently clocked in at 97% – only slightly below the 98% bulls that were seen in silver just before it crashed in May.

The vast bullish consensus in the premier 'safe haven' currencies is the one piece of evidence that most strongly argues in favor of of a bounce developing in risk assets soon. Of course, when market moves become as relentless as they have recently been, a single trading day or two can make a big difference, so one should perhaps not expect too much from such data points.

(Click charts to enlarge)

The Swiss franc, a.k.a. the energizer bunny among currencies – it is now very overbought and the bullish consensus is even further off the charts than the CHF itself. Although the SNB's initial attempt to stop its rise failed, it may soon be helped by a natural reaction.

The yen has been blitzed by joint action from the BoJ and Japan's finance ministry – alas, the hefty dip to the 50-dma saw buyers emerge once again.

Last up to bat was the ECB – which has been fingered as one of the 'triggers' of Thursday's market meltdown. Markets were likely disappointed on several grounds. First of all, although the ECB kept its benchmark rates unchanged and altered its official statement language to a more dovish, or rather more uncertain sounding wording (as numerous Kremlinologists noted), Jean-Claude Trichet let it be known during the press conference that he would probably prefer if there were clear sailing for more rate hikes. He once again stressed the 'risks to price stability' and noted that the ECB regards its current policy as still extraordinarily accommodating. Clearly there is the wish to 'normalize' interest rates, even though the euro-land economies are weakening considerably again of late. So he sure didn't exactly sound like someone who's going to implement 'ZIRP' just because there's a crisis.

We should note here that money supply growth has actually turned deeply negative in the 'PIIGS' nations, presumably a side effect of deposit money fleeing from their banks to Germany.

Moreover, there were probably widespread expectations that the ECB would announce a more forceful interventionist plan than it actually did end up announcing. Yes, intervention in government bond markets is once again on – alas, so far only in the bonds of Ireland and Portugal, the 'already rescued' countries. These amounts will be fully sterilized, so there is definitely no 'QE' – not yet, anyway. No attempt to buy Italian or Spanish bonds was contemplated – which some observers took as a hint toward Italy and Spain to 'do more' to rein in their fiscal train wrecks. Guilio Tremonti reportedly complained in the meantime about the fact that the central bank wouldn't consider buying Italian bonds, which he apparently considers as akin to a vote of no confidence.

Most significantly however, there were several dissenters in the governing council who voted against a new bond buying program, among them reportedly BuBa chief Jens Weidman. A confrontation with the BuBa would certainly be regarded as bad news.

As Bloomberg reports:

“Bundesbank President Jens Weidmann opposed the European Central Bank’s decision to resume bond purchases today, an official familiar with the discussions said.

ECB President Jean-Claude Trichet told a press briefing in Frankfurt that while the decision was not unanimous, it was taken with an “overwhelming majority.” The official, speaking on condition of anonymity because the ECB policy meeting is not public, said Weidmann was not the only Governing Council member against the move. A Bundesbank spokeswoman declined to comment.

Germany’s Bundesbank, under then president Axel Weber, opposed the ECB’s initial decision to start buying the bonds of distressed euro-area governments in May last year, opening a rift with Trichet and other ECB policy makers. The ECB, which ceased purchases 18 weeks ago, re-entered markets today after Italian and Spanish yields soared to euro-era records.

Weidmann interrupted his summer holiday to attend today’s council meeting, the Bundesbank spokeswoman said. When asked during the press conference who opposed reactivation of the purchase program, Trichet declined to comment.

“We have a rule, according to which we speak with one voice when the decision is taken,” Trichet said later in an interview with Bloomberg Television. Central banks around the world take decisions based on majority rather than unanimity, he said.”

It is true that central banks generally make decisions on a majority basis, but bit is not irrelevant whether an ECB decision is opposed by the BuBa president or, say, the representative from Cyprus. We have previously reported on the growing imbalances within the euro-system's central bank liquidity operations. As depositors flee from the commercial banks of the PIIGS and park their money in Germany, the Bundesbank's claims against the other national central banks continue to grow commensurately. The funding of the commercial banks in the nations concerned is handled by the ECB – again through the national central banks that form part of the system (inter alia the Bank of Ireland famously has an 'IOU' from Ireland's moribund banks booked under 'other assets' on its balance sheet to the tune of € 80 billion). This 'backdoor' financing helps mask the capital flight that is taking place, but it also means that the PIIGS central banks owe ever more money to the BuBa. Since there is actually no mechanism for settling such payment imbalances within the euro area's central bank system, these amounts just keep growing. By contrast, the Federal Reserve's district banks do have an established settlement system for such intra-system claims. As we have noted before, it doesn't matter from the point of view of providing liquidity to Germany's banks – since they need less and less ECB funding the more deposit money they gather up. It is not quite clear how these imbalances would be dealt with in case of a break-up or partial break-up of the euro area. It seems likely that the BuBa is not entirely happy with the process. At the time the euro-system was established no-one really thought it would ever become necessary to devise a settlement procedure – since it was held that there would only ever be very small amounts involved that would simply flow back and forth according to short term requirements. The BuBa has in the meantime noted that 'the ECB guarantees these correspondent accounts' and that Germany is therefore not on the hook for the entire amount by itself. It is clear though that these imbalances (the so-called 'TARGET-2' balances) are a direct result of the crisis and it is not quite clear what would happen if push really came to shove.

Creditors and debtors within the euro-system of central banks.

Meanwhile, the UK's financial regulator FSA has asked UK banks that they disclose their 'exposures to Belgium', in another sign that the euro area debt crisis is spreading deeper into the 'core'. As the WSJ reports:

“British regulators are pushing U.K. banks to publicly reveal more information about their exposures to troubled European countries such as Belgium, a sign of how concerns about the euro zone are spreading beyond southern Europe.

Lloyds Banking Group PLC (NYSE:LYG) on Thursday disclosed its holdings of debt tied to the Belgian government and local financial institutions as part of the bank's second-quarter results. Executives said they made the disclosure at the behest of the Financial Services Authority.

"It was the FSA's suggestion that Belgium be added to the list," said Tim Tookey, Lloyds's chief financial officer. "That is the sole reason" the bank started making the disclosures.

Sarah Bailey, an FSA spokeswoman, said the regulatory agency has been talking with Lloyds and other British banks about ways for them to improve their disclosures about their holdings of debt tied to cash-strapped countries—a major source of angst among many investors and regulators.


“Lloyds's holdings of Belgian debt are relatively small. The bank said Thursday that it was holding £87 million ($142.9 million) of sovereign debt and £318 million of various debt issued by Belgian banks as of June 30. That compares to about £1.9 billion of total Italian exposure and £2.7 billion of Spanish exposure. Barclays PLC (OTC:BCBAY) and HSBC Holdings PLC (NYSE:HSBC), which reported their second-quarter results earlier this week, didn't include data about their Belgian exposures.

"We don't regard it as a country of stress," said Barclays spokesman Giles Croot. "We just chose not to" report the information. As part of the recent European Union "stress tests," Barclays disclosed that it was sitting on about €3.4 billion ($4.87 billion) of Belgian sovereign debt as of Dec. 31.

An HSBC spokesman had no immediate comment. HSBC reported in the stress tests that it had about €1.5 billion of Belgian sovereign debt.”

It appears from this that Lloyds has fairly little reason to be worried about Belgium specifically, while those who 'don't regard Belgium as a country of stress' have somewhat more reason to be worried. Anyway, the FSA's request is certainly symptomatic of the growing apprehension more generally.

Euro Area (and some other) Charts

Below are euro area CDS spreads and bond yields as of Thursday's close. As can be seen, the recent trends have continued unabated so far, in spite of a brief intraday 'relief bounce' when the ECB's latest interventions became known. This bounce lasted for about half an hour, so clearly the half-life of these interventions is growing shorter and shorter. This is beside the fact that the previous round of interventions has not kept the targeted bonds from collapsing into the nether regions.

Prices in basis points, color coded.

5 year CDS on Portugal, Italy, Greece and Spain – Spain and Italy at fresh highs again. CDS on Italy's debt are approaching the 400 basis point mark now.

5 year CDS on Ireland, France, Belgium and Japan – we'd worry about Belgium too – and France, as it were.

5 year CDS on Bulgaria, Croatia, Hungary and Austria – Hungary playing catch-up with a big bounce (Hungary is not a m euro area member, but has been bailed out by the ECB in the 2008 crisis).

5 year CDS on Latvia, Lithuania, Slovenia and Slovakia – yet another jump.

5 year CDS on Romania, Poland, Slovakia and Estonia – ditto.

5 year CDS on Saudi Arabia, Bahrain, Morocco and Turkey – Turkey is now joining the 'parabola club.'

10 year government bond yields of Ireland, Greece, Portugal and Spain – Irish bonds have actually profited a tiny bit from the ECB's buying.

10 year government bond yields of Italy and Austria, UK gilts and the Greek 2 year note. Gilt yields sink further, Italy's keep going higher.

Lastly,. this is a chart of biotech firm Dendreon (NASDAQ:DNDN). Thursday evidently wasn't an especially auspicious day for reporting disappointing earnings and guidance. This chart should serve as a small consolation for anyone who got caught long in the sell-off. You could have held this one!