Thursday, September 13, 2012

The "details" of a soap bubble ...

European Central Bank president Mario Draghi is expected to announce the details of a bond-buying programme to help keep down borrowing costs of crisis-hit countries later on Thursday. Leaks suggest it will involve unlimited purchases of government debt that will be "sterilised" to assuage concerns about printing money. The bond-buying scheme is rumoured to be called the "outright monetary transactions", with a shorthand title of OMT.
 
Maturity
The life of a bond, at the end of which it will be repaid in full. A bond's maturity can be as short as a year to as long as 100 years.
Seniority
This refers to how likely you are to be repaid if a bond issuer goes bankrupt. Bondholders with seniority over others will be paid back before other bondholders. There was some concern that the ECB would demand seniority over other bondholders when it undertook the bond-buying scheme, but leaks now suggest otherwise.
Unanimity
Was the ECB governing council united in backing Thursday's decision, or was there opposition? Bundesbank head Jens Weidmann has spoken out against a bond-buying programme before – is he now onside? Was the ECB split over interest rate levels, or were the decisions unanimous? Draghi's answer to these questions (which will surely come up) could be crucial.
Pari passu
A Latin phrase meaning "equal footing". In the bond markets, this means bondholders will be treated the same if a bond issuer goes bankrupt. Any purchases the ECB makes as part of its bond-buying programme are expected to be pari passu with other bondholders.
Collateral requirements
The ECB asks banks for collateral in return for taking out cheap loans. If they relax collateral requirements, they can accept a wider range of assets as collateral from banks. They have already relaxed these requirements, and can now accept everything from bundles of car loans to mortgage-backed securities.
Conditionality
This is the way the ECB would keep the Germans happy, by imposing conditions on receiving assistance from the ECB; so, if the ECB helps keep a country's borrowing costs low by buying up its bonds, that country may have to agree to some strict austerity. Without conditionality it would be easier for the ECB to unilaterally intervene.
Convertibility risk
This refers to the risk that you will buy bonds denominated in euros but could ultimately be paid back in lire or drachma (or deutschmarks) if the country taking out the debt leaves the eurozone before the end of the bond's life.
Unlimited intervention
Exactly what it says on the tin. Expectations are that the ECB will not put a limit on its bond buying. This is seen to be an improvement on the previous bond-buying programme, which was limited in size and therefore lacked credibility in the markets. If other traders do not believe the ECB has the firepower (or inclination) to buy enough bonds to bring down yields, they may continue to bet on them rising.
Sterilisation
This makes sure the money supply does not increase as a result of the bond-buying programme. When the ECB buys bonds, it is injecting liquidity into the financial system, effectively creating new money. To counteract that, the ECB has in the past followed bond purchases by subsequently draining an equal amount of liquidity from the system. It does this at the weekly deposit tender by increasing the rates it will pay commercial banks to deposit money with the ECB. The idea is that this will encourage banks to deposit more money with the ECB, thereby taking it out of the system.
Yield cap
Rumour had it that the ECB would set a yield cap on certain countries' government bonds. This would mean if the yield looked like it would break through that level, the ECB would start buying bonds to push prices higher and bring yields back down.

5 comments:

Anonymous said...

Some members of the European Parliament, including committed pro-Europeans such as former Belgian prime minister Guy Verhofstadt, immediately spoke out against Barroso's call, saying the EU needed to deepen the structure already in place, not become a federation of nation states.

Barroso said his vision would require another overhaul of the EU's treaty - the fundamental set of laws that govern how the European Union is managed. Changing the EU treaty has happened in the past, but it is a complex and lengthy process that often raises tensions among member states.

Barroso, a former Portuguese prime minister who has led the European Commission since 2004, said his office would flesh out proposals for the future shape of the EU, including the legal changes required to become a federation, before mid-2014.

In the meantime, he called for "broad debate" across Europe and its citizens about how the continent planned to recast itself and what attributes it would need to compete with its major trading partners such as China and the United States deep into the 21st century.
WELL HOW ABOU BENELUX ....HOW WILL THAT TREATE BE ALLIGNED TO THIS QURTAO REICH ????

Anonymous said...

I hope BARROSSO'S speech, translated into German with appropriate comment, is given wide coverage in the German MSM. The German people's democratic rights have been compromised today by their high court ruling on the ESM. This speech makes it clear what will happen to them if they don't wake up soon and stop feeling guilty about what their parents and grandparents did seventy five years ago.
The arrogance of Barroso knows no bounds. Perhaps this time he has overstepped the mark and will come to regret the disdain in which views the free people of Europe.

Anonymous said...

Maybe a light at the end of the tunnel. This fool(Barroso) has opened the door to treaty negotiations and with it, the chance of referendum.

Now let's see if that quisling bastard Basescu can find reason not to give us a chance to finally vote on our membership of this vile evil socialist union

Anonymous said...

"A democratic federation of nation states that can tackle our common problems, through the sharing of sovereignty in a way that each country and its citizens are better equipped to control their own destiny."

Providing nothing is permanent - I think a functioning federation could be a very useful string to the bow of legal instruments already available to aid any common citizens perusal, when necessary or appropriate.

I daresay with the best of modern regulatory capacity and capability such an instance could happen eg when fostering better ways to improve or avert disaster.

Anonymous said...

Glad to see that Portugal is doing so well, Barroso was a great PM and led his country to solid economic success.
Now he is doing a great job as president of Europe. I bet his fellow Portuguese are really proud of him. Makes you want to vote UKIP.