Will rising bond yields mean ECB QE is To Infinity! And Beyond!?

Yesterday the ECB ( European Central Bank ) President Mario Draghi spoke at the European Parliament and in his speech were some curious and intriguing phrases.

Our current monetary policy stance foresees that, if the inflation outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council is prepared to increase the asset purchase programme in terms of size and/or duration.

I say that bit was curious because it contrasted with the other rhetoric in the speech as we were told how well things are going.

Over the last two years GDP per capita has increased by 3% in the euro area, which compares well with other major advanced economies. Economic sentiment is at its highest level in five years. Unemployment has fallen to 9.6%, its lowest level since May 2009. And the ratio of public debt to GDP is declining for the second consecutive year.

The talk of what I would call “More,More,More” is also a contrast to the December policy decision which went down the road of less or more specifically slower.

We will continue to purchase assets at a monthly pace of €80 billion until March. Starting from April, our net asset purchases will run at a monthly pace of €60 billion, and we will reinvest the securities purchased earlier under our programme, as they mature. This will add to our monthly net purchases.

There was another swerve from Mario Draghi who had written to a couple of MEPs telling them that a country leaving the Euro would have to settle their Target 2 balances ( I analysed this on the  23rd of January ) whereas now we were told this.

L’euro e’ irrevocabile, the euro is irrevocable

Of course Italian is his natural language bur perhaps also there was a message to his home country which has seen the rise of political parties who are against Euro membership.

Such words do have impacts on bond markets and yields but I was particularly interested in this bit. From @macrocredit.


A rather curious observation from someone who is effectively doing just that and of course for an establishment which trumpeted the convergence of bond yield spreads back before the Euro area crisis. Just to be clear which is meant here is the gap between the bond yield of Germany and other nations such as Spain or Italy. These days Mario Draghi seems to be displaying all the consistency of Arsene Wenger.

Oh and rather like the Bank of England he seems to be preparing himself for a rise in inflation.

As I have argued before, our monetary policy strategy prescribes that we should not react to individual data points and short-lived increases in inflation.

Spanish energy consumers may not be so sanguine!

Growing divergence in bond yields

The reality has been that recently we have seen a growing divergence in Euro area bond yields. This has happened in spite of the fact that the ECB QE ( Quantitative Easing) bond buying program has continued. As of the latest update it has purchased some 1.34 trillion Euros of sovereign bonds as well as of course other types of bonds. Perhaps markets are already adjusting to the reduction in the rate of purchases planned to begin on April 1st.


Ch-ch-changes here are right at the core of the Euro project which is the Franco-German axis. If we look back to last autumn we see a ten-year yield which fell below 0.1% and now we see one of 1.12%. This has left it some 0.76% higher than its German equivalent.

Care is needed as these are still low levels but politicians get used to an annual windfall from ,lower bond yields and so any rise will be unwelcome. It is still true that up to the five-year maturity France can borrow at negative bond yields but it is also true that a chill wind of change seems to be blowing at the moment. The next funding auction will be much more painful than its predecessor and the number below suggests we may not have to wait too long for it.

The government borrowing requirement for 2017 is therefore forecast to reach €185.4bn.


Here in Mario’s home country the situation is more material as the ten-year yield has risen to 2.36% or 2% over that of Germany. This will be expensive for politicians in the same manner as for France except of course the yield is more expensive and as the Italian Treasury confirms below the larger national debt poses its own demands.

The redemptions over the coming year are just under 216 billion euros (excluding BOTs), or some 30 billion euros more than in 2016, including approximately 3.3 billion euros in relation to the international programme. At the same time, the redemptions of currently outstanding BOTs amount to just over 107 billion euros, which is below the comparable amount in 2016 (115 billion euros) as a result of the policy initiated some years ago to reduce the borrowing in this segment.

The Italian Treasury has also noted the trends we are discussing today.

As a result of these developments, the yield differentials between Italian government securities and similar securities from other core European countries (in particular, Germany) started to increase in September 2016……. the final two months of 2016 have been marked by a significant increase in interest rates in the bond market in the United States,

Although we are also told this

In Europe, the picture is very different.

Anyway those who have followed the many debacles in this particular area which have mostly involved Mario Draghi’s past employer Goldman Sachs will note this next bit with concern.

Again in 2017, the transactions in derivatives instruments will support active portfolio management, and they will be aimed at improving the portfolio performance in the current market environment.

Should problems emerge then let me place a marker down which is that the average maturity of 6.76 years is not the longest.


Here the numbers are more severe as Portugal has a ten-year yield of 4.24% and of course it has a similar national debt to economic output ratio to Italy so it is an outlier on two fronts. It need to raise this in 2017.

The Republic has a gross issuance target of EUR 14 billion to EUR 16 billion through both auctions and syndications.

To be fair it started last month but do you see the catch?

The size was set at EUR 3 billion and the new OT 10-year benchmark was finally priced at 16:15 CET with a coupon of 4.125% and a re-offer yield of 4.227%.

That is expensive in these times of a bond market super boom. Portugal has now paid off some 44% of its borrowings from the IMF but it is coming with an increasingly expensive kicker. Maybe that is why the European establishment wanted the IMF involved in its next review of Portugal’s circumstances.

Also at just over five years the average maturity is relatively short which would mean any return of the bond vigilantes would soon have Portugal looking for outside help again.

As of December 31, 2016 the Portuguese State direct debt amounted to EUR 236,283 million, decreasing 0.5% vis-à-vis the end of the previous month ( 133.4% of GDP).


Bond markets will of course ebb and flow but recently we have seen an overall trend and this does pose questions for several countries in the Euro area in particular. The clear examples are Italy and Portugal but there are also concerns elsewhere such as in France. These forces take time but a brake will be applied to national budgets as debt costs rise after several years when politicians will have been quietly cheering ECB policies which have driven falls. Of course higher inflation will raise debt costs for nations such as Italy which have index-linked stocks as well.

If we step back we see how difficult it will be for the ECB to end its QE sovereign bond buying program and even harder to ever reverse the stock or portfolio of bonds it has bought so far. This returns me to the issues I raised on January 19th.

If we look at the overall picture we see that 2017 poses quite a few issues for central banks as they approach the stage which the brightest always feared. If you come off it will the economy go “cold turkey” or merely have some withdrawal systems? What if the future they have borrowed from emerges and is worse than otherwise?

Meanwhile with the ECB being under fire for currency manipulation ( in favour of Germany in particular) it is not clear to me that this from Benoit Coeure will help.

The ECB has no specific exchange rate target, but the single currency has adjusted as a consequence. Since its last peak in 2011, the euro has depreciated by almost 30% against the dollar. The euro is now at a level that is appropriate for the economic situation in Europe.

The Monte Paschi saga continues

Firstly let me wish you all a very Happy New Year as we approach the month of January. As we switch to an ongoing theme which has occupied on here for some years it is linked to something else in the news or rather what is called fake news. From the Financial Times earlier this morning.

In an interview with the Financial Times, Mr Pitruzzella, head of the Italian competition body since 2011, said EU countries should set up independent bodies — co-ordinated by Brussels and modelled on the system of antitrust agencies — which could quickly label fake news, remove it from circulation and impose fines if necessary.

“Post-truth in politics is one of the drivers of populism and it is one of the threats to our democracies,” Mr Pitruzzella said. “We have reached a fork in the road: we have to choose whether to leave the internet like it is, the wild west, or whether it needs rules that appreciate the way communication has changed. I think we need to set those rules and this is the role of the public sector.”

I am pleased about this as I gave some examples of past fake news only on the 22nd of this month.



Oh and he was on CNBC in September.

Bailout for Italian banks has been ‘absolutely’ ruled out

So Mr.Pitruzzella can start with the past pronouncements of Italy’s Finance Minister! Once he has done that he can move onto the prime minister who has just departed. From Business Insider.

At the beginning of this year, Prime Minister Renzi said: “Today, the bank is healed, and investing in it is a bargain. [Monte dei Paschi] has been hit by speculation, but it is a good deal. It went through crazy vicissitudes, but today it is healed —it’s a good brand.

So both “healed” and “bargain” need to go into my financial lexicon for these times as we wonder how much of Matteo Renzi’s own money was invested?

The bailout or is it bail in?

Finance Minister Padoan ( who lest we forget was briefly  in the running to be the new prime minister) seems to be upset if someone points out his dissembling as this from Reuters highlights.

In unusually critical comments of the euro zone’s banking supervisor, Pier Carlo Padoan told a newspaper that the ECB’s new capital target was the result of a “very rigid stance” in its assessment of the bank’s risk profile.


“It would have been useful, if not kind, to have a bit more information from the ECB about the criteria that led to this assessment,” Padoan told the financial newspaper Il Sole 24 Ore.

You would think that by now Mr.Padoan would know pretty much everything about Monte Paschi and I note that “very rigid stance” is quite different to saying that the ECB is wrong. If we look at the numbers then using the word embarrassing simply does not tell half the story.

Monte dei Paschi, Italy’s third biggest lender and the world’s oldest, said on Monday the ECB had estimated its capital shortfall at 8.8 billion euros (7.5 billion pounds), compared with a 5 billion-euro gap previously indicated by the bank.

So the fake news that was most prevalent about Monte Paschi in 2016 was driven by the Ittalian government and the Bank of Italy telling us that a 5 billion Euro private rescue could work. In fact they would have lost their money just like the previous 3 rescues as it was not enough. In some ways it reminds me of the rights issue of around £12 billion that Royal Bank of Scotland undertook only a few months before collapsing which must have been based on a misrepresentation and should have resulted in prosecutions accordingly.

What no doubt is particularly irking Finance Minister Padoan is this from The Bank of Italy.

The difference between the amount of the capital injection for Banca Monte Dei Paschi di Siena calculated on the basis of the ‘market solution’ (€5 billion) and the amount required in the case of a ‘precautionary recapitalization’ by the Italian state (€8.8 billion) depends on the different hypotheses and objectives of the two measures, which also imply different methods of calculation and lead to different results.

We get a long explanation of the detail in an attempt to divert us from the fact that the Bank of Italy knows the Euro area recapitalisation rules and thus has deliberately overlooked them until now. As we progress we see not only the cost to the Italian state but the sum set aside for compensation to the retail bondholders.

the immediate cost to the State would therefore amount to about €4.6 billion (€2.1 billion to cover the first requirement and €2.5 billion to satisfy the second); to this must be added the subsequent compensation of retail subscribers (about €2 billion, to be verified on the basis of the status of the subscribers and their actual willingness to adhere to the State compensation scheme), for a total of about €6.6 billion.

This morning Italy’s new Prime Minster has joined the fray as shown below from Il Sole 24 Ore.

In his first end-of-year news conference, new Italian Prime Minister Paolo Gentiloni……….This content is now becoming “subject of a discussion with the supervisory board of the ECB, while the tranquillity, size and significance of our intervention is not in question.”

What has he left to discuss? Also given the lifespan of Italian Prime Ministers which is the same as UK Premiership football managers he first end of year news conference may also be his last.

The 20 billion Euro problem

Is this an official denial that “up to” now means more than? From Prime Minister Gentiloni again.

As affirmed by Padoan in recent days, the €20 billion from the bank rescue decree is still enough to help both MPS and other banks, such as the two Veneto lenders (Veneto Banca and Popolare Vicenza), run by the Atlante Fund, which could seek extraordinary public support.

The obvious truth is that like the two efforts at funding the Atlante private-sector bank rescue vehicle it is simply not enough. Some of the smaller sums might have worked if they had been applied early enough and been accompanied by genuine reform but in the meantime things have been allowed to rot and deteriorate.

Meanwhile Monte Paschi is going to issue some more debt according to Reuters. Please form an orderly queue.

Italy’s Banca Monte dei Paschi di Siena, which is being bailed out by the state, plans to issue 15 billion euros ($15.8 billion) of debt next year to restore liquidity and boost investor confidence, several newspapers said on Friday.


There are not many subjects in the financial sphere that have been subject to fake news more than Monte Paschi over the past few years. The really damning part of this is that so much of that has come from the government of Italy as well as the bank’s board. All the claims of business of usual have been replaced by a need of 8.8 billion Euros of equity capital and 15 billion Euros of bonds. Underlying this is a banking legal system called the “Draghi Laws” after the current president of the ECB after his time at the Italian Treasury and the Bank of Italy. Time for some Fleetwood Mac.

Tell me lies
Tell me sweet little lies
(Tell me lies, tell me, tell me lies)
Oh, no, no you can’t disguise
(You can’t disguise, no you can’t disguise)
Tell me lies
Tell me sweet little lies

Meanwhile Finance Minster Padoan is on the wires again. From Reuters.

“The bank is in optimal condition and will have great success,” he said.

Of Monte Paschi, Mario Draghi and the ECB

Today let us turn our attention to the long-running theme which is the Italian banking sector and in particular Banca Monte dei Paschi di Siena (BMPS) the world’s oldest bank. There was always going to be action post the Italian referendum actually whichever way the vote went but in particular with a no vote. This morning our favourite penny stock has been giving us an example of this as highlighted below by the Financial Times.

Care is needed with the chart as the old Y axis trick is at stake and misses past vastly larger falls in the share price of BMPS. But let us examine the news which has brought us here. Reuters was on the case yesterday afternoon.

The Italian treasury is considering raising its stake in Monte dei Paschi di Siena (MI:BMPS) to help the ailing lender remain in business by buying subordinated debt held by retail investors and converting it into equity, two sources with knowledge of the matter said.

The classic leak to see what the reaction is, trial balloon! Is there an Italian version of Yes Prime Minister? After all such a move would be against Euro area banking rules. It would also be something of an electoral bribe as the retail investors who bought bank debt stock ( what could go wrong?) get the equivalent of the PPI payouts in the UK, although the difference would be that the Italian taxpayer was explicitly paying for it.

On top of that the treasury would buy junior debt held by retail investors to ensure they do not suffer any losses, one of the sources said.

A second source within Italy’s government confirmed the plan. Some 40,000 retail investors hold around 2 billion euros of the Tuscan bank’s junior bonds.

This morning

The written equivalent of rhetoric has gained pace according to La Stampa via Google Translate.

But the only rescue of Siena would be like closing a hole in a tank full of holes. The decree to which the Treasury works worth far more than the three-five billion invoked the market for Siena, and at the moment does not provide for the direct intervention of the state, but that of Europe through the bottom Save-States ESM. The dancing figure indicated by two concordant sources of the Treasury is 15 billion euro.

I did enjoy “like closing a hole in a tank full of holes” as a description of BMPS and wonder what the Italian phrase is for this? Also there is a problem with using the ESM.

The ESM funds are formally a loan and therefore involve the signing of an agreement with Europe which requires those in technical jargon are called “conditionality.”

So what was called the Troika until that came to be debased and is now called the institutions ( a bit like the leaky Windscale nuclear reprocessing plant in the UK became leak-fee Sellafield) would be setting rules for Italy. Although them being applied seems unlikely with La Stampa pointing out that Spain applied them in theory rather than in practice. The other main issue is that Euro area banking rules have changed and now require bail-ins rather than bailouts although of course even the “rules-based organisation” the ECB has bypassed a few rules in its time.

How did we get here?

The meeting on Monday for the 5 billion Euro debt for equity swap does not seem to have got anyone to put their hands in their wallets or purses. I can’t say I blame them.

The time line of a banking bailout

I have posted this several times before but it seems appropriate to give it another airing.

1. The Board issues a statement accusing bloggers of spreading both irresponsible and factually incorrect rumours as the bank is sound and has no need of new capital.

2. The Bank issues a statement of confidence in its management.

3. The Bank tries to raise more private capital in spite of it having no need for it.

4. If this does not work the relevant government(s) express(es) complete confidence in the bank and tell us that it has a sound management structure and business model. Indeed the bank had only recently been giving the government advice as to how to run the public-sector more efficiently.

5. The relevant government(s) tell us that they are stepping in to help the bank but the problems are both minor and short-term and are of no public concern.

6. The relevant government(s) tell us that the bank needs taxpayer support but through clever use of special purpose vehicles there will be no cost and indeed a profit is virtually certain.

7.Part-nationalisation of the bank is announced and taxpayers are told that a profit will result from this sound and wise investment.

8. Full nationalisation is announced to the sound of teeth being pulled without any anaesthetic.

9. Debt costs of the relevant sovereign nation or nations rise.

10. Consequently that nation finds that its credit rating is downgraded.

11. It is announced that due to difficult financial times public spending needs to be trimmed and taxes such as Value Added Tax need to be raised. It is also announced that nobody could possibly have forseen this and that nobody is to blame apart from some irresponsible rumour mongers who are the equivalent of terrorists. A new law is mooted to help stop such financial terrorism from ever happening again.

12. Some members of the press inform us that bank directors were both “able and skilled” and that none of the blame can possibly be put down to them as they get a new highly paid job elsewhere.

13. Former bank directors often leave the new job due to “unforseen difficulties”.

We seem to find ourselves at point 7 although I must warn you that point 8 can then arrive faster than Usain Bolt.

Enter Mario Draghi

The President of the European Central Bank has been involved in this issue for years and indeed decades as I pointed out on the 21st of January.

If we look further back in time we see that the law covering Italian financial markets is often called the Draghi Law and we note that around the turn of the century he was Director General of the Italian Treasury. Then he went to Goldman Sachs which was busy designing derivatives for Italy and Monte Paschi as well as Greece before returning to head the Bank of Italy. So if there is a crime his fingerprints are all over it.

Of course Mario issued his “everything it takes” speech in the summer of 2012 which was explicitly for the Euro but also has implicitly helped the Italian banks. For example the sovereign bond buying of its QE program has given profits to their large holdings of Italian government debt. The purchases of mortgage debt must have helped their mortgage books as well. Yet in spite of this we are where we are.

Actually he went further before the referendum when he promised to step-up purchases of Italian government bonds should the vote be no. So my argument against Italy going to the ESM would be that it could issue the debt itself very cheaply with Mario’s bond buyers hovering in the background and maybe foreground. Awkward though if his bond buying allows Italy to break the new ECB driven bank bail in rules. After all he keeps telling us that the ECB is a “rules based organisation”.

I expect him to announce tomorrow that the ECB programs will not end in March and give us something along the lines of  a 6 month extension. His committees well report but have lost a lot of their modus operandi with the post Trump rise in bond yields although there is still the “safe haven” issue of Germany’s 2 year debt being issued today at -0.71%.


This has been a very long-running saga but one of my markers is back in play.

Italy is not preparing a request for a loan from the European Stability Mechanism (ESM) to support its banking sector, a Treasury spokesman said on Wednesday, denying a newspaper report.

Never believe anything until it is officially denied!

Of course the media produce all sorts of stories as we see in the world of football transfers where all sorts of inflated numbers appear as click bait. But some of them like Paul Pogba to Manchester United do happen. This is where we find ourselves as for example saying this makes Italy insolvent is not quite true. The QE dam of Mario Draghi holds back that flood for now and maybe “To Infinity! And Beyond” so point 9 of my banking timeline may be skipped. However without QE Italy would face solvency questions which a bank bailout would merely add to.

I bet they now wish they had like used the ESM in 2012 like Spain did.

Number Crunching

For BMPS from here on the 21st of January.

MontePaschi: Total capital raised since 2008: €14bn Market value today: €1.5bn ( h/t Macrocredit )

For Italy from Istat earlier.

The unemployment rate remained stable for the fourth consecutive quarter in comparison to the previous quarter and up 0.4 points from the same quarter of 2015, with a growth rate of 132 thousand unemployed.

Not much sign of any recovery there…

Time for The Italian Job?

In a year of events which were seemingly considered unexpected and at times unthinkable by the establishment we now face another role of the dice. This comes over the weekend in Italy. There is an irony that on the face of it the issues are domestic ones. As the Guardian describes below.

A series of major changes to the Italian political system. These reforms, which affect a third of the Italian constitution, have already been approved by parliament but by a slim margin, thus requiring that they also be passed by referendum……Under the proposed reforms, the Senate would lose almost all its power – the number of senators would be reduced from 315 to 100, and the remaining senators would no longer be elected directly.

The idea is to speed up legislation by in essence going from 2 political chambers to one to stop this sort of thing happening.

his means, put simply, that it can take a very long time for things to get done. For example, a law to give children born out-of-wedlock the same rights as children of married couples took nearly 1,300 days to be approved.

How very Italian! Which is of course part of Italy’s charm and also part of the problem. Another sign of this being Italy is that apparent reform involves creating an unelected second chamber. But the fundamental issue is that as so often happens the question on the ballot paper has morphed into becoming something of a vote on Prime Minister Renzi himself. Not perhaps the best plan when anti-establishment forces seem to have the upper hand. But as ever I will leave the political debate alone.

The economics

I recall that the appointment of Prime Minister Renzi was claimed as a new dawn for Italy and that his reforms would lead to much better economic growth. I remember asking supporters what changes were about to happen? If we look at yesterday’s update some 2 and a bit years down the road there seems to be little sign of progress.

In the third quarter of 2016 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) increased by 0.3 per cent with respect to the second quarter of 2016 and by 1.0 per cent in comparison with the third quarter of 2015.

The progress that there has been sees annual economic growth at 1% as opposed to 0.3%. So higher but of course feeds right into my theme that Italy struggles to get its economic growth rate above 1% in the good times. Are these good times? Well ECB President Mario Draghi keeps telling us that it is the negative interest-rates and QE bond buying of the ECB which has pushed economic growth higher. Also this has been a phase of a lower price for crude oil and indeed other commodities which should also have boosted the Italian economy. As per yesterday’s article that may be fading but as we look back it has certainly been in play.

Actually Mario Draghi may have been thinking of his home country when he said this in Wednesday.

Without concerted effort on structural reforms, per capita income growth in euro area is likely to stagnate or even decline

Per capita GDP has fallen by around 6% since it joined the Euro by my calculations. Whereas he is pointing out he things others have made ch-ch-changes.

Reforms in Spain in mid-2012 are example of a structural reform that has been successful in unblocking the labour market.

What country was he thinking of as a comparison with Spain here as he is interviwed by El Pais?

It is also true that Spain enacted reforms and repaired its financial sector earlier than others, which has proved crucial.

Every ECB meeting there is a part of Mario Draghi’s speech which is as nailed on as say Sergio Parisse in the Italian rugby team. It calls for structural reforms and is an example of rinse and repeat.

The banks

Last weekend the Financial Times shifted towards panic mode.

Up to eight of Italy’s troubled banks risk failing if prime minister Matteo Renzi loses a constitutional referendum next weekend and ensuing market turbulence deters investors from recapitalising them, officials and senior bankers say.

I guess you are wondering which 8?

Italy has eight banks known to be in various stages of distress: its third largest by assets, Monte dei Paschi di Siena, mid-sized banks Popolare di Vicenza, Veneto Banca and Carige, and four small banks rescued last year: Banca Etruria, CariChieti, Banca delle Marche, and CariFerrara.

Not Unicredit? That would make nine like say the Nazgul.

Monte Paschi

Let us stick with the world’s oldest bank for as moment and there is maybe a saviour on the horizon. From @creditmacro.

MontePaschi may sign preliminary investment agreement with Qatar Investment Authority between Saturday and Monday, Il Sole 24 Ore reports.

Mind you to that ying there is also a yang as Reuters have just reported.

Italy is discussing with the European Commission the terms of a state bailout of ailing bank Monte dei Paschi (BMPS.MI) that has already been requested and could be launched next week if needed, Italian daily Corriere della Sera reported on Friday.

Italy’s third-largest bank needs to raise 5 billion euros ($5.3 billion) by the end of the year to plug a capital shortfall identified by European Central Bank stress tests or face the risk of being wound down.

Care is needed as we have “may” on one side and “could be” on the other. But we do at least have an official denial and we know what they mean! From @livesquawk.

Italian Govt Undersecretary: MontePaschi Will Not Need State Help – ANSA

Anyway the Bank of Italy is dreaming of the future as it let is know on Wednesday.

The Bank of Italy has identified the UniCredit, Intesa Sanpaolo and Monte dei Paschi di Siena banking groups as other systemically important institutions (O-SIIs) authorized to operate in Italy in 2017. The three groups will have to maintain a capital buffer for the O-SIIs of 1.00, 0.75 and 0.25 per cent respectively of their total risk exposure, to be achieved within four years according to the transitional period shown in Table 1.

So SII has replaced SIGI which replaced TBTF ( Too Big To fail) as we go acronym crazy. Do I have that right?

Oh and if you are systemically important should they not all have the same thresholds?


We find ourselves facing for the first time in 2016 an event where this time the “shock” result is the expected one. Accordingly financial markets should have made much of their adjustment already. Although on the face of it I find it is hard to see much insurance in an Italian two-year government bond yielding 0.22% or indeed a five-year one yielding 0.89%. But perhaps as Reuters reports Mario Draghi has a put option ready for them.

The European Central Bank is ready to temporarily step up purchases of Italian government bonds if the result of a crucial referendum on Sunday sharply drives up borrowing costs for the euro zone’s largest debtor, central bank sources told Reuters.

Ah that word “temporarily” again! Those most annoyed by this should be the Portuguese who have much higher bond yields but by contrast have seen fewer bond purchases than their theoretical share.

As for the Euro it has drifted lower recently as we note an exchange-rate around 1.06 to the US Dollar and the UK Pound has regained ground to 1.18. The trade-weighted move has been from 96.1 to 94.4 so relatively minor. However looking forwards whilst there could be a knee-jerk fall surely an increase in the possibility of Italy leaving the Euro makes it more of a “hard” and “safe-haven” currency so it could later rise.

Don’t get a job involving numbers

This is from a Bank of Italy working paper on undeclared assets.

Third, it estimates the portion of tax evasion connected to the underreporting of foreign assets to range between $20 trillion and $42 billion a year over the period 2001-2013 for capital income tax,

Thanks for that!


Mario Draghi faces up to extraordinary monetary policy only providing moderate economic growth

There is a link between yesterday’s article and this as I note a side-effect of the US Dollar Index pushing above 101 overnight. In fact it has made 101.25 the highest since 2003. This means that the morning espresso of European Central Bank President Mario Draghi will taste even better as he watches the Euro dip below 1.06 versus the US Dollar. He may even take the time to note that the Euro has fallen against the UK Pound £ which has regained 1.17 today. Only the Japanese Yen may interrupt his bonhomie and that is because it has fallen even faster.  Of course there is still a fair bit of ground to be lost for the Euro to get back to where it was earlier in 2016 but Mario will be pleased to see it heading in what he considers to be the right direction. He will love this from @RANsquawk which even manages a reminder of his alma mater.

EUR/USD has seen the longest losing streak since its inception having fallen 4.93% and Goldman Sachs expects parity by the end of 2017.

Trade Figures

This morning’s release will also give Mario something to smile about.

The current account of the euro area recorded a surplus of €25.3 billion in September 2016 . This reflected surpluses for goods (€30.3 billion), services (€4.8 billion) and primary income (€4.2 billion), which were partly offset by a deficit for secondary income (€14.0 billion).

A dip but the monthly numbers are erratic and the annual figures are very strong.

The 12-month cumulated current account for the period ending in September 2016 recorded a surplus of €337.5 billion (3.2% of euro area GDP), compared with one of €322.5 billion (3.1% of euro area GDP) for the 12 months to September 2015.

He enjoys recounting stories about the basic underlying strength of the Euro area economy although of course he will move swiftly on before people point out that with a falling currency and current account surplus he is exporting deflation to others.

The economy

Here the going gets tougher as Mario has pointed out in a speech in Frankfurt this morning.

Since the onset of the global financial crisis, 2016 has been the first full year where GDP in the euro area has been above its pre-crisis level. It has taken around 7.5 years to get there.

There is also something revealing in the language used here.

The economy is now recovering at a moderate, but steady, pace.

If we move to the Eurostat release we see the problem here.

Seasonally adjusted GDP rose by 0.3% in the euro area (EA19) and by 0.4% in the EU28 during the third quarter of 2016, compared with the previous quarter

Firstly the Euro was supposed to be a triumph but yet again it has underperformed the other nations in the European Union. Then we get the “moderate” bit as it has gone 0.3% twice now but you might question the “steady” if you note it went 0.5%, 0.5% before that. With negative interest-rates and 80 billion a month of QE surely we should be seeing an acceleration not a slowing? But as ever reality is not a friend here as I note this description of the slowing.

allowing the recovery to gather steam,

There is a genuine success in the first part of the quote before as we also get an interesting way of analysing the drop in this quarters economic growth for Germany to 0.2%.

And the recovery has become more broad-based, with less difference in economic performance across countries.

Also progress in boosting inflation is as slow as a Geoffrey Boycott innings.

Euro area annual inflation was 0.5% in October 2016, up from 0.4% in September…….. A year earlier the rate was 0.0%

Care is needed here as whilst it is official policy to boost inflation I think it is a bad idea. But returning to the official line this is happening more slowly than expected and hoped. Also whilst I am no great fan of core inflation measures the ECB will have spotted this. From @fwred.

Short-term dynamics in ECB’s ‘super core’ inflation measure look worrying, down to 0.85% (3rd lowest print ever).

Wages growth seems to be underperforming as well.

The banks

There are all sorts of problems here but then apparently not.

The first development that gives us comfort is the improving solvency of the banking sector……. Common Equity Tier 1 ratios in the euro area have improved substantially, rising from less than 7% for significant banking groups in 2008 to more than 14% today.

Or maybe there are.

may also have created some uncertainties, for instance over steady state capital levels, which are reflected in bank share prices.

Of course there are dangers in viewing things too much via bank share prices especially in the case of Monte Paschi which bounces around like the penny (Euro cent) stock it now is. But of course there is food for thought in the world’s oldest bank being a penny stock especially after so many bailouts. The outlook for profits is “challenging”.

Even though the euro area banking system is today more resilient, its profitability remains a challenge – one that is weighing on bank share prices and raising the cost banks face when raising equity.

We are getting something of a swerve here as we were previously told that negative interest-rates would be no big deal for bank profitability.

If we move to the lending figures then I will be watching the next set closely because whilst we have seen some growth that looked like it was fading in the last series as we wait to see if it was an aberration or a new phase.

Bond Yields

In spite of the fact that the ECB has continued with its 80 billion Euros a month of bond purchases a month, bond prices have fallen recently and yields risen. For example Italy finds itself with a yield of 2.12% on its ten-year bond and Germany 0.3% after a period where it was patd to borrow even at that maturity. There are still quite a few negative bond yields at the shorter maturities but there have been shifts away from this. Perhaps the most exposed is Portugal with its 3.82% ten-year yield and sizeable national debt. As an aside some seem to be more equal than others and France in particular in the bond buying. As even in the Euro area we see that we are promised rules but get something rather different.

But as I have written before this gives the ECB an opportunity to act again.

So even if there are many encouraging trends in the euro area economy, the recovery remains highly reliant on a constellation of financing conditions that, in turn, depend on continued monetary support.


We arrive at a type of groundhog day as I note that this time last year we were discussing  monetary tightening in the US and a Euro area easing. Of course the US Federal Reserve has spent all of 2016 promising this and not delivering and the ECB move will be more minor but nonetheless there are similar themes at play to last year. Rather than a “taper” I expect the ECB to extend its QE for another 6 months and for its committees to find more bonds it can buy. Of course it is really only can kicking and at well over a trillion Euros an expensive can at that but that is central banking these days.

Meanwhile if this from Reuters is any guide Mario may be able to stop worrying about further Chinese devaluations.

Chinese policymakers have been unfazed by the yuan’s recent slide, but are ready to slow its descent for fear of fanning capital flight if the currency falls too quickly through the psychologically important 7-per-dollar level, policy advisers said…..The yuan fell on Friday to an eight-year low of 6.8950 per dollar, extending a sharp decline in the past week and taking its fall so far this year to 5.8 percent. If maintained, it would mark the yuan’s biggest annual decline since the landmark revaluation in 2005.

Maybe they feel that is enough for now…..




How much longer can the ECB keep telling us that QE has worked?

Later this week Mario Draghi and his colleagues at the European Central Bank Governing Council meet up for a policy meeting. As ever there is much for them to discuss and maybe he will raise a glass of Chianti to the passing of a significant threshold. From the ECB.

Public sector assets cumulatively purchased and settled as at 01/09/2016 €1,001,947 (26/08/2016: €990,807) mln

To infinity and beyond indeed as it now strides beyond the 1 trillion Euro barrier in terms of government bonds purchased. There were attempts to put this in perspective.

Completely useless stat of the day: if you made a €1tn pile of €500 banknotes it would be 1189x taller than the ECB HQ. ( @jonathanalgar)

You would have to complete it before they phase out the 500 Euro note though as using 200 Euro notes would be 2.5 times as hard!

Actually if we put all the QE programs into the pot including continuing ownership of Greek government bonds we come 1.37 trillion Euros. Let us look at what it has achieved as we are now at what we were told back in January 2015 was going to be the planned completion date..

Under this expanded programme, the combined monthly purchases of public and private sector securities will amount to €60 billion. They are intended to be carried out until end-September 2016.

Of course the rate of monthly purchases has risen since then ( 80 billion Euros) and the program got extended until March 2017 as the to infinity and beyond theme continues.

Economic growth

Let me use the words of Mario Draghi from the last ECB meeting.

Incoming data point to ongoing growth in the second quarter of 2016, though at a lower rate than in the first quarter. Looking ahead, we continue to expect the economic recovery to proceed at a moderate pace.

If we also factor in the oil price fall that is not a lot of bank for the Euro area taxpayers buck or Euro. As the program started the Euro area was in the process of seeing economic growth of 0.4% in the last quarter of 2014 and 0.6% in the first quarter of 2016. Of course some in the media were arguing yesterday that such policies work instantly! In reality whilst financial markets can move extremely fast real economies cannot. What we observe in terms of economic growth since has been 0.3%, 0.4%,0.3%,0.6% and then 0.3%. The latter number came with both France and Italy flatlining.

But in a word if you factor in the negative interest-rate of 0.4% and the lower oil price you might say “M’eh”. Or as has already been used in reply to me the word “counterfactual” which of course is the last resort of an economic scoundrel.

Looking Forwards

We got an implied view from the Mario Draghi quote above and he was unlikely to be cheered by the business survey from Markit yesterday.

The eurozone economy continued to expand at a broadly steady pace in August. The rate of increase edged down to a 19-month low, however, mainly due to a weaker rate of expansion in Germany.

Even less so by this bit.

There were, however, signs that the longest period of sustained job creation in the region over the past eight years may be cooling.

Rather than a glass of Chianti he may now want the whole bottle.

While the overall picture is one of steady but sluggish 0.3% growth in the third quarter, the revised figures indicate that the economy is losing rather than gaining momentum.


This is what the ECB is officially aiming at and is the stated reason for the increase in both the term of the QE program and the faster rate of purchases.

until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.

There was little sign of this in the Markit survey and in fact there were signs of the opposite.

Inflationary pressures are also cooling amid intense competition,

As the current official consumer inflation rate (CPI) is estimated to be 0.2% this poses a problem for achieving a 2% annual inflation target. In fact even the services sector which in both the UK and US is above the inflation target is not in the Euro area. Via its 1.1% annual rate and 44.2% weighting it is pulling the number higher but even if it was the whole index we would be below target still. Ignoring energy only takes us to 0.9%.

The ECB does not seem to have had much success in creating asset price inflation which of course is the central bankers dream. Yes prices of government bonds have surged and more recently corporate bonds have followed. But equities have dropped back since the initial knee-jerk response to QE which saw the Eurofirst 300 push strongly above 1600. As of this morning it is 1379 and virtually unchanged on a year ago. We do not have a reliable house price indicator for the area as a whole but only Austria and Estonia seem of the individual countries to have lit the blue touch-paper.

What is inflation?

Regular readers will be aware that I like to look into the details and I have found this report from Eurostat. Some of the data is for countries outside the Euro area but look at this.

The price of a cup of coffee was surveyed in 15 countries (Figure 4). 8 countries had prices below 1.15 €/cup (7 Eastern European countries and Italy). Norway had the highest average price, where a serving of a cup of coffee costs 3.08 €/cup on average. 3 other countries had prices above 2€/cup (The Netherlands, Finland and Germany).

Prices so different poses challenges for inflation measurement. Oh and if you are looking for the most expensive prices in Europe you seem unlikely to go broke by just answering Norway!

Government assistance

Usually this is presented for Greece and the ESM loves to tell us how much it has saved Greece. Seldom can a country which has apparently saved so much been in such shocking shape! But let us move to its opposite in Euro area terms.

Between 2008 and 2015, German government interest payments were a whopping €122 billion less than originally planned for. The figure comes from a ministerial response to a question submitted by the opposition Green Party, which Handelsblatt has seen.

They are over playing their hand as other influences ( safe haven status for example) have been at play here but for the last 18 months or so the ECB has been explicitly driving German bond yields lower leading to this.

In 2015, the German government paid €21.1 billion in interest, almost half the 2008 level, when it paid €40 billion.

For some bonds it is now paid to issue as the ten-year yield is -0.07%.

Germany does not help back

The ECB has moved from asking to pleading for fiscal help but Germany shows very little sign of doing so. It ran a balanced budget in 2014 and 15 and now looks likely to run a surplus. The one time it showed a sign of some expansionism was when Chancellor Merkel promised to take in one million immigrants.

The ECB would love Germany to spend some of the money it is saving and indeed in terms of imbalances ( Germany’s current account surplus) you can make a good case for it. Although it would have to continue to break the Growth and Stability Pact rules on national debt as the Euro area contradicts itself.

Also there is a clear and present danger that the ECB may run out of German bonds to buy as the FT points out.

bankers at Citigroup estimate that the country’s entire government bond market will become ineligible for the ECB’s bond-buying scheme by November.

Buy equites?

Bloomberg seems not to have figured this out but there is a clear implication in this point made by Citigroup.

Corporate investment faces a financing hurdle as the weighted-average cost of capital for companies (known as WACC) remains elevated thanks to the stubbornly high cost of equity,

Perhaps the ECB should just buy everything along the lines of “It’s the only way to be sure” from the film Aliens. After all what could go wrong?


As we look back we see a distinctly patchy record. Perhaps the irony is that QE type policies that were for so long criticised for being inflationary have in fact delivered pretty much nothing in that front at least in terms of consumer inflation at least so far. We do see a fair bit of asset price inflation but central bankers call that seed corn for economic growth.

As to economic growth the picture is one of “moderate” growth to use the ECB’s own words. But in the economic world we never get “ceteris paribus” and at the same time there have been other influences which have boosted growth. For example lower oil and commodity prices have boosted real wages and hence consumption and the world economy has grown. Whilst the UK is the current scapegoat of choice via Brexit it is also true that its economic growth since 2013 will have helped the countries that follow its trajectory such as Ireland and Spain.

So a lot of effort for not much and maybe it is an entry in the list of the most expensive PR campaigns in history. Indeed if you allow for the costs of any exit then you may find that the overall impact was in fact negative. On that road to nowhere we will see no exit especially on Mario’s watch.





Will Mario Draghi ride to the rescue of the Italian banks?

One of the main long running themes of this website has been the problems and travails of the Italian economy. Back on the second of June I expressed the issue in this form.

I have taken a look at the annual numbers and in the year it adopted the Euro (1999) Italy had a GDP per capita of 26,353 Euro’s and in 2015 it was 25,479 Euro’s or 3.3% lower (2010 prices).

That still has the power to shock me and please take a moment to consider the impact of the fact that according to the official statistics the individual experience has gone into reverse both this century and in consequence in the Euro era. At that point I used the words of the Governor of the Bank of Italy which reinforced this grim message.

that Italy has the potential to recoup the growth gap it has accumulated in the last twenty years.

This made me have a wry smile at the latest report on the subject by the International Monetary Fund.

This growth path would imply a return to pre-crisis (2007) output levels only by the mid-2020s and a widening of Italy’s income gap with the faster growing euro area average.

This led to a flurry of lost decade style headlines many of which missed the fact that if we look back as I have described above Italy has been in such a situation for quite some time. Indeed whilst the economic forecast below is not great it is about as good as it gets for Italy.

Growth is projected to remain just under 1 percent this year and about 1 percent in 2017.

This backdrop has significance for the banking sector and the IMF put it thus.

It also implies a protracted period of balance sheet repair, and thus of vulnerability.

There was also some specific advice for the Italian banking sector.

To substantially reduce the stock of NPLs over the medium term, lower the cost of risk, and improve operating efficiency, Directors supported further measures, including more intensive use of out-of-court debt restructuring mechanisms; strengthened supervision; and a systematic assessment of asset quality for banks not already subject to the ECB comprehensive assessment, with follow-up actions in line with regulatory requirements.

That was quite a lot of advice! One can learn a fair bit by the amount of it and this clashed with the official view from Italy which is that there is no problem at all. We were told that the rescue fund would deal with the problems as we mused whether it would even last the summer. That story seems to be changing somewhat however.

Italian banks: So Fondo Atlante is seriously depleted thanks to no take up for new shares, so the solution? Fondo Atlante 2 with €5 to 6bn ( h/t Macroeconomics1 )

Mario Draghi responds

The ECB President was intimately involved in the past history of the Italian banks as both a bank supervisor and as the head of the Bank of Italy. These days of course he is involved but from more of a distance as he has a general overview from Frankfurt. Regular readers will be aware that I have long expected him to offer help to the Italian banks and yesterday we did get some hints. This was an interesting reply to a general question about the Portuguese and Italian banks.

We have in place rules of state aid, we have the BRRD, and as I said several times, these rules contain all the flexibility to cope with exceptional circumstances.

He took the opportunity to describe the rules whilst offering the potential get out of “exceptional circumstances” which made me think that Brexit could be used as such. That would be familiar Euro area policy in responding to a crisis for it rather than acting in advance. Later he became more specific.

On the first question, public backstop is a measure that would be very useful but certainly should be agreed with the Commission according to the existing rules.

Ah “public backstop” words which should send a shiver down the spine of Euro area taxpayers who seem to be facing more socialisation of banking losses. We also got quite a contradiction to the past official mantra that there is no real problem.

The second point about the NPLs in Italy: I think the very first measure – well, certainly, it’s a big problem

He even pointed out the transmission mechanism to the real economy.

But we should be aware that the longer we have this in place, the less functioning will be the banking system, or at least will be the banks with high NPLs, and so the less capable will be these banks to transmit our monetary policy impulses to the real economy.

Then we got a clear hint to future policy.

One of the measures is to have a well functioning market for NPLs. What is needed for such a market to develop?

The problem is that it is quit easy to see sellers on Italian NPLs but who would buy them? Yes what are called “vulture funds” might but that will not be at a price which is likely to be acceptable to the Italian banks who would have to take a large hit. This is in fact a hint that the ECB will be the buyer as the discussion is very similar to the way the ECB wanted an ABS market to develop so that it could start buying them! He also gave a clear hint to the Italian government.

Several things, but one is in my view dominant, namely to create a legislative framework where the NPLs can be traded and sold easily.

Build it and we will come is the message here.

The Market response

This was covered by the Financial Times

European bank stocks, led by Italian lenders, rallied……The rally in Italian bank stocks was led by a gain of 4.1 per cent for the shares of Banco Popolare. Shares in UniCredit, Italy’s largest bank, were 2.4 per cent higher. Monte dei Paschi shares rose 1.6 per cent.

Actually that did not seem much of a response frankly. After all the share prices of these banks has fallen so much that these were very minor responses. Also we were told this.

The remarks by the president of the European Central Bank, at his monthly press conference, helped alleviate concerns about Italian lenders,

I am not sure that is right as maybe he alleviated the concerns of Italian bankers but he certainly did not alleviate the concerns of Euro area taxpayers.


This is the issue which will not go away. In essence it started with the persistent slow economic growth in Italy which of course then slumped. In other countries there has been economic growth periods which have helped reduce problem loans and strengthen bank balance sheets. But in Italy the banks and the economy have dragged each other downwards. So we see that according to Morgan Stanley Unicredit has an NPL ratio of over 15% and Banco di Monte Paschi dei Siena has one over 35%.

Whilst the Italian state might like to have a bailout there are two main problems. Firstly it has a national debt to GDP ratio approaching 133% according to the IMF. Secondly it has only recently signed up to Euro area bailout rules which mean there has to be a bail in equivalent to 8% of total liabilities before public capital can be used. That is awkward once you realise this. From Bruegel.

The prospect of bank resolution in Italy is complicated by the fact that a large share of banks’ bonds is held by retail investors who – as evident in the previous cases of resolution in 2015 – often had little awareness of the actual risk they were signing up to.

In Italy about a third of bank bonds are held by household retail investors

A bail in would include the Italian equivalent of Mrs Watanabe and would impact directly in the economy. There could be miss-selling compensation like we have seen in the UK but how could the Italian banks afford it? So that would likely have to come from the taxpayer. The Alan Parsons Project covered this.

I just can’t seem to get it right
Damned if I do
I’m damned if I don’t

A bailout via the ECB seems much more likely and for its President it would have the beneficial effect of covering up past misdeeds. Also should he start running out of other countries bonds to buy it seems that there is likely to be a ready supply from Italy. Meanwhile though those who were painfully bailed in vis the Cypriot banks might reasonably think that they were not treated either fairly or equally.