Gordon Kerr

Bank for International Settlements has labelled the impact of recent European quantitative easing as “unprecedented”. Worrying effects are not only the negative interest rates, but also very high price volatilities of asset. This development may soon hit not only economic, but also legal and even political boundaries.

The Austrian federal state of Carinthia continues to suffer from its long engagement with the Alpe Adria bank, which actually predates the recent crisis. Instead of making a quick cut liquidation after a bail-in, it is hoping to recover some assets in a dragged out wind-down process. It is to be seen whether this prolonged exposition to further claims will prove successful.

The ECB’s deal with Greece still leaves it exposed. Despite the rhetoric that countries must get their own finances in order, the ECB’s sister agency has started work on a new programme of $319 bn of mutualised debt.

US banks all pass their stress tests. However, that is not necessarily reassuring. When central banks took over testing from ratings agencies, can they be trusted that they would reveal problems potentially leading to a premature panic? UK banking may have some problems to solve.

Is the standoff between the ECB and Greece in any sense subtle, or simply a car crash waiting to happen? We explain why being the first to defect may in fact
benefit Greece. With low sympathy for formal (fiscal) debt forgiveness, we expect pressure to increase further on the ECB.

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Deutsche Bank’s CEO hails the new banking regulations. His counterpart at JP Morgan denigrates them. This, and further misconduct news just confirm that banking is still in worse shape than nearly all commentators and regulators appear to recognise.

Despite the attention offered by the media to Russian banking and foreign exchange markets, tensions are growing in the ECB. Some ECB Board members are unconvinced of the stance the ECB President is taking, doubting that the introduced policy would be effective, let alone constitutional. We explain the economics behind these tensions and review in this light the road how we got here in the financial crisis.

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Our November Newsletter’s analysis has been echoed by other commentators. Banks continue to be undercapitalised and a new Leverage Ratio cannot help. Governments continue to borrow heavily and the financial market seems to be in another bubble.

Although Scotland voted in September to remain in the United Kingdom, both sides hailed the high voter turnout as recognition of democratic engagement and growing European dissatisfaction with over-centralised, bureaucratic, seemingly unaccountable government. The effect has been to raise morale in Catalonia and a handful of other potential breakaway regions. This is bad news for Europe’s leaders.

Low interest rates contribute to weak labour markets
A new measure of Unemployment and Labour Market Conditions gains support at the Annual Jackson Hole Conference. Doubts continue about European QE as near-zero interest rates may actually be preventing employment from picking up.

Concerns about Repo Market Disruptions
The Repo market is becoming less attractive due to new Leverage Ratio rules. Doubts remain as to whether this can prevent reoccurrence of credit seizing up should insolvency worries reappear in the financial sector.

BIS has doubts about monetary policy in the Euro area
Latest BIS Report says that present monetary policies risk permanently destabilizing the global economy. It calls for A New Policy Compass, focussing on the ‘Financial Cycle’, not the Business Cycle.

Banks remain fragile and imbalances persist
The BIS notes that banks have been recapitalising, but in some countries problems with asset quality and earnings persist. The recent issue of a convertible bond for TESLA is a prime example of the behaviour of the financial markets, perhaps akin to the boom in subprime mortgages only a few years ago.