Recap 12-8-11

North America:

  • US Initial Jobless Claims declined to 381k vs 395k exp and 402k prev.
  • Corzine said he was ‘stunned’ by the huge shortfall in client funds, and plead the 5th.


  • EBA says EU banks must raise 114.7bn in capital, 8bn more than the October estimate as a result of harsher criteria. 30 of the 71 banks need to raise capital. EBA identified the biggest capital deficiencies in Spain and Italy, where banks need to find a total of €26.2 billion and €15.4 billion, respectively. German banks need to raise 13.1bn vs 5bn previously. Greek banks were estimated to need 30bn. Banks need to inform their national regulators by 1/20 on how they will come up with the funds.
  • ECB cut 25bps as exp. Draghi said the ‘other elements will follow’ does not mean additional SMP purchases. (!)
  1. It will conduce two 36 month LTRO’s, w/ the option of early repayment after 1yr.
  2. Collateral eligibility will be eased. ABS having a 2nd best rating of at least A will be eligible for ECB repo. NCB’s will also be allowed to accept additional performing bank loans that satisfy specific eligibility criteria.
  3. Reserve ratio is reduced to 1% from 2%
  4. ECB has to comply with the spirit of the treaty which forbids state financing.
  5. ECB itself is not a member of the IMF and cannot therefore provide any funding
  6. Sterilization remains a pre-condition for the program.
  7. 2012 Forecasts:
  1. Inflation: 2% vs 1.7% in Sept
  2. Growth: 0.3% vs 1.3% in Sept

BoE kept policy unchanged as exp


  • Australia UE increased to 5.3% vs 5.2% exp and prev
  • South Korea kept policy rates unchanged as exp
  • Japan Eco Watchers Outlook Survey declined to 44.7 vs 45.9 prev


Both Draghi’s statement as well as Constancio’s (ECB VP) statement devotes introductory paragraphs to the pursuit of price stability. This suggests that the ECB’s primary concern remains inflation, and NOT as its duties as the lender of last resort.
This is going to bite them in the ass. In a year or so down the road, the ECB will be fighting deflation. The central banker’s rulebook on fighting deflation is: avoid deflation. Ultimately, it may be deflation that – belatedly – gets the ECB to act more aggressively.


2 thoughts on “Recap 12-8-11

  1. The optimist within me hopes that the ECB is simply unwilling to commit until there is a defined set of policy from Euro area leaders. However, the realist within me knows that these leaders are incapabale coming to the right solution. It’s almost laughable…the governments are implementing austerity, and the EBA is forcing banks to raise capital levels (which means less lending -> greater negative for growth) -> the exact medicine to eventually lead to deflation & it’s not like higher tier 1 ratios are going to save these banks anyway when a euro disintegration does finally come.

    This market is simply not investable

  2. My friend from Belarus likes to joke that the attitudes of the Fed and ECB/Bundesbank towards monetary policy are driven by historical memory – of the Great Depression and Weimar hyperinflation respectively. Seems like it’s not a joke, but grim reality, for the ECB at least.

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