How does the ECB respond to yesterdays Black Swan event?

Yesterday I used a Lord of the Rings analogy to help describe the state of play of the Swiss Franc and in particular the phrase “And so it begins” used by Theoden King. Today my intention is to look at what in such terms one would call the tower of Isenguard where Saruman resides as my view of the new shiny Frankfurt Towers of the European Central Bank. No doubt it was burning the midnight oil last night as it tries to figure out what to do on the 22nd of January when it makes its next set of policy announcements. Also there were some developments last night which pose a question about the banking system in Greece into which somewhere around 30 billion Euros has been poured.

Glass Half-Full

Let us open with a positive for the ECB and that is the way that the Euro plunged against the Swiss Franc. The ECB website has a price of 1.028 for the exchange rate yesterday which is very different to the 1.2010 of the day before. As a chart it is amusing to see a virtually straight line downwards replacing a flat level one as we see a definition of what I was taught is a serially uncorrelated error term which in modern language is called a Black Swan event.

If we look for an overall impact the Euro depreciated by 1.6% yesterday as its effective exchange rate fell to 95.76. This was not entirely a Swiss Franc issue as for example the UK Pound pushed above 1.30 versus the Euro and in fact is edging towards 1.31 as I type this. It is a while since we have seen such a level for it.

If we look wider then there will be an economic boost from falling prices for oil and other resources. Whilst the price of oil has rebounded a little this week at US $49 for a barrel of Brent Crude Oil it is down some 54% on a year ago. I expect this to provide a boost from late spring/summer.

Bond Markets

Lastly there is the issue of bond yields which apparently can plummet as well as fall! The ten-year yield of Germany is now at a record low of 0.39% so congratulations to anyone who has been holding bunds as these are extraordinary returns for a bond market. We are also seeing negative yields for bonds as for example even the recently downgraded France has a negative two year bond yield -meaning you pay to own it- and Germany even has one of -0.05% at the five-year maturity. I think we should take a moment to consider this as it implies a strong safe haven currency just as it is weakening. Also there is the issue that the Swiss National Bank had been parking much of the Euros it purchased into such bonds as we wonder if it drove prices higher and yields lower. If so we may see a weakening over time.

On that subject we may be nearing something which I have been mulling in recent times. Let me pose it as a question. Will a benchmark ten-year bond yield go negative? Well the Swiss benchmark is very near as it trades (h/t @ReutersJamie ) at 0.04%. With the stock market down another 6% today anyone who had switched out of equities into bonds in Switzerland can probably be spotted doing a tap dance right now.

An awkward issue

This is a rod that the ECB has to a large extent made for its own back. Not only has it consistently over-estimated inflation in the Euro area but it has also keep repeating the same mantra as illustrated by this from the October 2014 press conference.

the firm anchoring of medium to long-term inflation expectations.

If you got that phrase in a bingo style drinking game you would be tipsy every month!So not only have their forecasts been wrong-footed but their attempt to further calm matters has backfired too. After all inflationary expectations have plummeted since the oil price fall began and in truth they never really backed the claims of the ECB.

Negative inflation to match negative interest-rates

This morning has seen the news that must have been dreaded at ECB towers. From Eurostat.

Euro area annual inflation was -0.2% in December 20142
, down from 0.3% in November. This was the lowest rate
recorded since September 2009.

In December 2014, negative annual rates were observed in sixteen Member States. The lowest annual rates were
registered in Greece (-2.5%), Bulgaria (-2.0%), Spain (-1.1%) and Cyprus (-1.0%).

By member states they mean European Union ones and I have just made a quick count of Euro area ones which comes to 12 in negative territory. At this point then the words of Paul Simon being sung by Art Garfunkel may have come over the loudspeakers.

Hello darkness, my old friend,
I’ve come to talk with you again,
Because a vision softly creeping,
Left its seeds while I was sleeping,
And the vision that was planted in my brain
Still remains
Within the sound of silence.

If we look into the detail of the numbers then I doubt you will be surprised to read what was the main cause and driver of this.

The biggest downward impacts on euro area annual inflation came from fuels for transport (-0.53 percentage
points), heating oil (-0.17 pp) and telecommunications (-0.08 pp),


Thus you can see that the ECB has as Oliver Hardy put it done this.

Well , here’s another nice mess you’ve gotten me into!



I like to be careful about this word as it is bandied about much too readily but we can see that it has applied in Greece and at the moment both Italy and France seem to be on the edge of it. By deflation I mean both falling aggregate demand and falling prices. So there is a risk of a downwards spiral which is different to the state of play in Spain where so far at least falling prices have been combined with a growing economy.


Just when the ECB may have thought that it had dealt with this issue then the perennial issue that is the Greek banking sector has returned to the news overnight. From Protothemanews.

Two systemic Greek banks, namely Alpha Bank and Eurobank, have already resorted to Emergency Liquidity Assistance (ELA) mechanism in order to boost their liquidity. The two banks submitted their requests for funding to the Bank of Greece on Thursday and, according to information, the remaining Greek banks will do the same in the next few days.


We await more news on this issue but more and more places are reporting that Alpha Bank and Eurobank have done this with their share prices down 7% and 9% respectively today. Er didn’t they pass the Euro area banking stress tests only a month or two ago?

The relationship between the ECB and the Greek banks was described by Rihanna  a while back.

Now that it’s raining more than ever
Know that we’ll still have each other
You can stand under my umbrella
You can stand under my umbrella

What about expanding the balance sheet?

Today’s news does not help in this regard.

Accordingly, on 21 January 2015 EUR 9,650.00 million will be repaid in the tender 20110149 by 7 counterparties and EUR 4,214.00 million in the tender 20120034 by 13 counterparties.


As to the expansion efforts they totalled a bit less than 2 billion Euros last week.


In the central banking war that has now broken out the ECB finds itself in a right pickle. Some of this is an internal Euro area issue in the way that the political class has abandoned its role in economic policy and left it to an unelected central bank. On those grounds I have sympathy for it as the job is simply impossible. However in its treatment of inflation it is in quite a mess. After all in itself what is so bad about 0% inflation? Workers and consumers would certainly prefer it to it being above target. But you see this is not in the interests of the central banking mafia who have done their best to brainwash people so they can impose this.

The primary objective of the ECB’s monetary policy is to maintain price stability. The ECB aims at inflation rates of below, but close to, 2% over the medium term.


Price stability is not provided by a 2% inflation rate and lies have a habit of haunting you which they are doing right now to the ECB and in the Euro area. Ironically some of its policies are working as for example the value of the Euro is falling and the falls in commodity and oil prices will help. But as I pointed out on Morning Money on Share Radio earlier the ECB may well have endgamed itself. After all it has called -0.2% for interest-rates a lower bound which would not go well with a further cut would it?

12:15pm update on France

According to Les Echoes the abandonment of the Swiss Franc cap puts many French municipalities in something of a pickle.

For local authorities, it is a new cold shower. The soaring Swiss franc puts a little more at risk the finances of thousand municipalities, departments and regions have subscribed toxic loans. “More than half of them have loans indexed to parity with the Swiss franc. This is very bad news and many elected officials are very concerned “regrets Christophe Greffet, the president of the association local actors against toxic loans (APCET). Itself is concerned in his department, Ain, which was a loan of € 9.8 million which rates increase from 8.5% to over 30% simply because of soaring over the Swiss franc. An additional cost of 2.5 million.


Perhaps someone might like to explain why they were borrowing in Swiss Francs in the first place!



15 thoughts on “How does the ECB respond to yesterdays Black Swan event?

  1. Every time I think of poor Mario and his increasingly desperate efforts to build a living monster out of various incompatible human components, I’m reminded of Bobby Pickett and the Crypt Kickers…

    I was working in the lab late one night
    When my eyes beheld an eerie sight
    For my monster from his slab began to rise
    And suddenly to my surprise

    He did the mash
    He did the monster mash
    The monster mash
    It was a graveyard smash

    From my laboratory in the castle east
    To the master bedroom where the vampires feast
    The ghouls all came from their humble abodes
    To get a jolt from my electrodes

    They did the mash
    They did the monster mash
    The monster mash…

    • Hi Andy

      I do remember that song which was from the early to mid 70s wasn’t it? I have to say that the lyrics below do fit the ECB quite well!

      “From my laboratory in the castle east
      To the master bedroom where the vampires feast
      The ghouls all came from their humble abodes
      To get a jolt from my electrodes”

  2. Shaun,illuminating as ever.

    I think the ramifications of this move will be playing through for a very long time to come.Some FX companies have gone under already.I suspect many more people will be disastrously on the wrong side of this move.

    Do you think it now ties the hands of the ECB viz Jan 22.Given the euro has depreciated,doesn’t this obviate the need for QE?Especially along a falling oil price?

    • Hi Dutch

      The Euro has indeed depreciated fairly quickly as 2014 has moved into 2015 although for places like Greece,Italy and France it needs to fall more I think. As to ECB QE well for all the hype of a scoop by the FT last night I think that it is being forced into it. The catch? Well look at the bond yields already! With the French ten-year yield already haven fallen to 0.64% what extra can QE provide? Also if there are economic gains from this they are already in the post.

  3. Great column, Shaun, even moreso as events lend themselves to drama. There’s a good chance (imv) that Draghi’s QE is like Carney’s interest rate rise; all talk and no action.
    Germany doesn’t want it, and Germany usually gets his way.

    • Talking of other countries, how long until the markets test Denmark’s resolve to maintain a euro peg? There must be some worried Danes…

  4. Great column, Shaun, as usual.
    I suspect the conclusion that the euro area had gone into deflation would hold up even if an owner-occupied housing (OOH) series based on the net acquisitions (NA) approach were included in the Monetary Union Index of Consumer Prices. The most recently published house price index data on the Eurostat website shows an annual inflation rate of -0.4% for the second quarter (why is there such a long publication lag). Unfortunately, only two euro area countries have published quarterly OOH series and neither has published Household Expenditure Price Index (HEPI) aggregates. (I believe this is what Eurostat wishes to call its HICP series augmented by an OOH component. This initialism seems ill-advised, as it can easily be confused with the well-established US Higher Education Price Index; and StatCan has also used calculated a Higher Education Price Index from time to time.) The annual growth in OOH prices for Finland for 2014Q3 was 1.2%, the same as its annual inflation rate for August, so there is no reason to think its HEPI inflation rate for December would diverge greatly from its HICP inflation rate. Latvia is quite a different story, since the annual growth in OOH prices for 2014Q3 was 9.5%, as opposed to an annual HICP inflation rate for August of 0.8%. Its HEPI inflation rate for December would almost assuredly be substantially higher than its HICP inflation rate, which was just 0.3%.
    James Wells of the ONS kindly disabused me of my illusion that all EEA countries would soon be publishing both quarterly OOH and quarterly HEPI estimates. Although all these countries are obliged to provide Eurostat with quarterly OOH estimates, they aren’t obliged to publish anything. In that sense, the people of Britain are lucky that the ONS, unlike most other European national statistical institutes has chosen to publish its quarterly estimates. Eurostat for its part, is not obliged to publish any estimates at all under existing regulations but it must present a report by 2018 ruling on whether an HEPI series is to be calculated.
    This lack of transparency is regrettable. Eurostat should issue a new regulation requiring EEA countries to provide them with quarterly HEPI estimates as well as OOH estimates, and it should publish both series on a quarterly basis. Surely this would be the fairest way of treating both the advocates and the critics of the net acquisitions approach to OOH.

    • Hi Andrew

      This is quite a mess isn’t it? The irony is that the UK establishment which has set its face against any realistic asset price inflation measure has in fact ended up publishing one! Let me credit the UK Office for National Statistics for operating in a fair and honest manner here.

      For those who have not seen the UK numbers then the estimate of UK House price inflation was 5.02% at the end of the 3rd quarter of 2014 which became 4.07% once other costs (which are recorded as falling) are added to it. Only four times the other useless method which soon to be Lord Paul Johnson recommended…..

  5. “By deflation I mean both falling aggregate demand and falling prices. So there is a risk of a downwards spiral which is different to the state of play in Spain where so far at least falling prices have been combined with a growing economy.” But surely for real deflation the inflation curve must also fall to the algebraic origin and become negative?

    • Hi Drf

      Contrary to the media spin that there is only one type of deflation I think that there are different types or steps. For me it builds up from the beginning which is a fall in aggregate demand in an economy. Should this be sustained then it is more worrying if prices also show signs of not only falling but a sustained fall. The final deflationary nail in the coffin would also be falling wages.

      Of course the mixture can be variable and with lesser or higher degrees of toxicity. But we go deflation,DEFLATION and then DEFLATION in bold type.

      • It seems to me that you are now muddling disinflation and deflation, which is exactly what the MSM do. Precision I feel is necessary in these things?

  6. Let’s ask who benefits from the ECB’s stubborn refusal to consider that their EURO project is failing ?

    In Germany, a small fraction of a percent, the industrialist elite benefit from a weaker currency. But the vast majority would benefit from a stronger currency which would reduce their food and energy bills.

    The ECB employees would lose and some bankers would face writedowns from eurobonds being redenominated in local currency and/or defaults.

    In the short term, a Greek redenomination would undershoot real value, causing inflation and pain -> but the Troika’s plan (stay in the euro, practise austerity and pay back what the kleptocrat Greek leaders stole) has already savaged Greek living standards with zero delivery on promised recovery. Default, devaluation and austere balanced budgets has a track record of recovery. (As most recently demonstrated by Iceland)

    So I postulate that euro continuation only benefits the 0.01% whilst impoverishing everyone else. Question is, how long can the elite keep their gravy train rolling ?

    • Hi ExpatInBG

      What has surprised me so far has been the lack of popular resistance to policies which benefit the 0.01%. Whilst this is indeed prevalent in the Euro area it also pops up in many other places including the UK. Was HG Wells right in “The Time Machine” to suggest that we are heading towards a future of Eloi and Morlocks?

  7. Hi Shaun, Following on yesterday’s blog, I read somewhere that the SNB’s rationale for deciding to pull the peg was that it was worried that Draghi actually will do something for once on the 22nd and go QE max thereby devaluing the Euro and the chf with it via the peg. If that is true, I just don’t see how the abolition of the peg could benefit them – do you?

    In answer to your question I think I would do absolutely nothing and let the consequences of the SNB announcement take their course (a falling Euro as traders scramble for the exit door seeing that the SNB will no longer provide a floor to the Euro). Indeed the SNB may well have done part of the ECB’s job for it.

    • Hi Noo2

      In the end these things are usually resolved by quantity and I suspect that we will find that the SNB was intervening in ever larger volumes and in such a place was afraid of what might happen on January 22 nd. Can a central banker be impeached?

      You know my view which is that the ECB has got its timing all wrong so it would not surprise me at all if it did the wrong thing next week. Frankly I fail to see how QE would help the Euro area right now with the only real policy measure being the falling Euro.

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