EXCLUSIVE-ECB mulls buying debt of cities and regions - sources
11-Nov-2015 10:47:08 AM
ECB examines extra money printing as economy stays slow
Municipal bonds could be added to shopping list - sources
Move could help Germany, boost slack Italy, Spain
By John O'Donnell
FRANKFURT, Nov 11 (Reuters) - The European Central Bank is examining whether to buy municipal bonds of cities such as Paris or regions like Bavaria, according to people with knowledge of a possible extension of its one-trillion-euro-plus money printing scheme.
This regional bond buying could be one in a series of measures to be rolled out in the coming months, although one of the sources said time was short for a full launch in December and that this would likely come by March next year.
The ECB declined to comment.
Despite the ECB's scheme of quantitative easing (QE) to buy chiefly state bonds, the euro zone's economy is growing only modestly and the central bank is urgently considering what more it can do to improve it and stagnant price inflation.
As part of preparations for the next rate-setting meeting of policy-setters on Dec. 3, ECB officials are now analysing whether and how to extend its shopping list to municipal bonds, issued by, say, Madrid or Mainz, or a federal German state.
"You have big markets, such as Spain and Italy. France has a well developed market," said one person.
According to data from Thomson Reuters IFR, almost $500 billion of bonds issued by European cities and regions are in circulation. The regions have sold more than $76 billion of bonds over the last year.
The city of Paris, for example, has borrowed 4 billion euros ($4.3 billion) in total through such bonds. It recently sold a bond of 300 million euros.
The source said that while some cities were risky, they had the fallback of central governments. Municipal bonds typically have a lower credit rating than governments. It is a fragmented market in Europe, with many small issues.
"Some cities in Spain or Italy are bust. But a city will always be there," said the person. "Someone will always pay back the debt. They have the backing of the government and the ability to raise taxes."
GERMAN BOOST
A second person confirmed that buying municipal or regional bonds already being traded was one of the options being studied, also a testimony to the fact that the ECB's alternatives are limited.
Corporate debt, for example, is much sought after and therefore difficult to buy. Buying into stock markets would face opposition because of the risk. The ECB already buys covered bonds and asset backed securities.
Any move to buy municipal debt would particularly benefit the German regions that have sold hundreds of billions of euros of bonds and dominate the market, making it even cheaper for them to borrow.
But it could also help rejuvenate slack markets such as Italy or Spain although regional borrowings count in calculating a country's overall debt pile and their size is therefore also kept in check.
In the coming weeks, ECB President Mario Draghi hopes to win the backing of a majority of Governing Council, which includes national central bank chiefs, for further steps to shore up the bloc's weak economy.
Germany's Bundesbank, which is opposed to any extra money printing, may find it easier to accept the buying of municipal bonds.
Because quantitative easing is determined by the relative size of a country in the 19-member euro zone, Germany does most bond buying. Some analysts predict that it could even run out of bonds to buy, as returns dip below the ECB threshold.
Putting municipal bonds in the mix could resolve that problem.
"If the ECB wants to extend the bond purchase programme, in our view, the ECB needs to include Federal states' bonds," said Hendrik Lodde of DZ Bank.
"With a lengthening of the 'shopping list', Germany can reach the level of overall bond buying intended easier."
From Exane
Danish Compromise to be maintained or only be partially but not fully removed? Good for Credit AgricoleIn a consultation document on the harmonising the exercise of options and discretions in Union Law the ECB indicated regarding the so-called Danish Compromise thatThe general rule is to deduct from banks' own funds their significant holdings in insurance undertakings. As an exception to this rule, in the case of bank-led financial conglomerates, Article 49(1) CRR gives competent authorities the option, on a case-by-case basis, to allow such holdings not to be deducted and for them to be risk- weighted instead (100% to 370%), provided that a number of conditions are met. Since this O&D requires an ex ante case-by-case assessment, the ECB policy approach is laid out in the Guide.A full deduction of insurance holdings would have had a significant impact on major bank-led conglomerates in the SSM. Indeed, when deducting the insurance holdings, the fully loaded CET1 ratios of relevant significant institutions (as indicated in Table 1) drop by 100 bp on average, from 11.41% to 10.41%. Therefore, the decision taken was to allow non-deduction while enhancing disclosure requirements. In addition, an intermediate approach is being explored, according to which only the Solvency II requirements of the insurance component would be deducted from the capital of the bank.Read across for Credit Agricole: Credit Agricole only trades at 0.8x TE for 10% ROTE because of capital deficit. In our current forecasts we have assumed a scrip dividend in order to build capital faster so as to be able to face the removal of the Danish Compromise. The article above suggests that full removal is no longer likely and that instead no deduction or partial deduction would be the most likely scenario. We currently remove EUR5bn from our SOTP valuation or around EUR2 per share. The table above suggests that on average (CA may be worse impacted than average) the 'intermediate scenario' is of only 24bp, ie 75% less than a full deduction. In the instance of CA this would be equivalent to a 50bp deduction instead of 200bp and would add c. EUR1.5 per share to our SOTPFollowing a sharp share price correction post a poor Q3 performance we believe the shares offer an excellent entry point. We reiterate our Outperform rating.
Danish Compromise to be maintained or only be partially but not fully removed? Good for Credit Agricole
In a consultation document on the harmonising the exercise of options and discretions in Union Law the ECB indicated regarding the so-called Danish Compromise thatThe general rule is to deduct from banks' own funds their significant holdings in insurance undertakings. As an exception to this rule, in the case of bank-led financial conglomerates, Article 49(1) CRR gives competent authorities the option, on a case-by-case basis, to allow such holdings not to be deducted and for them to be risk- weighted instead (100% to 370%), provided that a number of conditions are met. Since this O&D requires an ex ante case-by-case assessment, the ECB policy approach is laid out in the Guide.A full deduction of insurance holdings would have had a significant impact on major bank-led conglomerates in the SSM. Indeed, when deducting the insurance holdings, the fully loaded CET1 ratios of relevant significant institutions (as indicated in Table 1) drop by 100 bp on average, from 11.41% to 10.41%. Therefore, the decision taken was to allow non-deduction while enhancing disclosure requirements. In addition, an intermediate approach is being explored, according to which only the Solvency II requirements of the insurance component would be deducted from the capital of the bank.Read across for Credit Agricole: Credit Agricole only trades at 0.8x TE for 10% ROTE because of capital deficit. In our current forecasts we have assumed a scrip dividend in order to build capital faster so as to be able to face the removal of the Danish Compromise. The article above suggests that full removal is no longer likely and that instead no deduction or partial deduction would be the most likely scenario. We currently remove EUR5bn from our SOTP valuation or around EUR2 per share. The table above suggests that on average (CA may be worse impacted than average) the 'intermediate scenario' is of only 24bp, ie 75% less than a full deduction. In the instance of CA this would be equivalent to a 50bp deduction instead of 200bp and would add c. EUR1.5 per share to our SOTPFollowing a sharp share price correction post a poor Q3 performance we believe the shares offer an excellent entry point. We reiterate our Outperform rating.
"East countries should we now not dictate morality"
Italian Prime Minister Matteo Renzi speaks out to solve the refugee crisis for the EU South-East expansion. And he reveals what he does when he wants Angela Merkel resent times.
Matteo Renzi enters vigorously. He almost bounced on the door of the Renaissance Library of Palazzo Chigi, the government palace from the 16th century, together with the photographer. Tempo is his trademark. So far, his government has renewed the right to vote, the Senate, the labor market, public administration and partly Treasury and Civil Law. The Italians he informed daily via Twitter.
Die Welt: What do you tweet today?
Matteo Renzi: ". Civil Justice A structural reform that went by almost unnoticed." We have the latest figures for the first year. They show that the transition to the telematic process (digital file management, d. Red.) Has considerably shortened the processing time. In the city of Rome it has fallen by 48 percent. This also applies to the fight against tax evasion. The digital data synchronization has transported 224,000 tax evaders to day. The ancient Romans would say 'Quantum mutatus from illo!'. How much has changed ... since we are traveling with the rickety campers through the Lombard plain!
An earlier interview with Matteo Renzi, Mayor of Florence at that time, we had done during a trip in the camper, with whom he toured in 2012 as a candidate for the presidency of the PD by Italy. In December 2013. He became party secretary, in February 2014 then Premier.
Die Welt: You are head of government and party, seem to have little competition ...
Renzi: Two years ago in Italy was stopped, fainting. It was the Italians, not I, who had tired of it. They wanted a change of pace. I took office with the intention not to end up like Greece, but to do better than Germany. Now Italy is back and on the right track.
Die Welt: What happened to Silvio Berlusconi has become?
Renzi: Berlusconi is the past. I deal with the future.
The World: Unlike him, join our Chancellor best dogs: They laugh, make jokes together. How is your relationship?
Renzi: It's a good relationship, I guess Angela very. We are very honest with each other and tell us the things as they are, even where our opinions diverge.
The World: Where is this the case?
Renzi: In the vision of European economic policy over the past ten years: It was based on austerity, not on growth. For me that was a mistake. But as long as it stays that way, I will respect the rules. With a deficit of 2.2 percent, we have enforced a labor market reform this year. 2016, the debt will fall for the first time. If I want Angela annoy me, I remind you that Germany has used for three years and exceeded the three-percent mark.
A liveried waiter brings Espresso. Matteo Renzi jumps up, takes the tray, enough even the cups on. The photographer he jokes: "No pictures, I'm not Angela Kellner."
Die Welt: What do you think of Ms. Merkel's refugee policy? Was it right to open the borders? What if they are closed again?
Renzi: We can not build new walls. Today (the interview was held on November 9, the Red.) Is the day that commemorates the fall of the Berlin Wall. Walls are built so that they tear. Walls are no protection, they are a trap. The refugee problem we must solve together and us be clear that it will take many years in Europe.
The world: Do we have such a long time?
Renzi: The summit in Malta is on the program for six months. It is important to draw new guidelines for international cooperation with African countries. In Italy I have already made clear that we are still having to spend more money. We are the country which is paying the largest part in the European-Africa Fund. This is a long-term strategy.
The world: In Europe, but now reigns chaos ...
Renzi: Who says he will solve the problem within a week, only plays Marine Le Pen or other right-wing demagogues to the ball. We must not panic. In Italy, the flow of refugees for two years has swelled to twenty times to record levels. I called anyway to rest and reflection, although the opposition was storm. We need a long-term strategy, which is applied on an annual ...
Die Welt: Are not you afraid that the Union can break in the meantime to the right-wing demagogues? They are indeed in Italy, the Lega Nord.
Renzi: hits me particularly the behavior of the newer Member States. You owe Europe a lot. In some Western European countries, parties and politicians have their election and lost items to defend the European idea. Fearing the Polish plumbers went to France a referendum lost! The Western Europeans have paid a political price for the enlargement. It's not okay if these countries now dictate morality. I ask indeed anyone for help for Italy. The number of refugees who come every year to Italy, we create alone. But the entire challenge must tackle as a whole Europe. Alone Italy eventually pay each year nine billion to the Union, which also contribute to the growth of the new member states.
The World: How do you convince people like your Hungarian colleagues Viktor Orbán of it before it's too late?
Renzi: This issue concerns not only Orbán. It does not separate into right and left. It cuts across the parties. The socialists in the Czech Republic and Slovakia are on the same line as Orbán and many Poles. It is a geographical, not a political division between those who know Europe as a great ideal and those who primarily see it as an economic benefit. It embittered me to see that the walls are built, pitfalls for freedom. I want to continue to believe in the great ideal!
The world and the provisional, practical solution?
Renzi: The Union does not exist without common ground in addressing the great dramas and problems of our time. Immigration is a real problem. Hotspots, redistribution, repatriation, all must respect these institutions and rules. But these are technical aspects. The European Union is not just a set of rules and we are not only a union of taxpayers. Europe is a country with 500 million inhabitants. For the world, it is a model of civilization and can do this.
The world: Who has ever looked into the hot spots, know how slow in Europe much running. Is that a model?
Renzi: Everything is slow. We have been condemned by the European Court, because we have people sent back before the judgment of second instance was there. Our share of the work, even in the hot spots, we'll do. We have the people rescued from the Mediterranean, when we were still so alone. Now bring our Navy the dead from the wreck from the seabed, because we want to give them a funeral. We are human beings, not animals. If you hide a child who drowned in the hold of a cutter, then do not count election forecasts. I would put it rather a choice on the line.
The world the other way around: What can Europe do to stem the flow of refugees?
Renzi: It has to change the direction of view. The Union has been extended only to the east. But it was a tragic and historic mistake to omit the Balkans. Albania, Montenegro and Serbia have in the Union have priority.
The world must also return to operate when it is necessary?
Renzi: It can be linked to development projects in the agreements with African countries. That is our strategy. Africa will experience in the next 20 years an enormous upswing. We have begun to invest: in Egypt, Mozambique and Ghana. In Kenya and Ethiopia, there are projects. I myself have visited several countries in sub-Saharan and planning further trips. None of my predecessors in Italy did.
The world: Italy has historically close relations with Libya. Can you help with mediation and formation of a government? What is the status of the negotiations?
Renzi: There is still no solution in sight, only very delicate glimmer of hope. But intervene, bomb, can be briefly celebrate in Tobruk and then the retreat, which is not a strategy. We sit down with all his strength for a diplomatic solution to a, at all focal points of the region. In Lebanon, we are present with our UNIFIL contingent. I have just returned from Riyadh, where I met the Saudi king. I meet soon Hassan Ruhani. Like Germany, Italy is in Afghanistan on site. We need a medium-term strategy and no last-minute solutions. Last Minute makes you travel, but not politics!
--> Watch CO FP, EDEN FP
Buy crisis gaps at new high: Europe is cleansed
Time is right: Europe has just lived through 3 Black-swan like events
Crisis Gaps: surprisingly at the highest level in crisis
We were taken aback when we combined the gaps. The gap below is higher today
than at any time since the 08/09 crisis. The gaps we focus on include: 1) Real yield gap
for Equities vs Bunds where equities still offer 80% of their peak excess yield. 2) UBS
Cyclical/Defensive index is today below its 09 and 12 crisis troughs. Cyclicals are valued
for a recession (pg 19); and 3) Europe vs the US: the profit 'and' valuation gaps are at
90% of their peak at any time during the crisis.
How can they be higher than in the Mar 09 or Jul 12 meltdowns?
The US and European profit gap in early 2010 was only one-fifth what it is today.
Europe's ROE gap to the US is still at a decade high (fig 1). We may be putting the
sovereign debt crisis, austerity straight jacket, stress tests and a lock-down in credit
markets behind us, but they drove a DIVIDE between Europe and the US that is
'combined' at its highest level today. The cyclically adjusted PE (CAPE) comparison
suggests Europe is in recession. Plus, this isn't just about Technology and/or sector
differences. Our Sector Adjusted PB comparison to the US (pg 3) also shows levels
normally associated with a Europe that is in recession.
But why will gaps narrow? Europe is cleansed after 3 Black Swan like events
Europe has been through: 1) Sept 08 Lehman's shock: Financial profits fell 72% and
the profit hit was a '6.4 standard deviation' event (once in every 22,000 months); 2)
Oct 09 Greece shocked all and during 2012 Italian bond spreads experienced a 2.8
standard deviation move; 3) Jun 14 brought the commodity meltdown: the cut to
Energy earnings was a 3.5 standard deviation event and helped to wipe out Europe's
EPS growth for this year. We believe that Europe has been largely cleansed of last
cycle's material excesses and is now free to focus on growth.
Trades: Buy Europe, ROE 'catch up to US' & Cyclical dividends
1) DJStoxx 600 vs S&P500. CAPE PE & Sector Adjusted Price/Book gaps are at recession
levels; 2) ROE catch-up to US offer names with a Value Tilt; 3) Safe Cyclical Yield:
relative yield to defensives at a decade high, list offers yield of 4.7%.
No Need to Cut Rates Now, Says ECB Council Member
Comments from Ardo Hansson suggest additional stimulus is not universally supported
TALLINN, Estonia—There is no need at the current juncture for the European Central Bank to reduce its policy rates, including the deposit rate, the head of euro member Estonia’s central bank said in an interview on Wednesday.
The comments by ECB governing council member Ardo Hansson suggest that additional ECB stimulus, which is widely expected by economists to be announced at the bank’s Dec. 3 meeting, is not universally supported within the ECB’s 25-person governing council.
Other central bankers, particularly from the eurozone’s Baltic region, have expressed skepticism about the need for additional easy-money policies, though these voices are likely not numerous enough to block any such moves should top officials want to press forward.
Mr. Hansson said that lowering the ECB’s deposit rate further from the current -0.2% can be discussed and technically it is possible, but so far there is no proposal on the table.
“Knowing what I know now, I don’t think we should take that step,” Mr. Hansson said. “But if the trend in the next few weeks turns much negative, then every option is technically possible to analyze, but in the end it has to be a pretty thorough analysis."
The ECB’s deposit rate has stood at -0.2% since September 2014. At that time, ECB President Mario Draghi signaled it would go no lower. But he changed tack after the ECB’s meeting last month, saying that lowering it was discussed.
With a negative deposit rate, the ECB effectively charges financial institutions to store surplus funds at the central bank. The measure typically has a pair of benefits: spurring banks to lend to the private sector; and weakening the exchange rate.
Hopes for additional ECB stimulus have been fanned by low inflation—consumer prices were flat annually last month, well below the ECB’s target near 2%—and signs that the eurozone’s recovery remains lackluster. Still, Mr. Hansson’s comments suggested that there is little evidence the region’s outlook has changed enough in the past few weeks to justify additional stimulus.
“We have to see how the incoming data look and look at the forecast when it emerges in December to see if there’s a fundamental need to revisit” the current projections, Mr. Hansson said.
He added that most of the indicators, such as the latest inflation and retail sales data, released since the ECB’s last meeting in Malta on Oct. 22 have been more positive than negative.
“I don’t see the situation so pessimistically,” Mr. Hansson said. “Had it been that the news coming out of Malta would be systematically negative, I think it would be different.”
In particular, he said that inflation should start rising in the coming months as the effects of steep drops in energy prices drop out of the data.
“Inflation numbers in December and January should show sharp increase in headline inflation because of the erosion of the base effect related to the energy prices. That would be interesting and important to see how big that increase in headline inflation is and how that affects the outlook and expectations,” he said.
Mr. Hansson, a known skeptic of the ECB’s broad-based asset-purchase program, known as quantitative easing, or QE, did not want to comment on whether it should be increased in December. “We still have three weeks until that meeting,” he said.
Under the program launched in March, the central bank is buying €60 billion ($65 million) in mostly government bonds a month. The program is due to run until at least September 2016, but Mr. Draghi has signaled that the central bank could expand it at its next meeting in early December.
Mr. Hansson said that because the program’s end date is still some 10-11 months away, there is “plenty of time” and “no pressing need” for the council to make a decision next month on whether to extend it or not.
“The clock is not ticking in the way that would force us to decide now,” Mr. Hansson said. “I think it would make more sense to think about it a bit later, when we get closer to the announced end of the program to see what comes next. Because then you have more information about how things are progressing.”
He added that it would "make a lot of sense” to start talking about it about six months before the program ends.
Brian Blackstone contributed to this article.
15:21 (EU) ECB's Hansson (Estonia): no need to lower deposit rate at the moment; prolonging QE program should be discussed in spring - press interview - expecting Eurozone inflation to rise sharply in the Dec-Jan period - Source TradeTheNews.com