Deutsche Bank: The ECB must change course (Full report)

The ECB must change course (Full report)


Worrisome signs series: US less than a percent away from recession

Over the past four decades and more, one reliable indicator has pointed to recession every time successfully and few years ahead. That indicators is the spread between short dated (2 year) and long dated (10 year) treasury yields.

The spread between 2-year and 10-year treasury yields dropped to just 95 basis points on friday, which is the lowest level since late 2007, eve of great recession.

Every time that spread has dropped to negative, recession followed. Last time it was in negative was back in 2006, which was followed by Great Recession of 2008, before that back in 1999, which followed dot com bubble burst and US recession of 2001.

Similar can be seen in prior recession too.

And biggest worries are, growth is already weak enough and central banks’ stimulus across globe at highest. There may be few tools left to Central banks’ arsenal to tackle such a situation and if triggers another global recession.

Greek banks post haircut collateral value at €93 billion

Greece’s banks hold enough eligible collateral to access an additional €14 billion in Emergency Liquidity Assistance funds, two Eurosystem sources have told MNI, suggesting that just weeks of increasing support remains for the country’s beleaguered financial system.

The total value of Greek banks’ eligible collateral after haircuts last week was about €93 billion, two Eurosystem sources confirmed, highlighting the limited scope for the ECB to further step up ELA support as political negations with the country’s international creditors drag on.

A return to the haircut schedule used late last year would shave €6 billion off post-haircut collateral, according to the sources, reducing it to about €87 billion and in turn limiting the scope for further ELA increases to just €8 billion.

ECB board discussed various Greece haircut scenario

The European Central Bank’s Executive Board discussed during their meeting on Tuesday various options for raising the haircut on Greek government bonds used as collateral in lending operations with the Bank’s Emergency Liquidity Assistance facility, senior Eurosystem sources have told MNI.

The sources said that even though the Board did not reach a final conclusion, it will review the various options during Wednesday’s Governing Council meeting, at which, besides considering the question of whether to hike ELA for Greece, members will be called to vote on whether a haircut should be decided today or in the next weeks.

If the necessary majority is found, then the decision will be communicated in writing around 21:00 CET Wednesday evening, one source said.

According to a senior Eurosystem official, the Executive Board on Tuesday discussed “various options for Greece” as the Bank essentially seeks ways to push for a speedier deal between Athens and its partners.

“The issue of whether to proceed with raising the haircut has been discussed on Tuesday, and it could take various forms,” the source said.

The Executive Board’s approach is different compared to February, when the decision to lift the waiver and not accept Greek bonds as collateral was announced on February 18 but proposed the day before by the Executive Board.

“In February the Governing Council was presented with the proposal and approved it. This time could be different if there are options. However, a growing number of Council members have been increasingly frustrated with Greece and have been pushing towards raising the haircuts before the May 11 Eurogroup meeting,” another senior Eurosystem source said.

“Whatever would be the decision, it will not be harmful for Greece,” commented a third source.

“But, if the Council decides to postpone the decision for two weeks, one way or another the ECB will communicate its intentions on Greece,” he added.

Asked why any decision to raise the haircut on Greece would not be harmful, the source said, “If you raise the haircut, then the amount of total collateral for the Greek banks is shrinking. But even with a possible haircut,  there is still a buffer and the Greek banks would continue to get ELA assistance for weeks.”

“I will not comment on the ceiling of the ELA; it is a complicated mechanism, but there is still a buffer,” the source continued. However, he added, any increase of the haircut would signal that the ECB won’t be raising the ELA for Greece on a weekly basis for much longer.

A Greek banking source commented that a possible raise in the haircut by 10% would be tolerable, but a 20% raise would make the credit facility of the Greek banks quite difficult and wouldn’t be sustainable for many weeks.

ECB President Mario Draghi met on Tuesday with Greek Vice President Yiannis Dragasakis and the Alternate Foreign Minister, Efklides Tsakalotos, who is also head of the negotiating team, as the Greek side attempted to halt any possible decision on increasing the haircuts.

Apart from that, the Greek officials explained the liquidity situation of Greece and affirmed their desire to obtain a written statement from the Eurogroup on Monday that negotiations are progressing towards a deal. Such statement, according to the Greek side, would enable the ECB loosen its stance on Greece.

However, multiple Eurozone sources have told MNI that a deal on Monday is not possible and that the two sides are still quite far from reaching an Agreement.

According to a Greek government official, Athens repaid on Wednesday the IMF loan tranche of E200 million, but markets wonder whether there are enough cash reserves to make the May 12 IMF loan repayment of E750 million.