ECB Contemplates ‘Monetary Twilight Zone’ Neutron Bomb: NIRP (= Negative Interest Rate Policy) !!!

Former Goldman Sachs managing director & ‘European Central Bank President Mario Draghi is contemplating taking interest rates into a twilight zone shunned by the Federal Reserve’

What could possibly go wrong?


Europe’s “Monetary Twilight Zone” Neutron Bomb: NIRP (ZeroHedge, June 27, 2012):

Just because ZIRP is so 2009 (and will be until the end of central planning as the Fed can not afford to hike rates ever again), the ECB is now contemplating something far more drastic: charging depositors for the privilege of holding money. Enter NIRP, aka Negative Interest Rate Policy.

Bloomberg reports that “European Central Bank President Mario Draghi is contemplating taking interest rates into a twilight zone shunned by the Federal Reserve. while cutting ECB rates may boost confidence, stimulate lending and foster growth, it could also involve reducing the bank’s deposit rate to zero or even lower. Once an obstacle for policy makers because it risks hurting the money markets they’re trying to revive, cutting the deposit rate from 0.25 percent is no longer a taboo, two euro-area central bank officials said on June 15… “The European recession is worsening, the ECB has to do more,” said Julian Callow, chief European economist at Barclays Capital in London, who forecasts rates will be cut at the ECB’s next policy meeting on July 5. “A negative deposit rate is something they need to consider but taking it to zero as a first step is more likely.” Should Draghi elect to cut the deposit rate to zero or lower, he’ll be entering territory few policy makers have dared to venture. Sweden’s Riksbank in July 2009 became the world’s first central bank to charge financial institutions for the money they deposited with it overnight.

There is only one problem when comparing the Riksbank with the ECB: at €747 billion in deposits parked at the ECB as of yesterday, the ECB is currently paying out 0.25% on this balance, a move which may or may not be a reason for the depositor banks, primarily of North European extraction, to keep their money parked in Frankfurt. However, once this money has to pay to stay, it is certain that nearly $1 trillion in deposit cash, currently in electronic format, would flood the market. What happens next is unknown: the ECB hopes that this liquidity flood will be contained. The reality will be vastly different. One thing is certain: inflating the debt is the only way out for the status quo. The only question is what format it will take.

More from Bloomberg:

“It won’t help the prospect of a functioning money market because banks won’t be compensated for the risk they’re taking,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. It would make more sense to lower the benchmark rate, thus reducing the interest banks pay on ECB loans, and keep the deposit rate where it is, Green said.

Read moreECB Contemplates ‘Monetary Twilight Zone’ Neutron Bomb: NIRP (= Negative Interest Rate Policy) !!!

Italy Pays More For 6 Month Debt Than America Pays For 30 Year, As LTRO Claims Its First Bank Insolvency

Italy Pays More For 6 Month Debt Than America Pays For 30 Year, As LTRO Claims Its First Bank Insolvency (ZeroHedge, June 27, 2012):

Today Italy had a rather critical Bill auction in which it sold €9 billion in debt due six months from today. Obviously, since the maturity is well inside of the LTRO, the auction itself was rather meaningless from a risk standpoint. Still, the good news is that Italy managed to place the entire maximum amount targeted. The bad news: it cost Italy more to raise 6 months of debt, or 2.957%, than it costs the US to borrow for 30 years (2.70%). Not only that but the average yield 2.957% was the highest since December when the Italian 10 Year was north of 7%, and nearly 50% higher compared to the 2.104% at auction on May 29, or less than a month ago. The Bid/Cover of 1.62 was unchanged compared to the 1.61 at the May 29 auction. From Reuters: “Today’s bill sale points to the sovereign getting this supply away but at yield levels sufficiently elevated to leave a niggling doubt at least as to the medium-term sustainability of the country’s public finances,” said Richard McGuire, a rate strategist at Rabobank. On Tuesday, Spain paid 3.24 percent to sell six-month bills. Madrid is seen at risk of having to ask for more aid after formally requesting a European rescue for its banks this week. But doubts are also growing on Italy’s ability to keep funding its 1.95 trillion euro debt, which makes it the world’s fourth-largest sovereign debtor. Domestic appetite has so far allowed the Treasury to complete 56 percent of its 445-billion-euro annual funding plan.”

It gets worse. Recall that the LTRO was conceived back in December 2011 precisely to facilitate the sovereign debt ponzi in a way where domestic banks would borrow from the ECB only to buy their own sovereign debt, a circumvention of the ECB’s prohibition to buy sovereign debt in the primary market, and a plan that was so circular those who actually could see through it would scream a warning to anyone who cared. Six months later, the chickens have come home to roost:

Read moreItaly Pays More For 6 Month Debt Than America Pays For 30 Year, As LTRO Claims Its First Bank Insolvency