Tag: Euro

More Target2 divergence: This time is different

In the midst of the Eurozone “sovereign debt” crisis and increasing spreads in 2010-11, interbank lending came to a halt. At the same time, bank clients were moving funds from the banks of the countries “in trouble” to the banks based in “safe countries”. Because “core” banks were not willing to lend liquidity back to them, “periphery” banks borrowed from the Eurosystem to settle their payments, and Target2 balances diverged. This ended with Draghi’s “whatever it takes” announcement in the Summer of 2012 and the introduction of OMT in the ECB’s toolbox.

What is happening today (SEE CHART) is very different, and does not reflect a “flight to safety” as it did back then. Today’s divergence is a consequence of the ECB asset purchase program (QE), as well as of the current levels of policy interest rates set by the ECB.


T2

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Mario Monti defends the austerity fortress

I have known Mario Monti since the time he was my professor of Monetary Economics in the late 70s. An excellent teacher, he opened his course by teaching financial accounting and balance sheets, explaining that every financial asset has a corresponding liability and demonstrating the importance of net sectors’ financial positions.

Today, Mario Monti chairs the EU “high-level group on own resources”, working on a reform of the EU budget. In an interview by Federico Fubini (Corriere della Sera, 18 October 2015), he discusses the current state of public finances in the EU and shares his concerns that the tight fiscal policy enforced in highly indebted EU countries is now being relaxed prematurely.

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Eurozone desperately needs a “FISCAL WHATEVER-IT-TAKES”. But EU leaders ain’t bold enough to act.

Even under the rosiest scenario that a deal is reached on Greece’s new three-year bail-out program, the economic conditions of Greece, and of the Eurozone as a whole, will remain serious. Europe seems unable to find the political path to move out of such deadly gridlock. Yet, the logic is simple.

Eurozone like Monopoly

Consider the Eurozone like the game of Monopoly. Read more

Is QE forever?

The point of Draghi’s QE is not the amount. It is the principle.

It is not the much discussed size of the ECB operation. Rather, it is the fact that the ECB has become a buyer of government bonds issued in the countries that are members of the Eurozone.

This is the really big news in the Eurozone where, until last week, the ECB’s monetary operations did not include the possibility of trading in the government securities market in the same way the Fed, the Bank of England, or the Bank of Japan do.

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