The ECB can’t always get what it wants but will the Euro get what it needs?

This morning European Central Bank executive board member Benoit Coeure has told us that in terms of Quantitative Easing that  “the heat is on” to quote Glen Frey. From Reuters.

Coeure said in a speech in Paris that the ECB had bought 9.8 billion euros worth of assets in three days and that the average maturity of the bonds bought was 9 years. The central bank had had no problems in finding bonds to buy, he added.

So they are proceeding at pace and are buying bonds of a longer maturity on average than when they had the Securities Markets Programme or SMP. There was a time when 9.8 billion Euros seemed a vast sum of money but now it does not feel like it does it?! We have changed in the meantime at least in regard to central bank numbers.

Also Mr. Couere told us that it was very important that the ECB made it as easy as possible for banks and hedge funds to make large profits out of this.

European Central Bank executive board member Benoit Coeure said on Thursday the ECB wants to be predictable and regular with its quantitative easing policy.

We can’t have those highly paid traders having to work for their money can we? The banks and indeed the financial sector look ever more like “The Precious” from The Lord of the Rings. Indeed almost any holder of Euro area bonds is sitting on large profits which are being driven by their taxpayers via their central bank. I have pointed out before that there is enormous mispricing here and it is being driven by those whose job it is to stop market-rigging! As to malpractice well with the carrot of 1.14 trillion Euros and the knowledge that Bank of England auctions from the past need investigation there are grounds for genuine fears i think.

On a more technical note you may have spotted that he pointed out that the ECB had so far had no trouble in finding bonds to buy. Someone please explain to him the difference between 9.8 billion and 1.14 trillion! Or perhaps he could find a job that does not involve understanding numbers.

France turns Japanese

I will discuss other changes later but the most symbolic one today is that the French ten-year bond yield is 0.41% which is the same as that in Japan’s government bond market. I will let The Vapors take this one up.

I’m turning Japanese
I think I’m turning Japanese
I really think so

The Euro

This has been the main player so far  in the economic effect of the ECB and its new expanded QE policy. As is the way of these matters nowadays much of the impact came on the expectation of the policy move – did it leak? – but it has fallen since. Overall there was a turn on the 16th of December and since then the trade weighted exchange rate has fallen from 100.6 to 90.1 which in theoretical terms should give the Euro area economy a boost. However there is a rub as I have written in today’s City AM newspaper.

“The Rolling Stones once sung “you can’t always get what you want”, and that summarises the position of the Eurozone right now. I could also have said Bad Timing is appropriate. Because the euro has fallen sharply since mid-December, but so have commodities, and here the euro’s weakness has created some problems. Over the past year, the price of a barrel of Brent crude oil has fallen by 48 per cent, but that has been partly offset by the euro falling 24 per cent against the US dollar. Since oil is priced in dollars, half the gains from lower oil prices have been lost due to euro weakness. There is a similar effect with copper prices, which have fallen by 13 per cent over the past year, but have actually risen in euro terms – due to the fact the currency has weakened nearly twice as much. So while a lower euro is an outright gain in economics textbooks, in practice euro weakness has eroded the gains from lower oil and commodity prices.”

The falling value of the Euro was welcomed by ECB President Mario Draghi yesterday if you translate the central banker language.

the weaker effective exchange rate of the euro – and the impact of our recent monetary policy measures. The latter have had a very substantial impact on what we call “market-based technical financial assumptions”, such as interest rates, exchange rates and stock prices, with the effect being especially large on long-term interest rates.

Oh and when you read about Euro exchange-rate turbulence you may want to note that its average level is 100.21 compared to a starting point of 100. Stability or in ECB speak Stabiliteeee.

What about government bond yields?

These had been falling pretty much ever since the “whatever it takes (to save the Euro)” speech given by Mario Draghi in the summer of 2012. If we continue to use France as an example its ten-year bond yield was 2.8% back then or nearly seven times the current level! It fell below 2% last April and 1% as we moved into December and is now a rather extraordinary 0.41%.

In some ways even more extraordinary is the 0.28% ten-year bond yield of Austria as the news on Heta bank which I discussed on the 2nd of March goes from bad to worse.



@PavelRyska Austrian province of Carinthia? going bankrupt and Austria selling bonds at negative yield. Thank you central banks for correcting markets.

What could go wrong?

If we move to longer-dated government bonds we have plenty to consider as both Italy and Spain have seen their 30 year bond yield fall below 2% in the last 24 hours. Even more extraordinary is the fact that the 30 year bond yield in Germany is 0.69%.

What about annuities which are based on such yields?

What about pension funds as in the UK yield falls raised final-salary pension deficits?
Oh and as the ten-year yield in Germany at 0.21% in future when we refer to yield falls in Japan we will have to call it the Germanification of Japanese government bonds! Rather aptly the group Europe put it thus.

The final countdown, oh ho
It’s the final countdown
The final countdown
The final countdown
(The final countdown)


Trouble in little Cyprus

You would not think that it would be a source of much trouble but after the bank haircuts,capital controls and economic distress comes this. From the Financial Mirror.

The House Ethics Committee chairman, Demetris Syllouris, as well as opposition parties AKEL and DIKO, have also demanded the resignation of the entire Central Bank board, including the Governor, two Executive members and five non-executives. Kiliaris is a senior member of DIKO and former Trade Minister


The ECB may regret having the Governor of the central bank of Cyprus answer questions at its last press conference.


The irony of all this is that the Euro area economy was recovering anyway in my view due mostly to lower oil and commodity prices but also to past ECB action. Now it has a lower currency but the gains there will be dissipated by the way that it offsets and in the case of Dr. Copper overrules the price falls seem so far. If lower bond yields and peak stock markets were a solution then many of these countries would have boomed already!

Let me leave you with two thoughts. Firstly due to ECB rules the main beneficiary of ECB QE is Germany which does not need it. Secondly Portugal which is likely to default has a ten-year bond yield of 1.53% whereas the unlikely to default UK has one of 1.77%. Time for a market mispricing enquiry?! The ECB could investigate itself like that Bank of England has had to, what could go wrong with it being investigator,judge and jury?

For those who prefer a visual interpretation here are my views from a webcast I did with Rebecca Harding of Delta Economics.



16 thoughts on “The ECB can’t always get what it wants but will the Euro get what it needs?

  1. Hello Shaun,

    So what will Germany do when its inflation rate soars away ?

    drop from the Euro land?

    I doubt it

    Also what do you think of the BBC Radio 4 series , Promises Promises: a history of debt

    One of the assertions was that all debt is Government debt in our modern world


    PS: in answer to one of the posters yesterday

    yup it appears he’s changed his name and heads the BoE !!

    PPS: if it comes to pass that because of cheaper yields on government debt leads to negative rates on Pensions , surely that industry will collapse ?

    yet another bail out or will that be a bail in ?

    • Hi Forbin

      Surely it would be more accurate to argue that in the end all debt is private-sector debt as one way or another taxpayers foot the bill! What exactly can a government back on its own?

      I didn’t realise that Comical Ali was still around..

      Some parts of the pensions and insurance industry must be in quite a mess already as Andy Z hinted at with his -3% pension illustration for cash.

  2. Hi Shaun

    Great article as always.

    Do you know what the impact of the wealth tax was in cyrpus? afaik the politicos and foreign investors all drew their money out month before the tax was imposed. And this heavily impacted pensioners who had the temerity to save cash for their retirement.

    looking on the internet, its hard to find any analysis?

    thanks in advance

    • Hi Anteos and thank you

      If we look at deposits in the banking sector we get a good idea. The peak was in December 2012 when there were 70.2 billion Euros of them whereas by December 2013 or post changes there were only 47 billion Euros of them. Quite a credit crunch isn’t it? Oddly the category with the largest percentage fall was other Euro area residents. As of this January it was 46.5 billion Euros so in essence for all the cries of recovery about a third of deposits disappeared never to return or at least so far.

    • yah , saw that , and how long have these Banks been allowed to fix the Too big to fail ?

      I think its time to let the Untouchable Banks go , but then they do “own” us ….

      well it feels that way !


      Popcorn doesn’t mind being owned ……. it being consumed thats the issue 😉

  3. Shaun, I very much enjoyed your webcast and hope it is the first of many. You mentioned that the Treasury Department had kept housing prices out of the Bank of England’s inflation indicator. However, they haven’t kept the ONS from publishing the quarterly owner-occupied housing series based on the net acquisitions approach that they produce for Eurostat. The fourth quarter update came out on March 4, and showed a trivial revision to the 2014Q3 estimate, which brought down the annual inflation rate from 4.07% to 4.03%. Since these are pilot estimates they are not subject to the non-revision policy for the official CPI estimates. The 2014Q4 annual growth rate is 3.48%.
    Regrettably, the ONS does not publish quarterly CPI series including this OOH component but it seems likely that if it did so, it would raise the annual CPI inflation rate for 2014Q4 from 0.9% to 1.1% or 1.2%. This does really change the conversation, since this would no longer be below the 1% lower bound, but above it.

    • Hi Andrew and thanks

      As to the owner-occupied housing series I am glad that I was not the only person looking at it! Maybe it just was the two of us as Grover Washington Junior put it back in the day.

      It is a great shame that these numbers do not get more publicity as they would provoke a change in the inflation agenda as you say. I await the new CPIH with much higher rental numbers and the excuses from all those who backed a disaster!

  4. I have this wee maggot burrowing in my brain.
    It’s telling me that Greece has already embarked on leaving the Euro.
    Here’s why:
    Varoufakis, an extremely clever, committed Marxist, not known for compromising on his principles, and an absolute opponent of the troika bailout, apparently jets around the EU capitals, meeting such esteemed people as Osborne and Schaeuble, and then after two brief negotiation sessions, drops his knickers to the troika and bends over.
    Betrays not only his election promises (fair enough, they all do, but with such indecent haste?), but his own beliefs?
    A man who has put aside an excellent career in academe, to sell out in politics?
    I don’t believe it.
    I believe he would have resigned rather than reneged.
    I’m no economist, but I’m judging a person, and his motivations.
    Furthermore, I remember watching this video:
    Pretty naff but…
    How long is the bailout extension?

    So what if Varoufakis’ tour of EU was to inform Europe that Greece was leaving the Euro?
    What if the threats made against Greece were countered by threats to align with Russia?
    What if the two negotiating periods were really to settle terms under which Greece leaves the Euro?

    As I said at the start, it’s a wee maggot, and maggots aren’t very clever, but it keeps nagging.

    What do you think, Shaun?

    • I agree. My question is “how long does it take to print enough new bank notes to leave the Euro?”. The new Greek Government couldn’t have risked being forced out of the Euro within a couple of weeks of winning the election because they need time to prepare the new currency but a few months’ extension . . .that should be enough.

      Pass the popcorn, the show is about to begin (maybe).

    • Yes I have the same maggot! I have corresponded with Varoufakis in the past and whilst he does come over as a very mild Marxist (if indeed he is one as opposed to just a pragmatist) he is certainly a man of principle – and considerable intelligence. Watch out for Greek Easter which is one week later than our Easter. It is a big holiday there and everything shuts down for several days. A good time for Grexit.

      • Further, why would the troika give Greece only four months, when it was asking for six?
        Could it be because the implementation of QE is due to start PRECISELY IN THAT TIMEFRAME?
        ECB could not, and would not, for obvious reasons, embark on a huge programme of QE, knowing that Greece was going to secede very shortly afterwards, and so, COULD not give Greece any more time.

    • I share these thoughts conjectures, but its all guesswork, and for me the following thoughts play better: elected on a platform to keep Euro, most Greeks want/wanted that; need a new mandate to leave; therefore need electorate to understand/believe they really can’t have that cake and eat it; give them time and information to get the idea and get even angrier; go back to them with the real choice on the table. Maybe some sensible politics all round would ensue?

  5. Hi Shaun

    So on the day when a dodgy Spanish bank is buying a dodgy British bank with £1.7 bn
    of dodgy funds we hear that BHS which is alegedly debt free is sold for £1. Maybe their both
    overpriced but in very different ways.
    As for Grexit,is it possible that Cyprus with its cosy Russian connections will join the Easter

    • Hi jrh

      I am glad that this issue has been asked about in the comments because I meant to mention it in the blog. The UK has a friendly relationship with Spain apart from Gibraltar but I felt that we let Santander buy into too much of our banking industry. Abbey National as it was then was already a chunky bite but political convenience (were there any other buyers?) allowed it to buy Alliance and Leicester and Bradford and Bingley too. Along the way the competition issue was ignored but more to the point too much of our banking industry was in Spanish hands. Thus I am not best pleased about the bid for TSB…..

      I expect there will be plenty more trouble from Cyprus.

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