QE EU style? AAA UK?

Today the ECB hosed the European banks down with long term money. The Germans may be able to stop them lending directly to near bankrupt countries, but they can’t stop them lending to commercial banks. The Treaty allows the one and bans the other.

The money lent achieves two purposes. It eases liquidity for the banks, who can borrow very little in the usual way in the inter bank markets, where fear stalks the computer screens and dealing rooms. It allows the banks to be more relaxed where they have to refinance their own bond loans, where these come up for renewal over the next twelve months. The ECB has come to the rescue.

Some think they will buy sovereign bonds of the weaker countries – they hope that the ECB has created a kind of QE by the back door. It would be imprudent for the banks to buy too much weak sovereign debt. What they gain on the interest payments they may lose on capital account if fears strengthen for repayment.

Meanwhile Moodys has reminded us that the UK’s AAA rating needs to be looked at from time to time in the light of the figures. They have not put the UK on negative watch or forecast a downgrade. It is just a reminder that the UK is a heavily indebted country that needs to succeed with its deficit reduction programme. Today’s figures of £18 billion for last month are presented as a success, remaining on target. They are also a reminder that the targets for this year still allow very large borrowings. It gets tougher from here.


  1. lola
    December 21, 2011

    Can’t the commercial banks be ‘pursuaded’ that buying Soveraign debt will be the equivalent of boosting their capital….?

    1. Gary
      December 21, 2011

      That is the problem. Banks buy sovereign debt on the secondary market, use that as collateral for more money from the central bank , and then go and buy more sovereign debt, to use as collateral……No money leaks into the general economy.

      See the perpetual motion machine ? In Italy it is getting so desperate that they are not only offering sovereign bonds for sale but the sovereign itself to avoid taxpayers having to bailout banks yet again !

      The WSJ reported :

      ““Governments in Europe are tying themselves in knots to prop up their banks, desperate to blunt the cost and embarrassment of a fresh wave of taxpayer-funded bailouts.

      “In Italy, for example, the government is encouraging banks to buy public properties that the banks then can use to borrow money. As part of a broader deficit-reduction program in Portugal, the government essentially is borrowing money from bank pension funds and could use some of the funds to help state-owned companies repay bank loans. Governments in Germany and Spain also are using unorthodox measures to support their ailing banks.

      It allows the banks to use their government bonds to purchase army barracks, office buildings and other state-owned real estate that the government has been trying to sell. The government would then lease the properties back from their new owners. And the banks can package the income-producing properties into asset-backed securities, which can be pledged as collateral with the ECB in exchange for loans, analysts say.


      1. Acorn
        December 22, 2011

        See following. Deposits at the ECB have shot up this year by 750 billion Euro and that is before the latest 500 billion was printed yesterday. So expect that lot to end up on deposit at the ECB as well.

      2. Denis Cooper
        December 22, 2011

        Very little or no money leaks into the general economy if previously issued government bonds are bought on the secondary market, but when new bonds are bought from the government the latter uses that money to pay its bills and then most of that money does go into the general economy.

    2. Javelin
      December 22, 2011

      I’ve been saying for a couple of years that the root of the banking crisis is near zero interest rates.

      Fundementally banks are becoming irrelevant to savers. With no savers there can be no borrowers. So we have to resort to printing money QE/Tarp/ECB QE to create money to lend. The actual mechanics behind this are quite complex – but the simple reality is that low interest rates exaggerate the risks between lending and borrowing. We keep hearing of liquidity and collateral shortages – but nobody is lending to the banks apart from the Central Banks because rates are so low.

  2. Bill
    December 21, 2011

    Yes, the UK is a heavily indebted country. Can you tell us what the UK’s position was when Blair took over from Major? What would our financial position now be if we had not had the misfortune to put up with all those years of Labour government?

    To answer my own question, I imagine that we would (a) have avoided the Iraq war and (b) have a financial position closer to that of the stronger northern countries of Europe.

    1. forthurst
      December 21, 2011

      “I imagine that we would (a) have avoided the Iraq war”

      Dream on, if you seriously imagine the Conservative Party was or is any more patriotic than the Labour Party.

      1. forthurst
        December 21, 2011

        Didn’t you notice Cameron sucking up to the neocons on Libya and now Syria and Iran? No Referendum, more wars, more immigration: our priorities? I think not. Whose?

    2. uanime5
      December 22, 2011

      Given that the Conservatives were calling for fewer restrictions on banking our finances would have been even worse.

      Reply: I called for stronger controls on cash and capital which would have averted the disaster.

  3. Daedalus
    December 21, 2011

    With regard to our AAA rating, why cannot government look to real long term reductions in how much it taxes and spends? Before the crash Cameron was saying that growth would be shared between government and the private sector; WHY? Government has done little over the last 15 years to share it with anyone. The private sector brings growth, when the private sector is only 47% of the total how do they expect to keep a AAA rating? It’s time for someone to start talking about really reducing the size of the state. I would love to see it below 30% before I kick the bucket, but with only 15 years of my 3 score and 10 I know it’s unlikely to get there.


  4. Mark
    December 21, 2011

    Agencies such as Moody’s continue to operate via the rear view mirror with blinkers on. The UK was downgraded by Dagong (the Chinese rating agency) from AA- to A+ with negative outlook back in May. Our gilts prices simply reflect the fact that the BoE buys more gilts than the DMO issues to finance the deficit. What commercial bank wouldn’t want to be able to be a seller at top prices for as long as that situation persists?

    The ECB’s exercise is simply going to end up in the vaults of the banks. It will at least permit them to reduce their gearing by reducing their loans to each other, and is a subsidy in view of the below market rates on the loans. They can borrow EU sovereign debt to post as collateral via repo markets: existing holders will be delighted to get a small extra income for renting them out.

    Persuading buyers to fund fresh sovereign debt is not going to be so easy. That is one reason why the EU wants to wrest control over the financial sector: they could then force such debt down the throats of pension funds and insurers by law as a matter of “prudence” (and we all know where Brown’s favourite girlfriend ended up…).

  5. figurewizard
    December 21, 2011

    … ‘It gets tougher from here’

    Which is why we must make sure that the current brouhaha surrounding public sector pensions must not add to the problem.

  6. lifelogic
    December 21, 2011

    Just a mere £18 Billion for one month and only £29M people actually working and most of them paying no net tax into the system (if they have a child at state school or similar). Many of the ones who are net contributors are are planning their exit due to Osbourne’s absurd 40%/50% tax rates + NI.

    1. lifelogic
      December 21, 2011

      I see the demand for ECB loans is very high, clearly therefore they are lending too cheaply. As we already knew, do not understand markets at all. They should charge the going rate for these loan and auction them off in some efficient way at the going rate but related to the risk of the borrower.

      How are they being allocated is it being done efficiently and fairly one wonders (doubts)?

      1. Jose
        December 22, 2011

        You’ve hit the nail on the head, you’ve managed to mention efficiency and fairness in one sentence regarding the EU. It’s of course a nonsense as they’ll do whatever suits them regardless of both fairness and especially efficiency. If you get the time, watch Michael O’Leary tell the Brussels machine just how efficient he thinks they are (Daniel Hannan).

        They really are a disgrace.

        1. lifelogic
          December 22, 2011

          The UK government and it seems the inland revenue (big business tax agreement team) do not seem any better at all.

  7. Antisthenes
    December 21, 2011

    The West has two problems large debt and low growth. So far QE, bailouts and all and sundry initiatives, subsidies, austerity measures, proposed treaty changes and political rhetoric has produced even larger debt and the likelihood of even lower growth. It’s going to plan then. It must be Merkel has gone off on her annual two week winter holidays. By the way the euro is still devaluing. Ah! That’s why Merkel can go on holiday come the new year Germany’s exports will be booming.

  8. Gary
    December 21, 2011

    They are all at it. Stealth QE, if not overt QE. 1/2 Trillion euros for the EU banks, and the BoE buying gilts at “approaching market limit”, and getting set to print even more cash.


    This is how you get a disparity between record UK debt and low gilt yields.

    The problem since 2008 has got worse, nothing has been solved, on the contrary, more debt for an insolvency problem has guaranteed that. Best take some steps for personal financial protection.

  9. Disaffected
    December 21, 2011

    In his Demos speech, Mr Clegg attacked the House of Lords as “an affront to the principles of openness which underpin a modern democracy”. LAst week the Uk was a “pygmy” nation and French ministers deemed it appropriate to follow his lead to to denigrate the UK’s economy. This is from a premise where Clegg continues criticise British culture and the country in preference to the culture of Germany.

    Why does not Clegg consider his remarks contrast or make him a hypocrite against the EU he vehemently supports? For example, if he makes comments about the HoL like this why does his remarks not apply to the EU, Commissioners and all the anti-democratic institutions it has? Did he not watch the coup of two democratically elected governments by unelected officials who prevented the respective populations of these countries having a say? it is incredulous this man is in politics or that there is anyone in the country who believes a single word he says. He speaks like an enemy within.

    Balance all this against his categoric pledge for an EU in/out referendum. Does he understand the word trust?

    Wakeup Tories for goodness sake.

    1. uanime5
      December 22, 2011

      Criticisms by France, an EU country, should not be considered a criticism by the whole EU.

      “why does his remarks not apply to the EU, Commissioners and all the anti-democratic institutions it has? ”

      Care to name some of these institutions. The Commission has 1 Commissioner per member state who has to be chosen by the Council and approved by the Parliament.

      “Did he not watch the coup of two democratically elected governments by unelected officials who prevented the respective populations of these countries having a say?”

      If you’re referring to Greece and Italy both countries replaced their Prime Ministers, not the Government, in exchange for a bailout. Also in the UK Major replaced Thatcher and Brown replaced Blair without the populations of this country having any say (though Major did later win an election, unlike Brown).

      1. Winston Smith
        December 23, 2011

        The electors voted for a Party, which published a manifesto. Major and Brown were leading members of their own parties. There is democratic consistency. The Italian were compelled to replace their elected Govt with one led by former banker. The equivalent would be for Blair to have been replaced by Fred Goodwin on the orders of the EU.

  10. Gary
    December 21, 2011

    The intended consequences of printing money is for rates to stay low, the unintended consequences of printing money is that bond speculators step in front of the central bank and buy bonds and sell them to the central bank for a sure profit. It is the safest and surest speculation in town. It guarantees rates are driven even lower, but it also guarantees that the money stays locked up in a vortex between the banks and the central bank and precious little gets into the economy. The more they print, the more the economy gets strangled to death. The folly of trying to manage markets. The minute you step into a market , the market discounts your action and arbitrages it away. And that is what the statists can never work out. And the harder they try the more the market foils them and the worse it gets. Until something breaks , properly. And then they blame everything under the sun except their own actions.

  11. D K McGregor
    December 21, 2011

    I love your short posts ,,, they say so much more.

  12. norman
    December 21, 2011

    In the midst of the great veto coverage I remember reading a couple of paragraphs about this tucked away in an obscure corner of The Telegraph (or somewhere), that the ECB had allowed unlimited funds to banks as the credit had all but dried up to them and thought at the time that this would turn out to be far more significant in the medium term. Where is this cash coming from is an obvious question.

    As for the UK, at some point we will regress to the mean, interest rates can’t stay at historic lows forever, and when that time comes let’s hope that Cameron and Osborne have used this breathing space afforded by the ultra-low rates to ‘mend the roof’ as they laid into Brown for failing to do. From the outside it looks like they’re taking advantage of the low rates to defer any real spending cuts and adding tremendously to our national debt but time will tell.

    I was reading an article in The Commentator website about corruption in the Soviet Union and it linked to a site showing various facts and figures for 1990 (http://www.theodora.com/wfb/1990/rankings/external_debt_million_1.html) and, as you do, I clicked on a few links and saw our external national debt (not quite sure what total debt was) for 1990 was $15bn, a little less than Vietnam and only slightly more than oil rich UAE. How things have changed.

    We did come second on the list for Budget Expenditure (to the Soviet Union) so some things haven’t changed! Not sure how accurate that can be, according to the left the 1980’s saw spending slashed and whole swathes of the country laid waste!

  13. Ralph Musgrave
    December 22, 2011

    Why would it matter if Gilts were reduced from AAA to CCC? Interest rates on NEWLY ISSUED Gilts would shoot up of course. But the solution to that is for the UK government to cease borrowing any more, and simply print money instead. And to the extent that the latter was too inflationary, government could get the money it needed via a DEFLATONARY money raising system called TAX.

    QED. Problem solved. End of.

    1. Gary
      December 22, 2011

      Small problem. Tax is not deflationary, it merely redistributes money. Usually to special interest of the govt. The only deflation is when money is removed entirely from the economy. Manipulating the economy by inflation and deflation is a false economy because it masks price signals caused by the real indicators of resource allocation, supply and demand. When this happens you get an economy built on mal-investment and that is not economically sustainable, by the laws of supply and demand.

      Reply: £80 billion of tax (or borrowing) is being sent abroad for the EU and overseas aid this Parliament. There is then the effect of poor productivity in the public sector on real incomes – if you spend more in less productive ways we are all less well off as a result

      1. Ralph Musgrave
        December 22, 2011

        Gary, When government borrows and spends, government takes £X from the private sector, gives the private sector £X of bonds in return, and spends the £X back into the private sector. Thus the private sector is up to the tune of £X worth of bonds, which Keynes said was stimulatory, and my guess is he was right.

        In contrast, if government funds £X of spending from tax, the effect is approximately neutral, or as you put it, the tax option “merely redistributes”. Thus funding expenditure from tax is more deflationary that doing so by borrowing.

        But if funding expenditure from tax is not deflationary enough, then there is always the option, as you say, of raising taxes and extinguishing the money collected. That is the most deflationary option of all.

        Thus the last sentence of my first paragraph was not quite correct. Instead of saying “government could get the money it needed via a DEFLATONARY money raising system called TAX.” I should have said “government can counteract any inflationary effect of money printing by raising taxes”.

      2. Gary
        December 22, 2011

        I do agree that if the tax leaves the country and if that tax does not buy us increased revenue by trade , that is deflationary.

        The money taken by a productive private sector into the relatively non-productive public sector of the same country is not deflationary, the money still exists within the country. Deflation and inflation are monetary phenomena. All else equal, goods and services produced by an inefficient public sector would be less in demand, especially if full payment was required upfront, and so the price would drop. Forced taxation to pay for these inferior goods distorts the price signals and keeps alive a public sector producing inferior goods and services, that would otherwise whither away in a free market. Just as any business producing inferior goods should eventually go out of business and make way for the efficient producers.

    2. APL
      December 22, 2011

      Ralph Musgrave: “… DEFLATONARY money raising system called TAX.”

      It might be deflationary if the government collected tax then destroyed the money, the net result of that behavior would be to reduce the currency in circulation implying an increase in the value of each remaining individual currency unit. In terms of the currency, prices would appear to go down.

      But that is not what government does with its tax receipts.

      In any case we are in a period of credit deflation, so there is probably scope for the government to inflate the money supply.

      Question is, do you trust them to know when to stop.

      Where the governments motive is simply to finance its activities, which are themselves are expanded beyond what the productive economy can stand by itself – hence the borrowing, it is rather like asking a heroin addict to regulate his own addiction.

  14. APL
    December 22, 2011

    BBC proselytizing for Labour on R4 right now.

    Why are women still supporting the Tories when the Tories are making such cuts to public services …

  15. election watcher
    December 22, 2011

    Why does’nt anyone ask where all this ECB money is coming from? I assume they are printing it. The Bank of England has printed £275 billion and given it to the banks but all they have done is to use it to boost their reserves. Why don’t the government insist it is used to get the economy growing by subsidisng new jobs, lending to expanding firms etc. Again why aren’t ther media asking these questions?

  16. Bazman
    December 22, 2011

    How do I get a job in the financial sector? Engineering is quite complicated and if you are not smart enough as am not, at maths and logic is often quite hard and dirty work, risk of personal injury is high, which is a bit worse than financial loss in my opinion. If ripping off pensioners is called ‘mis-selling’ then I’m sure I could do a bit better than that. My main qualifications would be that I can spin a yarn and charm as good as the next guy. I know how to gamble and if required can pretend, quite convincingly I might add, to be a middle aged middle class smart-arse. If any financial giant is interested in taking on another chancer. I am available for much less than expected rate and will provide my own sandwiches.

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