The end of the myth of the strong Euro.
Since the start of the financial crisis in 2008, the largest central banks in the world to share an unprecedented increase in the money supply. The money printed out of thin air central banks buy up government bonds, allowing you to increase the indebtedness of many countries. Much of the money went also to commercial banks, central banks that resale junk assets for which there were no buyers, and that could lead these banks into bankruptcy.
the whole company of the European Central Bank conducted as a restrictive policy, what undoubtedly przyłożyły Germans who still remember what it ends unrestrained reprint currency. But it seems that for two months the situation begins to change, and the ECB intends to follow the lead of the Fed or the Bank of Japan.
Less than two months ago a man Goldman, Mario Draghi, President of the European Central Bank announced that to “encourage” banks to lend, will charge them a fee for keeping funds in the accounts at the ECB. This step was intended to force commercial banks to grant loans to stimulate the economy. In fact, it was about boosting inflation, which would reduce the real value of the debt of the euro zone.
During the last speech Draghi went even further. Significantly more. He said in fact that, despite enormous opposition in Germany in October, the ECB intends to start buying ABS’ów (Basked Asset Securities). According to various speculations, it is estimated that the reprint will be between 500 billion and 1 trillion euros. This is indirectly confirmed by the words of Draghi, who stated that he wants to balance the ECB returned to the levels of 2012.
Akytwa European Central Bank.
Source: Yardeni. com
Balance sheet of the ECB declined over the past two years, not because the central bank limited miraculously supply of money, but because the very limited commercial banks lending, which translates into a slowdown.
loan from the ECB for European financial institutions.
Source: yardeni.com
This is what currently intends to make the President of the ECB is not increased lending or supplying liquidity to the banking system, as is commonly believed.
The actions of the ECB have some hidden agendas. By buying ABS’ów means the situation in which the ECB creates new Euro, for which he buys from various commercial banks assets (bonds bankrupts, unpayable mortgages and other bad debts).
Commercial banks in the past three years focused a significant amount of the bonds of European countries. As a result of the huge demand bond prices rise, which decreased their profitability. Banks, except interest on bonds, have earned a lot to increase their prices.
Today, however, we came to the levels at which prices can not continue to grow and need help from the ECB. Ten-year German bonds are the most expensive 200 years, offering interest of less than 1%. The bonds of France, in turn, are the most expensive 250 years, paying only 1.29%. Bankrupt Spain can borrow up paying just 2.13% interest, which is less than thriving, functioning without debt Singapore.
Bond yields in Italy, Germany, France.
We have therefore peak of the bull market in bonds to European and there was no sudden puncture the bubble require an additional merchant. The only buyer on the bonds remains extremely overvalued ECB.
In a situation where we have a buyer with unlimited portfolio present bond holders get a clear signal. If the price of the bond starts to fall, the ECB enters into action and make the necessary purchases to calm the situation. Thanks to many countries indebted to the hilt, as Spain, Italy and Portugal will be able to continue to live on credit. No matter will be that rising debt to GDP, since the ECB will be guarding the interest on the loan is not too much strain on the budget. For a moment, such a policy can be effective.
It is a big supporter of buying assets was France who has a problem with the banking sector exceeding four times the country’s economy. French banks due to excessively risky transactions incurred significant losses that are hidden due to very loose accounting standards applicable in the banking system.
In a situation where one of the banks would be threatened with bankruptcy, the shares will be able to enter the ECB to buy toxic assets, temporarily improving the condition of the bank. In the long term, of course, will be held at taxpayer expense savings plucked from higher inflation. Worst is the fact that not allowing the bankruptcy risk of contracting the ECB gives green light to risky surgery. Finally, the central bank can always come to the rescue.
What action the ECB mean in practice?
1. Reduced risk cypryzacji savings , at least for now.
If threatened the bank will be able to get direct help from the ECB, similar to the American TARP’u in 2008, it will not need to worry private deposits, which in turn would kill the remnants of confidence in the banking system.
In the long term, however, such a policy helps to increase the scale of the problems which even the ECB will not be able to prevent.
2. Increased risk of rupture of the euro zone.
reprint currency by the central bank always translate into inflation, but not necessarily right away. Germans are very opposed to the destruction of the Euro. In a situation where the ECB he goes a little too far, a few countries, including Germany, Austria, Finland and Luxembourg may decide to abandon the Euro zone and the formation of a new currency bloc. For other members of the zone, this would mean an immediate increase in inflation and a huge increase in debt servicing costs.
3. The continuation of ZIRP (zero interest rate policy).
Over the short-term interest rates have control of the central bank. Long-term interest rates (10-year bonds) shapes the market, at least in theory. Given, however, the ECB’s role as “buyer of last resort”, the profitability of European bonds may remain at extremely low levels for another year or two. The potential for a further decline in large gone.
In my opinion, the main task of the current policy of the ECB is to call inflation, which would help reduce the debt-to-GDP ratio. However, the debt grows too quickly to be able to reduce its real value. What you can do is artificially lowered the cost of servicing the debt, until central banks remain the only buyers of domestic debt.
Summary.
ECB deciding to start buying assets showed that the maintenance of monetary stability is not important for the central bank. The most important is to rescue the banks and prevent to any country from the euro zone decided to abandon the common currency as a result of overwhelming debt.
Direct monetization of debt that laid, even 15 years ago it was a tool of monetary policy, reserved exclusively for third world countries. Meanwhile, out in the world we have to deal with the new standard. I wonder which country will pay the highest price?
Trader21
Source: Independent Financial Portal Independent Trader
http: // independenttrader.pl/267,koniec_mitu_silnego_euro.html
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