Saturday, 25 February 2017

Weekend Update 25/02/2017 Europe - “Oh, help and bother!”

‘Oh, help!’ said the ECB’s Maestro, Mario Draghi. ‘I’d better go back.’ ‘Oh, bother!’ said Maestro Mario Draghi.  ‘I shall have to go on.’ ‘I can’t do either!’ said Maestro Mario Draghi.  “Oh, help and bother!”

The ECB’s Maestro, Mario Draghi. With apologies to A.A. Milne, and Winnie-the-Pooh

Will the EUSSR fall apart before John Bull gets his freedom from the EUSSR prison? Increasingly that answer is starting to look like a very big YES! “Economic sanity may not prevail,” says German central bank Executive Board member Andreas Dombret. President Trump’s incoming Border Access Tax, when it happens, makes that YES, sooner rather than later.

Just don’t tell anyone on the bridge of the increasingly dysfunctional EC and EUSSR. They prefer to think of the icebergs ahead, as fresh source of ice for their gin and tonics. Breakfast Glenlivets for the man at the top of the increasingly irrelevant EC. They are busy speeding up the EU ship to get to the icebergs sooner. Super fuelled by the Italian madman at the top of the European Central Bank.

“People say nothing is impossible, but I do nothing every day.”

J-C Juncker, with apologies to A.A. Milne, and Winnie-the-Pooh

Maastricht's Flaws Still Plague Europe, 25 Years Later

Feb 24, 2017 1:26 AM EST By Mark Gilbert
Twenty five years ago this month, the representatives of 12 countries gathered in the Dutch city of Maastricht to sign the Treaty on European Union. Its claim to mark "a new stage in the process of creating an ever closer union among the peoples of Europe" looks grandiose and overblown a quarter of a century later.
More importantly, the economic convergence it promised looks further away than ever.

That's a problem in more ways than one. It presents the European Central Bank with the dilemma of how to set monetary policy for a multi-speed economy, with Germany in particular chafing at ultra-low interest rates. The lack of convergence also undermines support for the European project, with the economic benefits harder to argue for in, say, Italy, which is suffering an unemployment rate of 12 percent, twice Germany's 5.9 percent jobless level.

It's fair to say that there's little popular enthusiasm these days for the notion of ever-closer union. Turnout at European parliamentary elections has dropped at every vote, reaching a low of 42.6 percent at the most recent ballot in 2014. The European Commission's latest Eurobarometer survey of public opinion shows trust in the EU at 36 percent, down from between 44 percent and 57 percent between 2004 and 2009. One of the treaty's founding signatories, the U.K., is on the verge of leaving the bloc. And a second, France, has a presidential candidate in the form of Marine Le Pen who says she'll seek a similar exit from the euro if she wins.

The introduction of the common currency was simultaneously the most concrete achievement of the Maastricht treaty and its biggest fudge. By setting five so-called convergence criteria for countries wanting to adopt the euro, the treaty sought -- at Germany's insistence -- to ensure that only the economically fittest could qualify.

Three of the Maastricht targets -- on inflation, exchange rates and long-term borrowing costs -- proved almost trivial at the time, since impending membership of the common currency in effect produced convergence in a self-reinforcing fashion. Of the two remaining criteria, on budget deficits and debt ratios, Germany and France quickly broke the rules in 2003; France still does but has plenty of company. Once those two nations escaped the punishment laid down in the Stability and Growth Pact, other countries felt emboldened to ignore their own slippage. And, as the following chart shows, while the euro zone as a whole has recently achieved the deficit target shown by the red line, France and Spain are still falling short:

Even in the government bond market, convergence has disappeared. Two-year Italian yields, for example, are about 0.05 percent. Spanish yields are about -0.24 percent, which is about twice what French yields are at -0.46 percent, which in turn are about twice what Germany levels are at -0.9 percent. There's a similar dissonance in 10-year borrowing costs:

Citigroup Sees German Two-Year Yields Below -1% as Rally Extends

by Marton Eder  24 February 2017, 11:22 GMT
The rally in German two-year notes gathered steam on Friday, with Citigroup Inc. predicting yields could drop to minus 1 percent and beyond.
The securities headed for the best weekly gain since the euro area’s debt crisis, buoyed by demand for safer assets amid rising French political risks and the European Central Bank’s stepped-up purchases below its old deposit-rate floor. Citigroup estimates the ECB will buy about 80 billion euros ($85 billion) of one- to six-year German bonds this year even as it trims its overall monthly purchases from April, analysts led by Harvinder Sian wrote in a client note.

Le Spread, Meet Die Bundesbank

By Marcus Ashworth  Feb 24, 2017 6:39 AM EST
For a brief halcyon moment on Thursday the confluence of a political bromance at the center ground of French presidential candidates and charges that a top aide to Marine Le Pen misused public funds produced a sharp contraction to the ever-widening spread between French and German government bonds. Frankfurt's putting the pressure back on, and it's probably going to stay there.

With about two months to go before the French presidential election, a pronounced narrowing isn't in store

The Bundesbank has finally unfriended quantitative easing. President Jens Weidmann informed us Thursday that he didn't support extending the European Central Bank's Public Sector Purchasing Program in December. And the Bundesbank has made a point of raising provisions for expected losses once the ECB starts raising interest rates. With friends like these, Mario Draghi must be feeling lonely.

To compound the trouble, deep in the plumbing of the financial system, the German central bank seems set on making a bad situation worse. The collateral shortage in the repo market, which Gadfly has already warned about, is getting more acute. The ECB tried to address this, but turns out that it didn't buy itself much time with its Dec. 15 decision to allow national central banks to buy their own government debt as low as minus 70 basis points -- German debt under four years already yields less than that new floor. It looks like German buying at the front end of the yield curve is to blame for pushing 2 year yields towards minus 1 percent, akin to Swiss levels.

Compounding the felony is that in the collateral borrowing markets, the Bundesbank only lent out a tiny amount of its bund holdings over year-end in the repo market, yet both it and the ECB hold over a quarter of outstanding German debt. This parsimony does not suggest a central bank that prizes efficiency in transactions.

It's within the German debt office's gift to ease tight conditions by altering or increasing the supply schedule. A spokeswoman made clear on Thursday that, if there ever were to be a problem with a squeeze in the cheapest-to-deliver security into the 10-year bund futures contract, it would act by issuing more bonds, Reuters reported. She made equally clear that issuance won't increase at the short end to tackle market strains.

So there is no relief in sight for ever-more-negative yields, not even the attraction of being paid to raise money. Citibank analysts say further new lows in Schatz yields are inevitable as the ECB needs to buy around 80 billion euros of bunds due in one to six years by year-end, so below minus 1 percent is in sight. If this feeds into difficulties in extending QE beyond December, the ECB's backstop for the periphery is going to be tested.

In Brexit news, to the ecstatic delight of Amsterdam, Dublin and Paris, Frankfurt just fired a shotgun into both feet. Boeing opts for Brexit GB.

Bankers Told No Fly-In, Fly-Out Hub in Frankfurt After Brexit

By Gavin Finch, Nicholas Comfort, and John Glover
24 February 2017, 10:00 GMT 24 February 2017, 12:23 GMT
Banks choosing Frankfurt for their licensed European Union hub after Brexit will have to set up full-scale operations in the country, not brass-plate offices with bankers commuting from London, according to German central bank Executive Board member Andreas Dombret.

“We will not accept any empty shells or ‘letterbox companies,’ where the business effectively continues to be done out of London,” Dombret said in a speech in the U.K. capital on Friday. This includes “fly-and-drive banking, where bankers fly in daily from London, or ‘dual-hatting,’ where transactions are booked on the EU subsidiary but in fact executed in London.”

Frankfurt is emerging as the favored destination for global banks such as Goldman Sachs Group Inc. and Citigroup Inc. that need to set up new or expanded bases within the EU to maintain their access to the single market after Britain withdraws from the bloc. Germany’s financial capital already hosts Deutsche Bank AG, the European Central Bank and part of BaFin, one of the few EU regulators with experience overseeing complicated derivatives trading.

For critical functions such as senior management and compliance, qualified staff will need to be present at the new EU subsidiary full-time, Dombret said.

Dombret also said a “race to the bottom” on financial regulation should be avoided as the U.K. prepares to secede from the EU. His comments at a presentation organized by the consultancy zeb echoed a warning last month from German Finance Minister Wolfgang Schaeuble.

“Given how the Brexit debate developed early this year, this warning is not at all an empty one,” Dombret said. “A financial-center strategy comprised, among other ingredients, of very low corporate taxes and lax regulation has already been mentioned in the U.K. as a fall-back option for London.”

Considering the potential for political acrimony on both sides, he said people should not count on “economic sanity” being the guiding principle in the divorce negotiations between the U.K. and EU.

Boeing to Open Its First European Plant in Post-Brexit U.K.

by Christopher Jasper
Boeing Co. plans to open its first ever European factory in Sheffield, northern England -- delivering a vote of confidence in the U.K.’s manufacturing capabilities as the country prepares to exit the European Union.

The 20 million-pound ($25 million) facility will supply parts for Boeing’s 737 short-haul workhorse and the 777 wide-body, specializing in actuation systems that extend and retract an aircraft’s wing flaps in different phases of flight.

The move advances Boeing’s plans to increase in-house manufacturing of actuator components in order to boost production efficiency, enhance quality control and reduce supply-chain costs, the U.S. company said in a statement Friday. The 25,000 square-foot plant will initially employ 30 people, with recruitment starting next year.

“Our decision to start manufacturing high-value components in the U.K. is a step-change in our engagement and a further example of Boeing’s commitment to grow here,” Boeing Europe President Michael Arthur said in the release.

EC President J-C Juncker: He has no EU enemies, but is intensely disliked by his friends.

With apologies to Oscar Wilde.

As usual most weekends, we leave the last word on America and unorthodox President Trump, to Jason in California.

 Tension Between Trump Administration, Media Reaches Fever Pitch & Marks Critical Moment for American Democracy

N. Jason Jencka February 25th, 2017 3:15 am ET

The Trump administration's rhetorical war against what it deems to be “fake news”  reached new heights this week with the barring of mainstream media titans CNN & the New York Times from a Friday closed-door briefing with press secretary Sean Spicer. Both outlets have been critical of president Trump at various points throughout his campaign and the first month of his presidency. As such, their ban from an administration briefing is viewed by those with an anti-Trump disposition to be evidence of a general clampdown on dissent and an affront to the role of a free press as a guardian of democracy. Conversely, Trump loyalists view the decision as an example of an administration refusing to acquiesce to a hostile, ideologically opposed and obstructionist media. As concrete evidence of the monumentally contentious environment surrounding the aforementioned briefing, Time and the Associated Press chose to boycott the briefing to maintain solidarity those at the NYT and CNN. While it may be that one weekly press briefing would typically be viewed as an inconsequential footnote of a 4 year presidential term, what is certain is that for better or for worse nothing in Mr. Trump's administration is remotely “typical”. In the words of New York Times editor Dean Baquet “Nothing like this has ever happened in our long history of covering multiple administrations of different parties.” Indeed.

N. Jason Jencka is presently studying Finance and Economics at Sierra Nevada College, located near the shores of Lake Tahoe on the border of California and Nevada. His interests include the interplay between world markets and the global political sphere, with a focus on developments of both sides of the Atlantic in North America and Europe. In his leisure time he enjoys connecting with those people that have an interesting story to tell and a genuine desire to make an impact in the world.
“For every fatal shooting, there are about 3 non-fatal shootings. Folks, this is unacceptable in America.”
George W. Bush

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