Danish CB inspires ECB

Berlingske has:

Quote:

The Euro-crisis is splitting Europe in a South, where interest rates rise due to kreditors fears of never seeing their money again, and a North where the banks get next to nothing – or in some cases must pay CB’s for depositing money. That is the case in Denmark, where the CB recently introduced a negative short time deposit interest of .2%.

Comment:

That is just part of the story:

The Danish sovereign bonds of 2 year, 5 year and 1 year maturity have interest rates of -1/4%, 0% and 1% respectively. Another thing is that lately the Danish CB announced extension of the borrowing with 75-100 bio. DKK they need like a bad habit. The currency reserve is 1/3 year GDP.

Berlingske cont.:

This ploy has caught the ECB’s attention – according to the newsagency Reuters. Earlier this month lowered loan interest to .75% and the short deposit rate to zero. Member of the banks steering committee have lately hinted that further lowering of interest rates might happen, if market pessimism does not abate.

Comment:

The official explanation is that the Danish CB wants to “encourage” the banks with deposit surplus to lend it to the banks with a deposit deficit. That is not happening! CB deposits are not to force under 200 bio. DKK. Ok the week deposits have dropped 60 odd bio. DKK; but the day-to-day folio accounts have double to approximately the same amount to the princely interest of 0%. More or less a natural consequence of doubling the allowable deposit (exceeding the folio-limit automatically transfers to a week deposit).

The Danish CB has only intervened with about 30-40 bio. DKK buying foreign currency, so the external Euro pressure is not excessive: The problem is fundamentally home grown. The deposit excess banks know full well that the major banks with mortgage banks buy their own flexible interest real estate bonds – bonds whose collateral in property value is fictional.

The perspective is:

The depositors in Greece, Spain and (maybe) Italy are fleeing their respective countries – this money will in all likelihood ends up as deposits in other European CB’s or in f.i. German sovereign bonds at 1% for a 10 year maturity. In other words there is a run on the Southern European banks. The countermove is as always lending the money back to the liquidity distressed banks under a state guarantee (directly or indirectly) – at a price.

Wall Street Journal has:

Treasury Secretary Timothy Geithner Monday warned German leaders against leaving Europe teetering on the edge of financial disaster while trying to force troubled neighbors to overhaul their economies, saying such a strategy will be more costly financially and politically for Europe.

And:

Greece, Italy and Spain’s financial and debt woes continue to strain the monetary union and derail a weakening global recovery. Germany, the euro zone’s dominant economic power and political force, holds a central role as its neighbours look for support.

Mr. Geithner on Monday said German Chancellor Angela Merkel is right to press the other nations for reforms as a condition of financial support, though he also urged quick action to resolve Europe’s crisis.(My emphasis).

The reason for lecturing:

“It’s reducing demand for U.S. businesses, for the things they produce and sell both in Europe and around the world. It’s helping slow growth everywhere, not just in Europe. But it’s also causing businesses everywhere to pull back because of concern that this crisis could intensify,” Mr. Geithner said.

Comment:

There are two problems simultaneously:

1)      The banks in Southern Europe experience a bank run which is being dealt with. The problem is that the guarantees of the appropriate states must have substance.

2)      The economies of Greece and Spain are running a deficit, which means these countries are denied credit (7% interest on a sovereign bond is a de facto denial of credit) by all but the ECB and IMF. A stimulus package in Spain f.i. will only run that country deeper into debt and with no prospect of financing it.

On the other side there is a stimulus package in Europe: That is called a devaluation of the Euro relative to USD. But that was not what the USA had in mind, as that supposedly hurt US exports. The answer to that is: The products that the US is most likely to expand in are agricultural where rising prices is going to compensate for the overvalued USD. Pity there are no farmer votes left in the US.

Furthermore the prospect of large scale bank cannot avoid having a negative effect on European growth – to put it mildly. The tragedy of it all: There is money in Spain, Italy and Greece to pay the debt – it is all a matter of taxation. That may be what lies behind this quote:

The U.S. has been largely hamstrung in its ability to prompt faster action by euro-zone authorities, though Mr. Geithner said American and European officials have been working together behind the scenes. The U.S. Treasury, for example, is sending Charles Collyns, Treasury’s assistant secretary for international finance, to Greece and Italy this week to meet with government officials and private sector representatives to discuss the crisis.