Europe

Delicate balance

The current account still matters, but other things do too, and maybe more. In light of recent focus on gross flows, here and elsewhere, I want to argue for the language of the balance of payments. This language has a quaint feel to it, and my sense is that economists view it as archaic and outmoded. I am certain, at least, that one can get through grad school with no fluency in it. Read more

John Whittaker: Eurosystem balances explained

[The following guest post is by John Whittaker, from whom we have learned much of what we know about how the European payments system works.  See his terrific papers here and here, both of which reward close study.  He has been looking over the last couple Money View posts, and the comments to those posts, and has this to say.] Read more

Is there an ECB?

The ECB has always been the protagonist of the eurozone crisis story. At times it has seemed the arch-villain, coldly standing on principle even as the financial system crumbles around it. At other times it has seemed the hero in waiting, ready to step in at the eleventh hour to bring a moral-hazard-free end to the turmoil with its unlimited balance sheet.

What is becoming increasingly clear, however, is that the plot is taking a twist. The question is no longer whether the ECB is villain or hero, but whether it exists at all. (And today's collateral eligibility expansion doesn't resolve the question.) Let me explain. Read more

First the ECB, then the IMF, Part One

The fact of the matter is that European bank funding markets are collapsing onto the ECB balance sheet.  Forget about the €200 billion of outright peripheral bond purchases--small potatoes.   National central bank exposures, through the TARGET clearing system, now exceed €400 billion, and private bank exposures, through discount lending and deposit facilities, are the same order of magnitude.  

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Financial (De)Globalization and the European Experiment

Europe is embarked on a grand experiment, managing modern financial crisis without a dealer of last resort, so refusing to follow the lead of the 2008 Fed.  The scientist in me thrills at this opportunity to gather new data from unexplored territory; the citizen in me quails at the brinksmanship, what Martin Wolf has called "just in time, just enough". Read more

Liquidity, Public and Private

A week ago, Mark Carney, chairman of the Financial Stability Board, warned of emerging global consequences of the escalating eurozone crisis.  The problem, he said, is contraction of global liquidity.

What he is worried about, apparently, is disruption of the global funding system as continental European banks retrench.  In normal times, these global banks serve as funding intermediaries, gathering short term funds from all ends of the earth at one price, and lending them on to other ends of the earth at a slightly higher price.  Trouble for these banks means trouble for global credit markets.

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Euro Summit Statement Explained

Okay, so here is the statement, but what does it mean?  Felix Salmon offers an unnamed advisor's flowchart.  Let's see if Money View thinking can do better.

Words are of limited help here (unless perhaps you are a Munchau!).  What is important is to understand the balance sheet relationships, and that takes a video.

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First Liquidity, then Solvency

First ECB, then EFSF

Tightening money market conditions in Europe have now claimed their first victim, Dexia, and in so doing shifted the focus of policymakers from sovereign debt to banking recapitalization.  But it is just a change in approach; the underlying problem remains the same.

The demise of Dexia should remind everyone that liquidity kills you quick.  In this regard, Trichet's reminder that no European bank should worry about liquidity is reassuring, or should be anyway.

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Twisting in the Wind

While waiting for TALF

Bernanke did everything he could last week, short of a QE3 expansion of the Fed’s balance sheet, but apparently the market was expecting more.   A creature of habit, the market was fixated on the balance sheet that has done the global heavy lifting since Lehman, rather than on the balance sheets that are poised to do the heavy lifting now, namely the other central banks that jointly announced unlimited dollar lending last week, especially the ECB. Read more

Bazooka

Understanding QE3

Liquidity is not a problem within the Eurozone, insisted European Central Bank president Trichet last Monday.  But the markets didn’t believe him.  The question now is whether the announcement last Thursday of a coordinated central bank intervention—by the ECB and also the Swiss National Bank, Bank of Japan, Bank of England, and the Fed--gives more reason to believe.  Read more