$500 BILLION by the ECB in loans?????

[grapejelly]

http://money.cnn.com/2007/12/18/news...ion=2007121811

staggering...

FRANKFURT, Germany (Dow Jones/AP) -- The European Central Bank has let loose a torrent of cash to give banks in the euro zone access to more money as the rest of the year winds down, with nearly 400 of them seeking some of it.


The move, though unexpected, was welcomed, and helped force short money markets to fall.


In a statement Tuesday, the bank, which oversees monetary policy among the 13 nations that use the euro, said it allocated €348.6 billion ($501.74 billion) in its main refinancing operation, a process that also boasts a duration of 16 days, meaning it will not mature until Jan. 4.
The bank said the lowest, or marginal bid, rate that it accepted was 4.21 percent, matching the weighted average allotment.
The ECB also said that 390 banks and financial institutes submitted bids totaling €377.1 billion ($542.76 billion) at rates of between 4 percent and 4.45 percent.


That maximum bid rate left analysts puzzled over the rationale of institutions bidding at that level given the bank's announcement Monday. It pledged to satisfy all bids at or above 4.21 percent - the weighted average allotment rate of the main refinancing operation that settled on Dec. 12 - at the main refinancing tender Tuesday, to smooth out continued heavy demand for liquidity in the euro-zone banking system.


"It's a huge amount, really significant...but liquidity needs are also significant," Nathalie Fillet, a strategist at BNP Paribas in London told Dow Jones Newswires. "It will have the most impact for rates between two weeks and one month."


Two-week rates were trading around 4.20 percent to 4.35 percent in the afternoon, while one-month rates had come down to 4.44 percent to 4.56 percent from levels around 4.88 percent to 4.93 percent earlier in the day.
The size of Tuesday's tender was more than the €180.5 billion ($259.79 billion) allotment, or what the ECB estimates how much money banks will need to conduct business as normal.

[Spartacus]

Re: $500 BILLION by the ECB in loans?????

The big question I have is, are these funds restricted?

Since the ECB injected the funds specifically to relieve stress in the interbank markets, is their use restricted to inter-bank settlements?

Can they be used to write more loans through the normal fractional reserve channels?

Being temporary, and it looks like they're very short term, they may not be able to get far out of the banks, but if they can be lent and multiplied, the $500 billion is the bare-minimum injection.

[bart]

Re: $500 BILLION by the ECB in loans?????

The big question I have is, are these funds restricted?

Since the ECB injected the funds specifically to relieve stress in the interbank markets, is their use restricted to inter-bank settlements?

Can they be used to write more loans through the normal fractional reserve channels?

Being temporary, and it looks like they're very short term, they may not be able to get far out of the banks, but if they can be lent and multiplied, the $500 billion is the bare-minimum injection.

To the best of my knowledge, they're not restricted... but the key as you noted is that they're very short term - two weeks. Two week loan potentials are a minimal issue in my opinion, especially since the real issues are liquidity and solvency.

ECB wise, there is (very roughly) a $20 billion add to the temporary operations total money pool since about late June when compared to the prior year. Considering that their M3 is about $8.5 trillion, that's not a huge number even with fractional reserve effects.

[jk]

Re: $500 BILLION by the ECB in loans?????

i think the real question is whether or how much they roll over on jan 4.

[metalman]

Re: $500 BILLION by the ECB in loans?????

i think the real question is whether or how much they roll over on jan 4.

having some difficulty putting the toothpaste back into the tube, i see.

Call to relax Basel banking rules

"If these funding routes are not reopened it will have massive consequences for the economy as a whole," he said. "It will make 1929 look like a walk in the park."

He dismissed as "window dressing" the move announced by central banks around the world this week to pump extra money into the money markets and increase the type of collateral they will accept in return, in an effort to get them running again.

"This won't get to the core of the problem: the fundamental lack of collateral. As these problems drag on, the consequences for the macro-economy of not relaxing [the Basel regulations] are unthinkable."

[Finster]

Re: $500 BILLION by the ECB in loans?????

http://money.cnn.com/2007/12/18/news...ion=2007121811

staggering...

Stultifying.

Breathtaking.

JK raises a good point about it getting rolled over. If it does go on the rollover treadmill, expect gold to go to the moon. And if it doesn't, the credit collapse will continue. Draw your own conclusion ...

[jk]

Re: $500 BILLION by the ECB in loans?????

it's hard to imagine that the ecb WON'T roll over all these loans. it solves the problem of "the fundamental lack of collateral" by making all the [unspecified] collateral [literally] money-good.


later edit: from an article on this subject in the telegraph: "The ECB's unlimited liquidity is a sign of emergency: people who think this move is just end of year house-keeping have lost touch with reality," said Hans Redeker, currency chief at BNP Paribas.

and
The ECB allows them to borrow against bonds with a credit rating as low A+ and a wide array of mortgage securities - so long as they are in euros."The ECB is a very broad church," said Marc Ostwald, an economist at Insinger de Beaufort. "Banks can hand over almost anything they want as collateral and borrow cheap, so it is likely that British banks are going there for funds."

and
In theory, yesterday's liquidity blitz was a short-term house-keeping measure to keep the markets fluid through Christmas and New Year. The markets remain sceptical, suspecting that the eurozone may be harbouring something very nasty - possibly in the Spanish banking system.
The ECB cannot allow the risk of a "Northern Rock" in Europe because there is no European government to take charge. Any suggestion that German taxpayers might have to bail out a Club Med bank would be politically explosive, testing the viability of monetary union. This is why Frankfurt has been most willing to open the floodgates at each stage of the crisis.


and
The ECB is constrained by inflation, now running at 3.1pc - the highest since the launch of the euro. Even so, the mood is shifting. Jurgen Stark, the ECB's chief economist and arch-hawk, told Italy's Il Sole yesterday that Europe would not be able to shake off the US slowdown. "I don't believe in the decoupling hypothesis. People who talk about it stress the trade links between the US and the eurozone, but you have to remember that the financial links and the effects of confidence are more important. We will not be immune," he said.

http://www.telegraph.co.uk/money/mai...cnbanks319.xml

[whitetower67]

Re: $500 BILLION by the ECB in loans?????

The markets remain sceptical, suspecting that the eurozone may be harbouring something very nasty - possibly in the Spanish banking system.

I wondered the same thing -- what major bank in the EU is about to go insolvent? It's the size of the liquidity injection that's mind-boggling. Something must be rotten in Denmark, Spain, wherever.

(And, you have to wonder if there are "nasty" situations percolating here.)

[Finster]

Re: $500 BILLION by the ECB in loans?????

... Mr Greenspan stands accused of allowing these bubbles to inflate by holding US interest rates too low for too long – a bad habit his critics say stretches back over his whole tenure, from the first few months where he cut rates sharply in the wake of the stock market crash of 1987...

"With hindsight, it is possible to see that his modus operandi was to blow one bubble after another," said Tom Schlesinger, the executive director of the Virginia-based Financial Markets Center, which analyses the Fed. "Mr Greenspan consistently argued that central banks have no legitimacy to intervene to prevent asset price bubbles, and to substitute their judgement for that of millions of market participants. But central banks have no problem whatsoever intervening when they think that product prices are inflating, or when labour markets are overheating." ...

http://news.independent.co.uk/busine...cle2961311.ece

So much for the theory that the central bank can underwrite asset bubbles and then just erase the consequences later. Asset prices are prices too, and are usually the first responders when inflation is kicking up. Looking only at consumer goods and wages for inflation information is like trying to calculate the speed of a car by analyzing its exhaust fumes after it's already sped by.

As is so painfully obvious now, once allowed to get that far, inflation cannot be reined in without severe withdrawal symptoms. But no hindsight required. We had an inflationary boom characterized by asset bubbles in the 1920, and a painful recovery in the 1930s. Another one in the 1960s was followed by a very difficult 1970s. Another one in the 1990s … Greenspan himself remarked to his fellow FOMC members on September 24, 1996 that "there is a stock market bubble problem at this point." (http://www.wsws.org/articles/2002/se...gpan-s18.shtml). Five thousand Dow points later …

[grapejelly]

Re: $500 BILLION by the ECB in loans?????

Shouldn't the price of gold be discounting this event? Isn't it fairly obvious that currency is expanding at a mind boggling pace in order to conteract the credit contraction? Isn't this inflationary all over the place?

[Finster]

Re: $500 BILLION by the ECB in loans?????

Shouldn't the price of gold be discounting this event? Isn't it fairly obvious that currency is expanding at a mind boggling pace in order to conteract the credit contraction? Isn't this inflationary all over the place?

You better believe it! That it hasn't yet suggests an opportunity. Maybe this act by itself isn't enough, or the market doesn't yet recongize the implications. Maybe this slug of currency has to show itself to be not as temporary as advertised. If $500B pops into existence, does its lube job, and is extinguished in a couple weeks, no harm no foul. Then there's a certain amount of inertia in markets, too. At the moment, there are a lot of people way short dollars in the US - we printed up a bunch but sent most of it to China - and that dollar demand is real and urgent, even while the expat dollars compete with those that remain here for resources.