BIS: Central Banks defenseless against the next crash

[Winehole23]

The world will be unable to fight the next global financial crash as central banks have used up their ammunition trying to tackle the last crises, the Bank of International Settlements has warned.

The so-called central bank of central banks launched a scatching critique of global monetary policy in its annual report (http://www.bis.org/publ/arpdf/ar2015e.htm). The BIS claimed that central banks have backed themselves into a corner after repeatedly cutting interest rates to shore up their economies.

These low interest rates have in turn fuelled economic booms, encouraging excessive risk taking. Booms have then turned to busts, which policymakers have responded to with even lower rates.

Claudio Borio, head of the organisation’s monetary and economic department, said: “Persistent exceptionally low rates reflect the central banks’ and market participants’ response to the unusually weak post-crisis recovery as they fumble in the dark in search of new certainties.” http://www.telegraph.co.uk/finance/economics/11704051/The-world-is-defenseless-against-the-next-financial-crisis-warns-BIS.html

[Winehole23]

http://www.bis.org/publ/arpdf/ar2015e.htm

[Slutter McGee]

Not that familiar with other central banks, but the persistently low interest rates are not going to (directly) cause a bubble or inflation in the US. The reason for this is that the FED started paying interest on reserves, so we have seen the amount of reserves banks are holding sky rocket (around 3 trillion I think) when banks can sit on the money instead of loaning it out. The question is what will happen when the FED targets the FFR up. They are going to either have to bump up the interest they are paying on reserves which has its own problems, or try to take that money out of the economy by selling assets or doing reverse repos, otherwise that money is going to spill out into the economy, and with a multiplier that some people believe is close to 100. In theory its possible but its a situation they have never been in so we just have to wait and see.

I am pretty sure the European central banks were able to put a better cap on reserves, so their situation might be quite different.

Slutter McGee

[boutons_deux]

How Much Puerto Rico Risk Is There at MBIA and Assured Guaranty?

Monday’s stock market sell-off may have looked harsh as the Greece exit of the Euro looks closer and closer. Municipal bond investors now have a much larger risk in the United States than they do in Greece — Puerto Rico has warned that it is effectively near default after Puerto Rico’s governor said that its $72 billion in debt is unpayable.

The governor had previously said that Puerto Rico would effectively do whatever was necessary to pay its debt. That change of tune has been just in recent weeks as well. What is interesting is that it is hard for a to unincorporated territory like Puerto Rico to file bankruptcy.

The firm BTIG came out on Monday and downgraded Assured Guaranty Ltd. (NYSE: AGO) and MBIA Inc. (NYSE: MBI). BTIG said that this risks makes the two insurers not buyable and that investors should not get involved in the names. Assured Guaranty and MBIA are municipal bond insurers, and their ratings were each downgraded to Neutral from Buy.

A figure from Bloomberg showed that these two insurers have a combined $9.4 billion of Puerto Rican dent that they have guaranteed. Assured Guaranty’s face value exposure was put at $4.9 billion, while MBIA’s face value exposure was put at $44.5 billion. MBIA’s National Public Finance Guarantee site lists 144 different issues under various Puerto Rico entities.

The fears were growing after a Sunday interview ran in the New York Times, with the ominous words that bond investors should prepare to sacrifice.

(http://247wallst.com/economy/2015/06/29/the-fallout-of-greek-shame/)Assured Guaranty Ltd. shares were down almost 15% at $23.33 in active volume on Monday. Its 52-week range is $20.02 to 29.75, and Assured’s market cap after the drop was listed as $3.5 billion.

MBIA Inc. shares were down almost 21% at $6.58 in very active late day trading on Monday. Its 52-week range is $6.54 to $11.77 — and that 52-week low was also hit on Monday. MBIA’s market cap after the drop is $1.2 billion.

Shortly after publishing the muni-insurance piece, Fitch Ratings announced that it has downgraded the Commonwealth of Puerto Rico’s general obligation (GO) and related debt ratings to ‘CC’ from ‘B’. Also, the ratings remain on Rating Watch Negative:

The downgrade of the ratings to ‘CC’, which indicates Fitch’s belief that default of some kind appears probable, is based on public comments by the governor supporting the broad debt restructuring strategy included in an external report released this morning by GDB.

Fitch no longer believes that the commonwealth views GO debt as worthy of the higher level of protection that to date has been assumed due to the very strong legal pledge and repeated public statements to this effect. As it is difficult at this point to predict the course that the commonwealth will take from here in pursuing debt restructuring, Fitch does not believe it is meaningful to distinguish among the various securities and with today’s rating action brings all of the commonwealth debt that is rated by Fitch to ‘CC’ Rating Watch Negative.


Read more: How Much Puerto Rico Risk Is There at MBIA and Assured Guaranty? - Assured Guaranty Ltd. (NYSE:AGO) - 24/7 Wall St. (http://247wallst.com/investing/2015/06/29/how-much-puerto-rico-risk-is-there-at-mbia-and-assured-guaranty/#ixzz3eUCmCok5) http://247wallst.com/investing/2015/06/29/how-much-puerto-rico-risk-is-there-at-mbia-and-assured-guaranty/#ixzz3eUCmCok5

Taxpayer bailout of these insurance companies?

[Winehole23]

Not that familiar with other central banks, but the persistently low interest rates are not going to (directly) cause a bubble or inflation in the US. The reason for this is that the FED started paying interest on reserves, so we have seen the amount of reserves banks are holding sky rocket (around 3 trillion I think) when banks can sit on the money instead of loaning it out. The question is what will happen when the FED targets the FFR up. They are going to either have to bump up the interest they are paying on reserves which has its own problems, or try to take that money out of the economy by selling assets or doing reverse repos, otherwise that money is going to spill out into the economy, and with a multiplier that some people believe is close to 100. In theory its possible but its a situation they have never been in so we just have to wait and see.

I am pretty sure the European central banks were able to put a better cap on reserves, so their situation might be quite different.

Slutter McGeeRecent hikes have given the Fed a bit of wiggle room if GDP continues to contract. The hikes also make reverse repos more attractive to banks, taking $Ts out of the economy -- and perhaps a bit of helium out of inflation. For banks this is more QE, but it's QT for the rest of us -- the reverse repo market basically pays institutions to keep money on the sidelines.

https://pbs.twimg.com/media/FYwGFIjWIAg56S9?format=jpg&name=small

https://pbs.twimg.com/media/FYukXNEUUAALxoj?format=jpg&name=900x900

[Winehole23]

Of course, whenever this position unwinds, that's a lot -- $2.2T seems to be the most widely reported figure -- of pent up demand.

[Thread]

Recent hikes have given the Fed a bit of wiggle room if GDP continues to contract. The hikes also make reverse repos more attractive to banks, taking $Ts out of the economy -- and perhaps a bit of helium out of inflation. For banks this is more QE, but it's QT for the rest of us -- the reverse repo market basically pays institutions to keep money on the sidelines.

https://pbs.twimg.com/media/FYwGFIjWIAg56S9?format=jpg&name=small

https://pbs.twimg.com/media/FYukXNEUUAALxoj?format=jpg&name=900x900

Negative growth?...good now.

tee, hee.