6 Jul 2012

Three Central Banks Take Action

 A trio of the world's central  banks loosened their  monetary policy in the space  of under an hour on  Thursday, signalling a  growing level of alarm about  the world economy, although  suggestions of coordinated  action were played down

China, the euro zone and Britain all loosened monetary policy in the space of less than an hour, signalling a growing level of alarm about the world economy.
Of the three, the surprise move was from Beijing which lowered its lending rate by 31 basis points to 6 per cent following an interest rate cut just a month ago that also came out of the blue.
The European Central Bank cut rates to a record low 0.75 per cent following a dire run of economic data. But it steered clear of bolder moves such as reviving its government bond-buying programme or flooding banks with more long-term liquidity.
Light trails made by a passing tram are seen in front of a euro sign sculpture outside the European Central Bank (ECB) headquarters in Frankfurt, Germany, on Wednesday, Aug. 03, 2011. European Central Bank President Jean-Claude Trichet signaled that the ECB has resumed bond purchases as it offered banks more cash to stop the debt crisis from engulfing Italy and Spain and hurting the economy. Photographer: Hannelore Foerster/Bloomberg
The European Central Bank, which pushed interest rates for the eurozone to a record low, joined Britain and China in tackling the sluggish global economy. Photo: Bloomberg
The Bank of England, whose rates are already at a record low 0.5 per cent, said it would restart its printing presses and buy 50 billion pounds ($US78 billion) of assets with newly created money to help the economy out of recession.
"It is a surprise that they are moving so quickly. It shows that policymakers' concerns about the global economy have only grown," Mark Williams, an economist at Capital Economics in London, said of the People's Bank of China's action.
A raft of Chinese data is due next week, including second-quarter gross domestic product that officials may know to be poor, he said. But they may also be trying to foster suggestions of acting in concert.
"Policymakers may have felt that cutting rates on the day that the ECB (did) the same would deliver a bigger impact, encouraging talk of a coordinated response to the slowdown in the global economy," Williams said. "Again, though, this might simply underline the seriousness of the downside risks."

'No coordination'
In Frankfurt, ECB President Mario Draghi denied any globally coordinated central bank action of the sort seen after the collapse of Lehman Brothers in 2008.
"On coordination, no, there wasn't any ... that went beyond the normal exchange of views on the state of the business cycle, on the state of the economy, and on the state of global demand," he told a news conference.
Asked if conditions were now as bad as they were in late 2008 when the world's financial system was teetering, Draghi replied: "Definitely not."
The action puts even more focus on what the U.S. Federal Reserve will do when it holds its next meeting on July 31 and Aug. 1. The Bank of Japan meets next week.
Last month, the Fed held off on another round of bond-buying but its chief, Ben Bernanke, said there was "considerable scope to do more" and Wall Street bond firms polled by Reuters saw a 50 per cent chance of another asset purchase programme.
Some encouraging data on the labor market on Thursday tempered anticipation the central bank could undertake a third round of bond purchases, known as quantitative easing or QE3.
But more weight will be given to Friday's nonfarm payrolls report, which is expected to show job growth picked up in June but still remained tepid at 90,000 jobs.
"If we get a couple of more bad jobs reports, (the Fed) will come in with more stimulus. Today's reports suggest they might hold off, but they will want to see more data before they decide," said John Canally, economist and investment strategist at LPL Financial in Boston.
In recent weeks, economic evidence from Asia, Europe and the United States has pointed to a world economy running out of steam.

Will it work?
All the major central banks, with interest rates at historic lows, face the law of diminishing returns.
The Bank of England had already created 325 billion pounds of new money before Thursday's addition. In doing so, it has successfully driven borrowing costs to all-time lows, yet the UK economy is languishing in recession.
"The BoE has been excessively optimistic about how powerful QE is," said Philip Rush, an economist at Nomura, referring to the money-creating strategies known as qualitative easing.
"The latest increase is more than just a token, but it is not hugely significant for the outlook for growth and inflation."
A poll conducted by Reuters found 27 out of 47 economists believe the central bank will stop at the announced 375 billion pounds in total. A minority said the BoE would do more, with a few still calling for as much as 500 billion.
The euro zone is no better off. "We see now a weakening basically of growth in the whole of the euro area, including the country or the countries that had not experienced that before," Draghi said.
Policymakers could counter that things would be much worse if they had not acted, but with most monetary policy levers already pulled, government action is also required to improve the world's fortunes.
The International Monetary Fund has urged the United States to quickly remove the uncertainty over the path of fiscal policy, which is set to tighten abruptly at the start of next year without congressional action.
Measures announced at a European summit last week bought some calm to the euro zone debt crisis with the promise of action to lower government borrowing costs, but economists say they did not tackle the root problems.
The ECB continues to put the onus on euro zone governments to solve their debt crisis and did not even discuss on Thursday "non-standard" measures such as buying Spanish and Italian bonds to lower borrowing costs which are not sustainable indefinitely.
Elsewhere, Denmark's central bank cut interest rates by 25 basis points, shadowing the ECB's action, in a historic move that put one of its secondary rates into negative territory for the first time. Kenya ended its nine-months-long hawkish stance with a bigger-than-expected 150 basis points rate cut


5 Jul 2012

Eurozone Banks Dump Bad Paper on Taxpayers

Bloomberg is reporting on what looks like a brazen con being pulled on taxpayers by eurozone banks and governments. It goes like this: During the recent credit bubble the PIIGS country banks created and then sold a bunch of low-quality mortgage bonds. Now they’re buying them up at big discounts to the original price, booking a profit on the trade, and using those securities as collateral for low-interest-rate loans from the European Central Bank.
Spanish and Portuguese banks are leading European lenders in buying back their own mortgage- backed securities at distressed prices to bolster capital and stockpile eligible collateral for European Central Bank loans.
Banco Bilbao Vizcaya Argentaria SA (BBVA), Banco Comercial Portugues SA (BCP) and other lenders this year repurchased 6.6 billion euros ($8.4 billion) of asset-backed bonds they issued, more than double the level for all of 2011, according to data compiled by Deutsche Bank AG. Banks buy the debt, packages of loans in which they kept subordinated portions, for less than face value, and book a capital gain similar to the discount.
The purchases follow European Banking Authority demands that banks raise 114.7 billion euros by last week after the sharp fall in the value of bonds issued by governments in the 17-member shared currency. The deals are poised to accelerate after the ECB last month reduced the minimum ratings it will accept for mortgage securities offered as collateral for cheap loans, adding incentive to lenders to buy back debt and pledge it with the Frankfurt-based institution.
“Compliance with the EBA rules has been the main reason of all buybacks we are seeing so far, but there will be more deals since the ECB will take more of that paper,” said Frank Erik Meijer, head of asset-backed securities at The Hague-based Aegon Asset Management, which oversees 220 billion euros of assets. “Lenders with little or no other sources to raise capital and funding can turn to this strategy.”
Northern Rock 
The bigger the discount the mortgage debt is trading at the larger the incentive for banks to repurchase their own deals because that translates into greater capital gains.
U.K. lender Northern Rock Asset Management Plc last month offered to buy back bonds issued under its Granite program as some were trading at 58 percent of face value. They’ve risen to 69 percent of face value after the Newcastle-based lender bailed out by the U.K government said it would offer 64 percent to 77 percent of par.
Incentives are greatest for Spanish and Portuguese lenders, where yields over benchmark rates for mortgage-backed securities are as much as 17 times higher than comparable notes pooling home loans in the U.K. Eleven Spanish banks and four Portuguese lenders have put out tenders to repurchase some of their securitizations, according to Barclays Plc data.
Few Alternatives 
European lenders have few alternatives to raise capital as demand for shares of financial companies has plummeted amid the crisis over the common currency.
Sales of stock from European financial institutions fell 71 percent to 2.7 billion euros, data compiled by Bloomberg show, as Europe’s sovereign debt crisis has spread from Greece to Spain, roiling credit and equity markets. The Bloomberg Europe Banks and Financial Services Index (BEBANKS) declined more than 28 percent in the last year.
Shares have fallen even as the European Central Bank pumped 1 trillion euros of three-year loans, known as the LTRO program, into the system since December, making it easier for them to fund such transactions. ECB provides the secured loans at a rate of 1 percent.
“LTRO money has made it easier for banks, especially from peripheral countries, to use funding to raise capital at a moment when other possibilities such as sale of stock or asset sales are virtually closed,” said Conor O’Toole, the London- based asset-backed securities analyst at Deutsche Bank. “Even as buybacks are at record levels so far this year, we expect a second round of tenders.”
Rating Changes
Last month, the ECB, which demands residential mortgage- backed securities to be graded by at least two credit rating companies, said it will allow a second ranking as low as the least investment grade, six steps below the prior requirement. The central bank also widened the range of asset-backed securities it accepts as collateral.
Banks can pledge between 40 and 50 billion euros of bonds, which were not eligible due to rating cuts, said Bank of America Merrill Lynch analysts including Alexander Batchvarov.
Securitizations pool assets ranging from corporate loans to mortgages and slice them into securities of varying risk. The transactions remain on the originator’s balance sheet when it retains the riskiest slices.
Bilbao, Spain-based BBVA bought back 638.2 million euros of bonds backed by mortgages, consumer and company loans in a deal allowing it to record a 250 million euro capital gain, according to a June 28 regulatory filing. Banco Comercial Portugues offered to buy back as much as 300 million euros of bonds it issued between 2003 and 2007 mostly under its Magellan program backed by residential mortgages.
Some thoughts
Stripped of all the terminology, this scam comes down to European governments investing taxpayer funds in risky mortgage bonds — in order to prop up banks that made a lot of ill-considered loans in order to generate big year-end bonuses. This may be legal, strictly speaking, but it’s definitely not moral, and to the extent that European taxpayers figure out what’s happening, the result should be, um, noisy.
It’s also interesting that the banks admit that they have no other source of cash. The markets at long last appear to have recognized that most big European (and American for that matter) banks are stuffed so full of bad paper and on the hook for so many billions in derivatives that they’re terrible bets. Now only governments with docile citizens are left to keep the zombie banks animated.
This game, like many others in today’s global financial system, can go on as long as the currencies the central banks are creating remain viable. Once euros and/or dollars lose their attractiveness as a store of value, the end will come quickly.

Silver likely to outperform Gold, Copper in Q4 2012: TD Securities

NEW YORK (Commodity Online): Silver likely to outperform gold, copper, crude oil and platinum in fourth quarter (Q4) this year, said TD Securities (TDS) in a commodities briefing. TDS is the global wholesale banking arm of Toronto-Dominion Bank Financial Group.

Silver to eventually get a boost from an increasing probability of more aggressive Federal Reserve monetary policy, although the metal could run into more tough sledding in the meantime should there be renewed eurozone debt worries and disappointments about U.S. quantitative easing, TDS added.

According to BNP Paribas, "An improving macroeconomic outlook and high risk appetite should see silver outperform gold for most of H2’12 and 2013 although silver, like gold, remains vulnerable to waves of liquidation. As a result, the gold/silver ratio should decline to the low 40s by H2’13.”

TDS also noted that, silver has been held back by gold’s sideways action lately and an economic slowdown that has hurt expectations for industrial demand. Meanwhile, mine supply keeps rising.

“At least for now, hedge funds and other specs have likely moved into other investments as they currently hold one of the smallest net-long positions in eight years,” they added.

The firm continued that, “However, if we see the Fed get aggressive on the QE front, silver should rally robustly as investors use it to hedge again. We would expect a rapid spec build in Comex net longs and a big rise in silver ETPs (exchange-traded products).”

“The probability of additional Fed balance sheet action to increase as 2012 unfolds, with silver likely outperforming gold, copper, crude oil and platinum in Q4” TDS concluded.

As of 12:15 p.m. EDT, spot silver prices rose by 3.2 percent to $28.36 on Tuesday, tracking gold's gains. Prices remain near their 2012 lows, however, and are little changed so far this year.

Gold prices rose 1.5 percent to a two-week high on Tuesday, as signs of a slowing U.S. economy fuelled investors' expectation that central banks around the world will introduce new monetary stimulus.

Platinum rose by 1.8 percent to $1,474.75, while palladium was also up 3.9 percent at $594.24.