# Central Banks to lend to European Banks



## dewdrop (16 Sep 2011)

In view of the poor economic outlook how will the European Banks be able to repay these proposed loans ?


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## Sunny (16 Sep 2011)

dewdrop said:


> In view of the poor economic outlook how will the European Banks be able to repay these proposed loans ?


 
The loans are secured on assets. It's just a liquidity measure because US money market funds were pulling out of Europe so there was a shortage of USD funding for banks. This just helps ensure that concerns about banks liquidity don't threaten to cause the money markets to come to a complete freeze. Of course, it doesn't do anything about the underlying concerns about solvency.


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## Chris (16 Sep 2011)

Sunny said:


> Of course, it doesn't do anything about the underlying concerns about solvency.



Very important point. The underlying businesses are still in extremely bad shape. All this is doing is distracting from this fact, while at the same time creating inflation.


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## Sunny (16 Sep 2011)

Chris said:


> Very important point. The underlying businesses are still in extremely bad shape. All this is doing is distracting from this fact, while at the same time creating inflation.


 
They are doing what Central Banks are there to do i.e. Be a lender of last resort when the money markets are not functioning. They are not increasing the money supply so they are not creating inflation. The USD liquidity is provided through swap lines between the FED and the various Central Banks. If the ECB want $100 billion to lend to their banks, they have to provide the FED with the € equivalent. It's purely a liquidity measue.


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## Ryandd (17 Sep 2011)

It would appear to me that something will have to break, it is clear that European countries and their banks will be relying on the central bank for assistant for sometime to come because markets are calling the shots and no closer to easing pressure on ratings.


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## Chris (19 Sep 2011)

Sunny said:


> They are doing what Central Banks are there to do i.e. Be a lender of last resort when the money markets are not functioning. They are not increasing the money supply so they are not creating inflation. The USD liquidity is provided through swap lines between the FED and the various Central Banks. If the ECB want $100 billion to lend to their banks, they have to provide the FED with the € equivalent. It's purely a liquidity measue.



They will be increasing the money supply, just as they did at the onset of the financial crisis. Where else is the money going to come from?
In the last 4 years M1 has risen 26% from €3754bn to €4742bn all in the name of providing liquidity. Watch the monetary figures over the next 6 months, they will be rising just as they have in the US.


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## Sunny (19 Sep 2011)

Chris said:


> They will be increasing the money supply, just as they did at the onset of the financial crisis. Where else is the money going to come from?
> In the last 4 years M1 has risen 26% from €3754bn to €4742bn all in the name of providing liquidity. Watch the monetary figures over the next 6 months, they will be rising just as they have in the US.


 
Tell me how they are increasing money supply in a way that will cause inflation. They are providing liquidity through repo's. These repo's are for a fixed period. It is not the same as their other programme of buying Government bonds outright which I agree is a form os Quantitative Easing despite their insistence that they are neutralising the effect by mopping up excess liquidity for the same amount. 

You are better off looking at M3 money supply if you want to use that as an indicator of inflation as it is broader than M1. The 3 month avergage of the annual growth rates of M3 is about 2%. The ECB has a 4.5% annual growth rate as a non-inflationary reference value for M3 so money supply is not indicating inflationary pressures. If anything, the ECB are probably going to start worrying about it and it is why you will probably see 50bps rate cut by year end. Having said that, looking at money supply as an indicator for inflation is dangerous.


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## Chris (20 Sep 2011)

Sunny said:


> Tell me how they are increasing money supply in a way that will cause inflation. They are providing liquidity through repo's. These repo's are for a fixed period. It is not the same as their other programme of buying Government bonds outright which I agree is a form os Quantitative Easing despite their insistence that they are neutralising the effect by mopping up excess liquidity for the same amount.


I agree that the actions being taken are very different to the purchasing of government bonds, but just because the repos have a time limit does not mean that the money created for them will vanish from the monetary base. It is far more likely that they will be continuously recycled as these banks are not getting any better. I could be proven wrong over the next 12 months, let's watch the various Ms and see.



Sunny said:


> You are better off looking at M3 money supply if you want to use that as an indicator of inflation as it is broader than M1. The 3 month avergage of the annual growth rates of M3 is about 2%. The ECB has a 4.5% annual growth rate as a non-inflationary reference value for M3 so money supply is not indicating inflationary pressures. If anything, the ECB are probably going to start worrying about it and it is why you will probably see 50bps rate cut by year end. Having said that, looking at money supply as an indicator for inflation is dangerous.


I agree that in general M3 is a better measure of broad money supply, but since the crisis and all the money printing it has become a very unreliable indicator. The reason I say this is because of the amount of excess reserves held by banks. I couldn't find the exact amount for ECB excess reserves, but in the US excess reserves are up to $1.5tr. Just because excess reserves haven't filtered through to M3, doesn't mean they won't, and I see nothing that suggests that a sudden drop in excess reserves could be significantly halted.
Everything the ECB has been doing has been increasing the money supply which has been creating price inflation above a level that otherwise would have existed.


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## NorfBank (20 Sep 2011)

Chris said:


> Everything the ECB has been doing has been increasing the money supply which has been creating price inflation above a level that otherwise would have existed.



How to save the euro: 

A question for those in the know - is this true?_"In today’s recessionary world, the ECB could buy several trillion euros-worth of bonds without unleashing inflation"_
​A simple-ish explanation if possible please.


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## Chris (21 Sep 2011)

NorfBank said:


> How to save the euro:
> 
> A question for those in the know - is this true?_"In today’s recessionary world, the ECB could buy several trillion euros-worth of bonds without unleashing inflation"_
> ​A simple-ish explanation if possible please.



Simple answer is that this is total and utter nonsense. It is this kind of incompetence that you can see if you look at German headlines from Weimar hyperinflation.
I posted last year about what inflation actually is: http://www.askaboutmoney.com/showthread.php?t=141913

Increases in the general price level are the result of increases in the money supply. If the ECB were to buy trillions of euros worth of bonds, then they would do so buy creating zeros (printing money) and increasing the money supply. Where the authors argument completely falls apart is that the quote you list is preceded with the following: "So long as governments are solvent and the bank sells the bonds back to the market after the crisis, this does not amount to monetising government debt."
This is a huge *IF* without any precedence in history of this happening. Who is suddenly going to buy trillions of euros worth of junk bonds in a short enough time period to stop prices from rising?


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## Sunny (21 Sep 2011)

I have to agree with Chris. I don't think the Economist itself even believes what they are saying.


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