Yesterday, European Central Bank President Mario Draghi sent the euro falling and eyebrows rising when he suggested he was ready and willing to begin charging banks to park cash in a deposit facility in Frankfurt.

A negative deposit rate, as that would be called, is a technicality but still a rubicon of sorts. As the ECB cuts its main benchmark rate (it did that yesterday) the rate it pays banks to hold their cash is depressed accordingly. It’s already at zero. If the ECB wants to cut the overall cost of borrowing again, it will likely have to push the deposit rate into the minus zone at some point. Previously, Draghi has more or less ruled that out as “uncharted territory.”

A consequence of ruling a negative deposit rate out, of course, is that the ECB may be at the end of the line when it comes to rate cuts. An uncomfortable thought, with the economy still languishing in recession. Hence, perhaps, Draghi’s hint yesterday that he still had some ammunition left. “We will look at this with an open mind and stand ready to act if needed,” Draghi said.

Ewald Nowotny, Austria’s central bank governor, has already called Draghi’s bluff. A negative deposit rate “shouldn’t be seen as something that’s realistic in the foreseeable future,” he said in an interview with CNBC today. The battle lines over the ECB’s next interest rate cut, should there be one, have been drawn.

Original post is Draghi Deposit Rate U-Turn Gets Negative Review by Euro Crisis.

The euro area has just come as close as it ever has to learning that what the European Central Bank gives, it can also take away. Before euro-area ministers agreed a last-ditch bailout in the small hours of Monday morning, Cyprus was hours away from being cut off from central bank funds and cast into financial chaos.

The threat that the ECB’s governing council would order a stop to so-called Emergency Liquidity Assistance for Cyprus as of close-of-business today is arguably what focused minds and helped forge a deal that will see the country’s second-largest bank shuttered.

For the uninitiated, ELA is an ad-hoc credit line extended by national central banks that exists in parallel to the ECB’s own satisfy-all-requests loan policy that has been in place since the beginning of the financial crisis. It means banks can get cash against poorer collateral than normal Frankfurt rules would allow, for a higher rate of interest.

It’s supposed to be limited to “the temporary provision of liquidity in very exceptional circumstances,” according to a pre-crisis description of its function in 2007. Recipients still have to be “solvent,” though, which is why Cyprus was threatened with shut-off. Without the prospect of recapitalization or restructuring for the banking sector that an IMF-EU adjustment program would bring, bankruptcy beckoned.

After deployment in countries including Ireland, Greece, Belgium and Cyprus throughout those nations’ banking-sector difficulties, ELA is no longer so very exceptional. The ECB’s threat to withdraw it from Cyprus, and the response that produced, has taught us that ELA has become the euro area’s indispensable weapon against banking-sector collapse.

Original post is ECB’s Emergency Cash Becomes Last Bulwark Against Chaos by Euro Crisis.

Mario Draghi says the currency war is phoney. According to the European Central Bank president, there’s been too much “chatter” in the past two weeks about fluctuations in global currencies, set off by a decision by Japan’s central bank to tackle domestic deflation that’s weakened the yen.

Talk of a round of competitive devaluations, or calls for central banks to intervene to steer their currencies “is either inappropriate, or fruitless, and in all cases it’s self defeating,” Draghi said at a press conference in Moscow, where the Group of 20 nations are meeting.

Problem is, Draghi isn’t exactly a non-combatant in the monetary skirmish. Last week, he managed to talk the euro down almost two cents as he spoke in Frankfurt, when he suggested interest-rate cuts remain a possibility if the euro’s level affects inflation.

Draghi has also played currency ping-pong with Jens Weidmann, head of Germany’s Bundesbank. What Draghi has sent down, Weidmann has sent back up, as the German has argued twice within a week that there’s nothing much wrong with the level the euro is at. Maybe that’s why Draghi is now urging a vow of silence.

Original post is Draghi Dismisses Currency Spat as More Jaw Than War by Euro Crisis.

It’s not going to be easy for Mario Draghi today. The President of the European Central Bank is often lauded as a straight talker. He might have to be just the opposite when he gives a press conference at 14:30 CET in Frankfurt.

There are three main topics on the board, none of them easy. First, the strength of the euro is becoming a problem. He may feel the need to talk it down a bit, but without reversing his relatively upbeat comments on the prospects for a euro-area economic recovery.

Second, the Monte dei Paschi banking scandal is burning in Italy, but he’ll somehow have to take the heat out of it in Frankfurt. As there’s an ongoing criminal probe, there may be little he can say.

Last, Ireland’s hopes of a quick ECB deal to resolve its banking woes were dashed last night as Governing Council members decided they needed more time to mull the consequences. Until they’ve done that, he might be mindful of an old Irish idiom: Whatever you say, say nothing.

Original post is Draghi in Triple Hot Seat May Seek Verbal Escape Route by Euro Crisis.

As Europe’s political celebrities pack warm for the World Economic Forum in Davos next week, expectations of what they’ll achieve there are about as low as their economies’ growth rates.

The Swiss mountain-resort pow-wow is shaping up to be a muted deliberation about where on earth economic growth is going to come from, given that taming the European debt crisis has gone hand in hand with torpedoing output.

Angela Merkel, Germany’s Chancellor and one of the very few women in the pantheon of Davos deities, may have just as much reason as the others for glum circumspection: Germany’s economy, long the motive force for a stalling Europe, could already be in a glacial decline.

There are voices signaling the end of Germany’s era of economic leadership. Joerg Asmussen, a European Central Bank board member and a former junior minister under Merkel, has warned twice in just over a month that Germany could be the “sick man of Europe” again within five years if it doesn’t begin economic reforms.

After last year’s blockbuster OMT program from the European Central Bank in Frankfurt, there might not be much help from monetary policy this year. Interest rates are already at a record low. Painful, slow-moving, politically-costly reforms aren’t sunny thoughts for politicians who, like Merkel, will have to fight elections this year. Having arrived in Davos, the Chancellor may well fancy staying a while.

Original post is Merkel Won’t Lighten Davos Downbeat Growth Deliberations by Euro Crisis.

For Mario Draghi the last cut could be the deepest. Unlike the Federal Reserve and the Bank of England, the European Central Bank is perceived to still have room left with traditional measures to reduce the cost of borrowing. With Europe in recession and central bank forecasting gloom until the second half of this year, one might think the ECB should be reaching for the rate lever. Probably not today.

The central bank likes to move its trio of emergency lending, benchmark and deposit rates nice and neatly, all at the same time. If it now takes the benchmark below the current 0.75 percent that would mean the deposit rate (which it pays banks to park cash with them) would go into minus territory — terra incognita indeed for the Frankfurters.

As there are a host of potential downsides to running a negative deposit rate, from shuttering money market funds to the sheer ineffectiveness of such a move, the ECB may stick to the old central bank adage that advises untested tools to be used timidly.

As it happens, fortune may favour the not-so-brave. Business confidence indicators from France, Germany and Italy all rose in the past month, suggesting managers see better times ahead. If the forecast improvement turns up in time, Draghi could be spared from having to make the most awkward of interest rate adjustments. It could be worth just hanging on a while longer.

Original post is Draghi Could Dodge Deposit-Rate Dilemma as Europe Cheers Up by Euro Crisis.

This was supposed to be the easy part. But installing the ECB as the chief supervisor for all 6,071 banks in Europe by Jan. 1, 2013, just seems to keep getting more difficult.

Even though a paragraph in the EU’s governing treaty specifically says the task can be conferred on the ECB, getting it into law is proving highly complicated. The matter was given added urgency as EU leaders in June linked giving Spain’s banks fresh capital to the ECB taking up oversight duties. No supervisor, no cash, crisis drags on.

Today, Germany’s Bundesbank, which supports a banking union in principle, threw its own large spanner into the works by hinting that the legal basis for the whole show may be much shakier than previously thought. The problem centers on the possible conflict of interest that would arise if the same people setting interest rates are also responsible for overseeing individual institutions. Yet the ECB can’t split the two duties completely because the treaty — yes, it always comes back to the treaty — says the Governing Council is the ECB’s prime decision making body.

So what next? The Bundesbank says Europe can either set up an ECB supervisor in a hurry, or they can set it up properly. And to do it properly, the logic goes, would require a change in the treaty to separate the two functions. However, a treaty change is something Europe never finds easy.

Original post is EU Banking Union’s Legal Basis Isn’t Solid, Bundesbank Says by Euro Crisis.

Paul Volcker once remarked that in order to stand up to the Germans, you have to be subservient to them, in monetary matters at least. Accordingly, Mario Draghi travels to Berlin tomorrow to face the German Bundestag and tell them why saving the euro means writing a blank check.

The general supposition is that the Germans don’t like Draghi’s unlimited bond-buying plan, known as OMT. They were never that convinced about him running the European Central Bank either. According to the alarmists, the wealth of every German family has been put at risk by ECB policy, and the plan announced on Sept. 6 itself is akin to the devilish act of printing money.

Draghi has in fact tried the subservient route before, intoning his deep respect for the Bundesbank model of monetary probity while doing the opposite of what they wanted. It didn’t wash. Attempts at irony — proclaiming the Germans couldn’t just always say nein zu allem (no to everything) — went down like a lead balloon, too. So this time it seems there’s a gulf to be bridged.

Except that the Bundestag is more malleable than might be assumed, and it has proven itself more than willing to sign the check for European bailouts when the Chancellor came asking. While there are plenty — like Free Democrat lawmaker Frank Schaeffler — who think Draghi has changed the rules of currency union while Germany wasn’t looking, there are still more — like the Christian Democrats’ Europe spokesman Michael Stuebgen — who say the ECB’s plan is just what Europe needs to breathe a little easier while governments get the job done.

It could well be that apart from a few monetary fundamentalists, Germany’s crisis-weary politicians will welcome Draghi with open arms. A press conference has been planned to take place on the parliament’s roof terrace, and not because the irate parliamentarians plan to throw him off it: After pledging billions for the Greek, Irish and Portuguese bailouts, the Germans are merely relieved someone else is flashing the cash for a change.

Original post is Draghi’s Open Checkbook May Swing Crisis-Weary Bundestag by Euro Crisis.