Rumour has it that there is a crisis at the European Central Bank (updated post ECB Press Conference)

The headline above is one that could have been used several times at the European Central Bank over the period of the Euro crisis. Yesterday was one where the situation was self-inflicted as various members of the Governing Council and their acolytes spent the day briefing against each other. It was as if they all decided that it was time to put Adele on their I-Pods and MP3 players.

Rumour has it (rumour)

Rumour has it (rumour)

There have been stories for a while now that the President of the ECB Mario Draghi does not get along with the head of the largest national central bank which is Jens Weidmann of the German Bundesbank. I am being polite with the does not get along bit! We have been told that the German Chancellor has been trying to act as a peacemaker. But Reuters has reported that Mario Draghi has also been flying solo with some of his statements.

his Sept. 4 comment during a question-and-answer session that the ECB aimed to expand its balance sheet “towards the dimensions it used to have at the beginning of 2012” at the peak of the euro zone crisis.

“We specifically agreed at the meeting… not to put any numbers on the table,” (said) one central banker. “Draghi’s reference to the balance sheet of 2012 irritated a lot of colleagues. So he has had to backtrack a bit … to compensate.”

According to Reuters a majority of the members of the Governing Council are unhappy about this. Furthermore it added this.

At least seven and possibly as many as 10 of the 24 council members are against U.S.-style quantitative easing – creating money to buy Euro zone government bonds – if inflation falls further below the ECB target of just below 2 percent, the sources said.

As you can see we are now moving into the realm of restrictions on future activity and activity which most market participants were expecting already. This reached its apex when there was even a rumour that Mario Draghi had threatened to resign. Such discussions will be happening at today’s Governing Council meeting but of course some members may already be singing along to a later part of Adele’s song.

Just ’cause I said it, it don’t mean that I meant it,
People say crazy things,
Just ’cause I said it, don’t mean that I meant it,
Just ’cause you heard it,

Currency Wars

The ECB’s contribution to these wars started with attempts to talk the value of the Euro down and have been followed by moves to expand its balance sheet or to be more precise so far slow the rate of contraction of it. Accordingly it will not have welcomed the fact that yesterday’s rumour mill saw it bounce against most currencies and pushing as high as 1.256 versus the US Dollar. This was awkward as it has been drifting lower against the US Dollar and indeed the UK Pound in a fashion of which the ECB would no doubt approve of.

This added to an issue which must be raising concerns at the ECB which is that it is far from the only player trying to push its currency lower. The main actor right now is the Bank of Japan which has meant that the Euro is nearly back to the January highs as it cruises into the 143’s. The travails of the situation in Russia have seen the Euro rise to a level where it buys some 55.5 Rubles and it is up more than 1% today alone. In the main trade weighted index Japan represents some 7.1% and surprisingly we have to move to the broad index to find Russia at 3.4%. Why that does not put it in the top twenty escapes me, if this were a music chart someone would be calling for a recount!

Meanwhile there is a shark in the water right now and it is the Swiss National Bank. It promises “unlimited intervention” at 1.20 versus the Euro for the Swiss Franc and we are at 1.2038 as I type this. I have tweeted this out and no-one appears interested which means that there is a good chance of a “surprise” here. Of course this will have to deal with the SNB and its operatives who no doubt are ready for action right now. If they recruited any old style FX traders they will now doubt be long of a can or two of Red Bull to perk themselves up.

Oh and if the SNB does find itself in action in the coming weeks that will only be added to if it has to keep 20% of its reserves in gold.

What is the state of the Euro area economy?

We have received a couple of updates today on the state of play. Firstly let us look at the business surveys.

The rate of economic expansion was little-changed from September’s ten-month low, with modest output growth registered at manufacturers and service providers alike

These numbers have been over optimistic in 2014 so far as actual GDP growth has gone 0.2% and then 0% whereas they for example predicted around 0.5% growth in the first quarter. Put like that then there is a possibility that they in fact now forecast a contraction especially if we add in this.

Job losses were reported for the first time since November 2013, while price pressures remained muted.

If we move to actual data as opposed to surveys we find little to cheer their either.

In September 2014 compared with August 2014, the seasonally adjusted volume of retail trade fell by 1.3% in the euro area.

In September 2014 compared with September 20134 the retail sales index increased by 0.6% in the euro area

So whilst there is a year on year increase it is sharply reduced from the 1.9% of August. The volumes are those of around a decade ago as we note that it has been lost.

Added to this the European Commission reduced its growth forecasts yesterday for the Euro area. What little credibility it retains was probably lost as one piece of rare good news was coming in from lower oil prices. But the situation remains weak at best for now.

More worries

I do not know how much this worries ECB Governing Council members but I can tell you that it would worry me if I was one. From Eurostat yesterday.

In 2013, 122.6 million people, or 24.5% of the population, in the EU were at risk of poverty or social exclusion. This
means that these people were in at least one of the following three conditions: at-risk-of-poverty after social
transfers (income poverty), severely materially deprived or living in households with very low work intensity.

These are European Union and not just Euro area members (for any CNBC presenters reading this Ireland is in the Euro area) but there is a clear message I think. If you want the polar opposites Bulgaria is at 48% and the Czech Republic is at 14.6%. There is food for thought here for the Bank of England as well as the UK reading is 24.8%.

What is the ECB actually doing?

Having depressed the interest-rate pedal as far as it can ( its words not mine) to -0.2% and also having tried to talk the currency down there is only the balance sheet left. Many have probably already forgotten the targeted longer-term refinancing operations (TLTROs) but the 82.6 billion Euros of the first one did not even offset the shrinking of the ECB balance sheet since they were first announced. So we advance onto the third go at some covered bond purchases and last week the pace did pick-up. The 4.78 billion Euros worth purchased meant that this was a week when the balance sheet actually expanded albeit modestly. Unless the ECB is really in disarray we will find out more about the plans for purchases of Asset Backed Securities tomorrow.

In a way the latest move by Apple was symbolic here. From the Financial Times.

The world’s most valuable company took advantage of lower borrowing costs in Europe to sell two tranches each of €1.4bn in non-benchmark maturities of eight-year and 12-year bonds, with yields of 1 per cent and 1.5 per cent respectively,

It would have saved on the paperwork to sell them directly to the ECB!

For clarity as newer readers are coming in I would just like to be clear that the covered bond purchases are a type of Quantitative Easing.


The situation that the ECB finds itself in is very unfair as Europe’s politicians have in effect delegated the vast majority of economic policy to it. This also poses a severe challenge to the concept of democracy as we so regularly see unelected technocrats lecturing elected politicians. But in terms of economics it leaves the Euro area as something of a one club golfer and it is clear that such a move is simply not cutting it. So perhaps the surprise is that discord has not arrived earlier. Also the discord may yet be magnified if future moves take place in months when the Bundesbank to pick a national central bank not entirely at random does not have a vote (May and October 2015). That really is a silly idea but sadly silly ideas are not only in plentiful supply these days but they often get implemented too.

Meanwhile the markets and media will be singing along to Britney Spears.

Gimme Gimme more
Gimme more
Gimme gimme more

The question now is will Mario be able to reply as shown below?

I just can’t control myself, more
They want more?
Well I’ll give them more (ow!)

Happy Bonfire night to you all. Where is a new Guy Fawkes when we need him?

Updated 2:40pm post the Press Conference

Firstly let me express my sympathies to the liver of the person who got the word “unanimous” in the Mario Draghi drinking game. It must be in pain right now! Indeed if inflation in the word unanimous could somehow be included in the consumer inflation definition the ECB would be a much happier place.

Indeed Mario Draghi was so full of protestations about how friendly things were at the ECB that I was reminded of this from Hamlet’s mother Gertrude.

The lady protests too much, methinks

Indeed the word unanimous goes into my financial lexicon for these times as we were told this.

It is fairly normal to argue about things

We got another hint of a planned one trillion Euro expansion of the ECB balance sheet when we were told this.

Draghi: March 2012. Boom. That’s the €1trn+ expansion, not the €500m one

Although later in an occurrence increasingly common for central bankers these days (think Janet Yellen) we were told this.

One trillion Euro’s should not be the reference number.

The markets have taken the hint and have pushed the Euro below 1.24 versus the US Dollar and the UK Pound has risen above 1.28 as the ECB latest Currency Wars salvo lands a blow.

Mind You

No actual plans were introduced. I guess these days such things are a mere detail.

Mind the gap

Mario Draghi was very keen to tell us that a ratings agency Fitch had written approvingly of his plans. What could go wrong?

Oh and apparently “it is a very big mistake” to remind the ECB about what it did in Ireland.

The Minutes

As the plan to publish ECB Minutes came up let me remind you of the words of the apocryphal civil servant Sir Humphrey Appleby.

Ah, Prime Minister… It is characteristic of all committee discussions and decisions that every member has a vivid recollection of them and that every member’s recollection of them differs violently from every other member’s recollection. Consequently we accept the convention that the official decisions are those and only those which have officially recorded in the minutes by the officials, from which it emerges with an elegant inevitability that any decision which has been officially reached will have been officially recorded in the minutes by the officials and any decision which is not recorded in the minutes has not been officially reached even if one or more members believe they can recollect it, so in this particular case if the decision had been officially reached it would have been officially recorded in the minutes by the officials. And it isn’t so it wasn’t.


12 thoughts on “Rumour has it that there is a crisis at the European Central Bank (updated post ECB Press Conference)

  1. Hello Shaun, last despatch from the Algarve – back home tomorrow- can you warm it up a bit!

    I noticed the bounce in the Euro with the announcement of discord at the ECB but no one has explained why? I would have expected the Euro to drop not rise. Can you imagine what would happen to the pound if there were similar news news from the B of E? Sometimes, no most times, I can’t make sense of forex traders faith in the Euro!

    I notice good Irish growth numbers but no detail. Just wonder if it is indigenous growth or foreign firms booking sales and profit via Ireland?

    The Euro economic forecasts are always ‘jam tomorrow’ and current years are always revised downwards. Unless there is some dramatic change then I see stagnation ,with a few minor ups and downs, as the norm for the foreseeable future.

    • Hi Pavlaki

      As to the bounce in the Euro on the “rumours” news I think it was because it made it look as though any more aggressive QE plans would be resisted and maybe blocked. However the move has now been retraced,at least against sterling.

      Looking at Ireland we are short of detail in the flash estimate but there is quite a wide gap between GDP and GNP growth.

      “Preliminary estimates for the second quarter of 2014 indicate that GDP increased by 1.5 per cent in volume terms on a seasonally adjusted basis compared with the first quarter of 2014 while GNP increased by 0.6 per cent over the same period.”

      Meanwhile it looks as though the rather chilly weather we have now will indeed warm up a bit for you return to the UK.

  2. Hi Shaun, to use a slightly obscure musical reference, all these carryings-on makes you wonder just what in the name of Graham Parker is going on at the ECB! Mario certainly doesn’t want the Euro to go any further along The Up Escalator, and if it does he will be Squeezing Out Sparks…

    I would love to be a multilingual fly on the wall of Mario’s office. I saw on Bloomberg one of his colleagues was complaining Mario spends all day staring at his three mobile phones and regularly dashing out of meetings to take urgent calls. He reminds me of a swan; serene on top, but frantically peddling underneath. Whatever, it is very clear there are deep divisions in policy and something of a power play going on behind the scenes. Can you clarify this point about certain representatives not having a vote between May and October 2015? How does the voting structure work? Are you suggesting he might try to do something when certain members are unable to do anything about it? That really would be a pretty cheap shot. Surely he’s better than that?


    • Hi Andy

      The ECB Governing Council is certainly a bubbling pot right now. I expect protestations of unity at tomorrow’s press conference but am waiting for what they actually do! As to the voting changes they are caused by this.

      “To ensure that the ECB will be able to continue to take decisions in an efficient manner, the Council of the European Union decided in 2003 to introduce a voting rotation system for the Governing Council of the ECB when the number of national central bank Governors in the Governing Council exceeds 18. That will be the case when Lithuania adopts the euro on 1 January 2015.”

      As they will then be 19 you might think that they might take it turns to miss out Oh no that would be far too simple!

      “The Governing Council of the European Central Bank (ECB) decided today, by means of a draw, which national central bank Governors will be the first to relinquish their voting rights when the rotation system enters into force on 1 January 2015. As a result of the draw, the Spanish central bank Governor in group 1 and the Estonian, Irish and Greek central bank Governors in group 2 will relinquish their voting rights in January 2015. On 1 February 2015 in group 1 the Spanish central bank Governor will regain his voting right and the French central bank Governor will relinquish his. In group 2, the Estonian central bank Governor will regain his voting right, while the Cypriot central bank Governor will relinquish hers. The draw took place in the presence of all members of the Governing Council, with the Lithuanian central bank Governor as observer.”

      I was just referring to when Germany misses out in a mischievous fashion as can you imagine if policy loosening happened when it did not have a vote?

      • I had absolutely no idea!! Hilarious! What sane economic powerhouse would give up central bank voting rights so an island like Malta could have say instead? Beyond belief!

  3. hello shaun

    as you say – who voted for this bozo ? no citizen did

    Telling the Germans what to do ! pfft !!! the man needs sacking and trotters pulled from the trough , no doubt he’ll squeal a lot , parasites like him often do!

    Swan ? more like a duck with its head down and it’s ar… sorry bottom , on view …..

    “…terms of economics it leaves the Euro area as something of a one club golfer ..”

    more like the guy left at the 19th hole to drown his sorrows , Shaun , eh ?

    but here ” ..122.6 million people, or 24.5% of the population, in the EU were at risk of poverty or social exclusion. ..”

    Aren’t these the ones living in Greece, Cyprus , Spain and Portugal ? Does the rest of the (dis) United States of Euroland care ? apparently not …..


    PS: yes it seems theres a glut of popcorn , or is it like Oil in that the “glut” is because people could not afford the price and it has/had to drop ? interesting times for 2014 me thinks

      • Hi Forbin

        I do not think that the top five were that easy to guess.

        “In 2013, more than a third of the population was at risk of poverty or social exclusion in five Member States: Bulgaria (48.0%), Romania (40.4%), Greece (35.7%), Latvia (35.1%) and Hungary (33.5%).”

        Portugal was a 27.4% and hadn’t changed as much as you might think from the 26% of 2008. Cyprus was 27.8%.

        In a reversal of current economic performance France at 18.1% does a lot better than the UK.

  4. in other news the supa doopa low oil price slugs Scottish North Sea development…

    “Oil & Gas UK said, before the fall accelerated, that an $80 price would mean a third of investment being put on ice, and the acceleration of closure plans for expensive, mature fields. That warning has now become all the more urgent”

    Seems that not only with LTO in USA being hit along with Russia , we get Alex ‘s worst nightmare…

    I wonder what it does for Frackiing in the UK ? Should we ever get past the NIMBY;s ofcourse – might not be worth drilling a test well…..


    • Hi Forbin

      The oil price is an important issue for Scotland and would have figured even more in the independence debate if it has been at these levels! The Office for Budget Responsibility produced in July forecasts from the major agencies who in general thought it would be around US $100 per barrel going forwards. Apart from the OECD who had it rising at US $5 per year.

      At the time the OBR took a lot of stick from nationalists who said that its forecasts were far too low. The only estimate which was near to the mark was the low estimate of the EIA.

      What is shows is how quickly things can change doesn’t it?

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s