Tag Archives: Deutsche Bundesbank

Euro Drop To On ECB Statement, SNB Rumors

The European common currency makes another drop Friday, after governing Council member Axel Weber was quoted saying that ECB should extend unlimited lending to banks past the end of the year and resume exit discussions in early 2011. In addition, there are rumors that the SNB is unwinding its hundreds of billions of EUR holding.

“Since inflation risks continue to be low over the policy- relevant medium term, this does not suggest a policy tightening yet.”

Axel Weber


The financial markets had been expecting the ECB would decide next month to keep in place its remaining emergency support for still-stressed bank-to-bank lending, eschewing any aggressive withdrawl of stimulus, Reuters reports.

Weber, however, is regarded as one of the ECB’s most outspoken inflation fighters and his comments in favour of maintaining loose policy sent the euro EUR down 1 percent to a five-week low against the dollar.

It fell to a seven-week low against the yen EUR/JPY.

Axel Weber

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News agency Bloomberg reported that Weber said it would be “wise” to keep full allotment in weekly, monthly and three-month refinancing operations until after the end of the year. “Most of these discussions about the continuation of the exit I think will be focused on the first quarter,” Weber said in an interview conducted on Thursday.

The comments bring the Bundesbank chief in line with fellow policymakers such as Athanasios Orphanides and Patrick Honohan, who have also signaled the ECB’s liquidity largess will continue.

The ECB is due to make a decision about whether to extend unlimited lending at the weekly, monthly and three-monthly operations at its next meeting on Sept. 2 and Weber’s comments bolster expectations it will be renewed until January.

“Since Mr Weber has historically positioned himself at the hawkish end of the Governing Council spectrum, his comments strongly signal that the ECB is likely to decide to continue with its current operations till at least early 2011,” Barclays Capital economists Julian Callow and Laurent Fransolet says.

The ECB has said that unlimited liquidity will be on offer in the shorter term, one week and one month operations until at least mid-October, and until the end of September for three-month money.

The end of the year was “usually surrounded by some uncertainty regarding the liquidity situation,” Weber says.

Weber stressed though that the improving economic outlook meant generous liquidity supplies could not be kept in place indefinitely and said he saw no need to offer more very long-term funds, such as over six months.

“It’s clear that we need to re-embark on a normalization procedure,” he says.

Dumping Euro?

Additionally, there are rumors that the Swiss National Bank (SNB) is unwinding its hundreds of billions of EUR holding.

“The indirect evidence: a surging CHF, which however could merely be a return to the flught to safety of the old regime, as Europe once again realizes just how bad things truly are beneath the surface,” Zero Hedge writes.

According to the Forex Blog there are a handful of Central Banks who are making their presence known on this front.

“On several occasions over the last few weeks, the Central Bank of Switzerland (SNB) has unloaded massive quantities of Euros. If you recall, the SNB amassed nearly €200 Billion over the previous year, as part of a massive buying spree aimed at holding down the value of the Franc. Given that the Franc has appreciated by more than 15% against the Franc this year, it’s perhaps unsurprising that the SNB is throwing in the towel,” the Forex Blog wrote last week.

Analysts from Morgan Stanley foresees a similar trend: “Central banks are likely to let their euro holdings slide as a percentage of the total, reflecting lingering concerns about the euro zone’s fiscal outlook…’We do not expect that central banks will provide as much support for euros as in the past. They have prevented the euro from depreciating more rapidly… but they are unlikely to stop its depreciation.’ ”

The implication is clear: the Euro is facing (passive) pressure on multiple fronts.

Here’s today’s market snapshots:

EUR/USD:

EUR/GBP:

EUR/JPY:

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Bundesbank: Ireland Will Destroy The Euro Zone

The Irish Independent have picked up some incredible comments from the Bundesbank in its monthly bulletin in which it criticised Ireland, Spain, Portugal and Greece for running “persistently high” current-account deficits over the past decade. The Bundesbank says is a “source of danger” for the single-currency region.

“The respective economies have no choice but to reduce domestic demand to a sustainable level.”

Deutsche Bundesbank

Dr. Axel Weber, president of the Deutsche Bundesbank

Ireland’s economic policies pose a danger to the euro zone as a whole and we should take measures to improve the economy ourselves rather than look to others to change, the Bundesbank warned yesterday.

The German central bank criticized Ireland, Spain, Portugal and Greece for running “persistently high” current-account deficits over the past decade which the Bundesbank says is a “source of danger” for the single-currency region.

“These macro-economically erroneous trends” are “a source of danger for other member countries and the currency region as a whole,” the Bundesbank write in its monthly bulletin.

Deficit countries damage the euro zone’s stability and “it is urgently necessary to correct maldevelopments and avoid a repetition in the future”.

The Bundesbank blamed the current-account deficits in Ireland and elsewhere on increases internal demand, “comparatively” strong inflation and a “grave” erosion of competitiveness.

“The respective economies have no choice but to reduce domestic demand to a sustainable level,” the Frankfurt-based central bank said. “A decisive fiscal consolidation is of central importance in light of dramatically deteriorating public budgets.”

The unusually forthright comments came hours after Moody’s downgraded Irish bonds and a day after Senator Dan Boyle of the Green Party questioned whether it was politically feasible to meet the European Central Bank‘s budget target to cut the annual deficit to 3pc of gross domestic product by the end of 2014.

A Department of Finance spokesman responded yesterday that government policies had led to a significant improvement in Ireland’s competitiveness and reiterated government forecasts that Ireland’s current account balance of payments would “move into surplus during 2010 and increase significantly in the coming years”.

Germany, which runs a current account surplus and relies heavily on exports to drive growth, has come under pressure from some other countries including France to boost domestic demand to help address the economic imbalances in the euro zone.

The Bundesbank dismissed the suggestion yesterday; saying it would only help countries which are already exporting successfully within the euro-zone and would be little to help Ireland and other countries running current account deficits.

Ireland’s current account deficit would only improve by 1 percentage point if Germany increased imports by 10pc, the Bundesbank says.

The current account balances in Spain, Portugal and Greece would only improve by a more meager 0.25%, it adds.

The bank also says that euro zone monetary policy was aimed at securing price stability for the currency bloc as a whole.

“That means, that it generally should not take consideration of the economic problems in individual states,” the German central bank says .

Related by the Econotwist:

Ireland Downgraded By Moody’s

Europe: Stocks Rise, Euro Strengthens On Renewed Concern About US Recovery

Banks Protesters Storm Irish Parliament

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German Banks With More Than 200 Billion Euro In Faul Credits

You think  Greek and Spanish banks are in trouble? Well, that’s only peanuts compared to the trouble the German financial industry is facing; according to a new report from PriceWaterhouseCoopers the amount of non-performing loans in German banks increased by 50% in 2009, to over €200 billion, and is still rising.

“Investors and banks will need to work together to reach a compromise on pricing deals which adequately shares portfolio risks and rewards.”

PriceWaterhouseCoopers


The new report on European banks’ non-performing loans by Price WaterhouseCoopers is quite interesting reading. (Not to mention scary). Since the last report, nine months ago, the amount of NPL’s in European banks have rose to unprecedented levels. Ukrainian banks have an increase of nearly 2500%. However,  measured in euro the German banks are holding the most – 213 billion.

It is a well known fact that Germany would be the most affected country in the EU by the global financial crisis, given its persistent and large current account surpluses.

Recent estimates by PriceWaterhouseCooper suggest that German Banks are sitting on a portfolio of about 213 billion euro in non-performing loans – the highest amount in Europe.

The alarming estimate of the scale of the problem was released yesterday by PriceWaterhouseCoopers.

According to the report NPL Europe June 2010,  the amount of bad debt among German banks was €213 billion at end-2009 – a 50% increase from 2008.

It is natural to suspect that the figures have continued to rise since in 2010, and does not include what German banks have yet to expect from their exposure to southern Europe.

“Based on information contained in financial statements of the largest German banks, NPLs and write-downs grew significantly during 2009 and many expect this to peak mid 2010,” PriceWaterhouseCoopers writes in the report.

Deutsche Bundesbank indicated in its Financial Stability Review 2009 that additional write-downs on loans of €50 billion to €75 billion will be necessary as a result of both macro and micro economic factors in 2009.

I guess it will be closer to 75 than to 50 when the final numbers are on the table.

Between 200 And 220 Billions

“2009 NPL volumes are an estimate based on movement in the loan loss provision and gross NPL volumes for a sample of banks covering 75 per cent of total assets in Germany. Based on these estimates, NPLs in Germany could be as high as EUR200 billion (using a 34 per cent growth rate) to EUR220 billion (using a 50 per cent growth rate) at the end of 2009,” PWC points out

All the key banks in Germany experienced significant portfolio deterioration during 2009.

The chart below shows the development in the largest German banks non-performing loan portfolios:

Last year, the German bank regulator produced a worst-case scenario of some €800 billion in write-offs.

And while we are not there yet, it is quite alarming to see that by end 2009, we were already a quarter of way, and they’re expected to rise significantly over the next couple of years.

Europe’s 620 Billion Problem

An oversight of 16 European countries shows a stunning total of 619,7 billion euro in non-performing loans.

For some – unknown – reason, French banks are not included.

The increase in NPL’s varies from 28% (Spain) to unbelievable 2447,6% (Ukraine).

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Will Need To Work Together

PriceWaterhouseCoopers conclude that the banks and investors will need to work together and reach some kind of compromise when it comes to the NPL’s, who in fact are illiquid assets at the moment.

“One major change observed is that investors claiming to have money and chasing NPL and non-core portfolios are back in force. The big question is how much this money costs and for how long can it be put to work. In most cases, NPL portfolios and to a lesser extent non-core portfolios are illiquid assets and require an investment horizon of at least three to four years. Experience over the last nine months suggests investors are pricing portfolios with the aim of getting their money back with a healthy IRR within two years,” PWC notes.

“On the bank side, in almost all countries the provision coverage of NPLs has decreased despite increasing levels of NPLs and non-core assets, indicating that banks may be underestimating their defaulted assets. In addition to this, there is evidence some banks are still using historical values for underlying collateral. Should updated appraisals be performed, collateral valuations will likely decrease, bringing further strain on loan to value covenants. The result is that the uncollateralised portion of the NPLs and sub-performing loans is being understated. The flow-on impact of this would be that the loan loss provision (LLP), which is applied to the uncollateralised portion of the loans, may also be understated.”

“Given the above, investors and banks will need to work together to reach a compromise on pricing deals which adequately shares portfolio risks and rewards. There are now 10 European markets with NPLs of over EUR5 billion, which means there are plenty of  opportunities to put this into effect. A key question over the next six to nine months is whether funding and collateral values will stabilize or even begin to increase enough to align the pricing of both buyers and sellers,” PriceWaterhouseCooper concludes.

For more shocking details; here’s a copy of the PWC report “NPL Europe June 2010”

Related by the Econotwist:

European Banks: “Leman Times Ten”

European Banks Loaded With Greek Debt

Investors Are Dumping Covered Bonds

G20: Another Meaningless Summit

Global Economy On Fast Track To Disaster

EU Officials Fears Second Depression And War

How To Create A 3 Trillion Dollar Bubble And Burst It

E.U. Parliament To Investigate Euro Zone Bailout

Bundesbank Suspects A French Conspiracy

Why Optimists Are Wrong About The Euro Zone

Transantlantic Bailout Buddys Agree To Disagree

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