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Presenting A Full List Of The ECB's Non-Monetization Options
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Presenting A Full List Of The ECB's Non-Monetization Options

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Presenting A Full List Of The ECB's Non-Monetization Options

Without doubt the primary topic of "serious" watercooler discussion in the last several weeks, and likely to last for many months, is whether or not the ECB will print, and if not why not. We have discussed this issue extensively in the past and are confident that the ECB will not be involved before there are at least 2 or 3 major bank casualties, which allows Goldman to step in and claim the wreckage at pennies on the dollar. Naturally, once the dominoes start falling, most likely early next year, the ECB will have no choice as Germany itself will be threatened once every neighboring country is collapsing left and right. But what happens in the meantime: what are the ECB's options short of outright monetization? Below we present the full list of ECB "support measures" that can be implemented that won't infuriate Angela Merkel, as compiled by Reuters. The question of course is not whether any of these can be implemented, but what and how long their impact will be before the dreaded "half-life" phenomenon exerts itself. The other question, of how one can claim the ECB is not monetizing when it is in fact doing not only that, but doing it 30% more on a monthly basis than the Fed as shown earlier, is a completely separate one.

So without further ado:

ULTRA-LONG TERM LOANS FOR BANKS

The ECB's reflex response in times of trouble is to jet hose liquidity at the banking system. According to euro zone central bank sources it is currently considering extending the length of the loans it offers banks to as long as three years.

This would be an unprecedented move and a clear signal of support by the ECB. In addition it could hold more operations where banks can borrow for one year or six months and promise to keep such sessions on offer for a lengthy period of time.

Its dollar-denominated loans could also be extended or made more attractive by adjusting the terms and the pricing.

FIX THE PRICE OF ITS LOANS

The bank could revert to offering its longer-term loans at a flat, fixed rate, rather than its current approach of a rate which tracks any headline ECB rate hikes or cuts.

In mid-2009 the fixed rate approach spurred banks to take a whopping 447 billion euros ($595 billion) in one-year loans which drove down the cost of borrowing on the open bank-to-bank market to just over 0.3 percent.

The euro zone's deterioration since then makes another such frenzy unlikely but fixing the interest rate could certainly boost demand significantly and push down borrowing costs again.

FURTHER RELAX ITS LENDING RULES

The ECB could relax its lending rules in a variety of ways to make it easier for banks to get access to its funding.

It could go back to allowing them to swap their dollar, sterling and yen-denominated assets for ECB loans. It did so between mid-October 2008 and the end of 2009 and doing it again would be a boost for those running short of euro-denominated collateral. The first time around it added an extra charge of 8 percent for using non euro assets.

A more general broadening of the types of assets it accepts as collateral is another option.

INTEREST RATE CUTS

Markets expect the ECB to continue cutting interest rates. Previously it only went as low as 1.0 percent with its main rate and 0.25 percent with the rate that banks get if they deposit overnight at the ECB.

The intensity of the crisis could soften resistance to going below 1.0 percent. J.P. Morgan has predicted the bank will go as low at 0.5 percent with its main rate and 0.25 with its overnight deposit rate.

Other money market experts say it could even cut the deposit rate to zero, which would mean that banks get nothing if they hoard cash at the ECB. This could help encourage those with spare money to overcome their reluctance to lend to peers.

BANK DEBT PURCHASES

The ECB has the ability to buy bank bonds and other bank issued securities. If it wanted to, it could make such purchases in tandem with its more controversial purchases of sovereign debt as part of its 'Securities Markets Programme'.

A concerted spell of buying could ease the funding pressure that banks are currently under but is likely to provoke complaints from politicians and the public.

FUND A CRISIS-FOCUSED IMF VEHICLE

While the ECB itself could not do so, the 17 national euro zone central banks could effectively print money to put into an IMF-controlled fund designed to help tackle the debt crisis.

Sources told Reuters earlier this month that policymakers were exploring the possibility.

This is the sole scenario under which the EU treaty allows central banks to pass money to governments.

Euro zone central banks have provided funding in such a way on two previous occasions. The first was for the IMF's Poverty Reduction and Growth Facility and the second was its Heavily Indebted Poor Countries Initiative.

LEND TO THE EFSF

Were the euro zone bailout fund to be given a banking license, there is nothing to stop it borrowing money at the ECB's mainstream lending operations and using to money to help out troubled countries.

Legal question marks remain over whether this could constitute financing of governments, something which is illegal.

So far the ECB has said it opposes the idea. However, it might be prepared to soften its resistance if it felt governments had taken the necessary steps to address their problems and the bloc as a whole introduced centrally-orchestrated debt controls.



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