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Rigging LIBOR or EURIBOR Macroeconomic Implications / asymptotix

version 4

 

In the midst of this LIBOR / EURIBOR scandal I thought I would share some references to LIBOR & its role in world capital markets from asymptotix. One would not generally reference LIBOR or EURIBOR explicitly since that would be far too arcane even for us!! Most of my references to LIBOR are in “asymptotix papers” which are long pdf documents; developed with the sole purpose of boring you to death! 

About this running LIBOR rigging story, unravelling this weekend; a ‘friend’ said

“What they've caught onto is barely the tip of the iceberg. Eventually, the part below the surface might be revealed...”

 Why are LIBOR & EURIBOR so important? They are the foundations, the technical-basis of the TERM STRUCTURE of interest rates; a crucial concept in Macroeconomics (& in banking risk management); in summary the 'term structure' is the PIVOT between MONEY & (real economic) ACTIVITY. LIBOR (or EURIBOR for Euro demoninated transactions) is the base, the lowest value of the 'term structure' vector (what is sometimes called the 'ratchet'). The technical phrase ‘Yield Curve’ can be used interchangeably with ‘Term Structure’. I give some colorful articulation of that relationship between Monetary conditions and the real economy in the references here on this page (but particularly in the paper below);-

ECB - the hint is there - Trichet Says Rates May Rise Next Month - official statement

European Central Bank President Jean-Claude Trichet Thursday signaled that the central bank could raise interest rates next month for the first time since the darkest days of the financial crisis in 2008.

Mr. Trichet warned that risks of inflation in the euro zone "are to the upside" and that "strong vigilance" is required to ensure that the rise in commodity prices recently doesn't translate into a generalized increase in inflation.

At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 1.00%, 1.75% and 0.25% respectively.

ECB did not do any Securities Markets Programme purchases last week

The ECB did not do any Securities Markets Programme (SMP) purchases last week.

That is the first time since October the ECB was not active.

La Stampa - Jean-Claude Trichet, ECB, rejects Weber Says Overwhelming Majority of ECB Council Backs Bond Purchases

European Central Bank President Jean-Claude Trichet took issue with recent comments on ECB policy by Bundesbank chief Axel Weber, saying they did not represent the views of the central bank's governing council. Asked in an interview with Italian newspaper La Stampa whether the program didn’t work and should be scrapped, he responded: “No! This is not the position of the Governing Council, with an overwhelming majority.”

ECB unveils tougher collateral rules for bank loans detoxing liquidity injections

The European Central Bank unveiled new provisions Saturday regarding key refinancing operations that should tighten some conditions for banks seeking to borrow central bank funds. The European Central Bank is to beef-up its powers to act against struggling eurozone banks in a move that could foreshadow a tougher line towards those depending on its liquidity to survive.The changes follow other reforms already proposed for the global financial system that could determine how much credit is available to drive an uncertain economic recovery. Although a largely technical change, the timing of the step is significant. ECB policymakers have become increasingly frustrated that a number of banks remain “addicted” to the offers of unlimited liquidity it has been making since the collapse two years ago of Lehman Brothers.

Axel Weber, the Bundesbank president, and the European Central Bank

Axel Weber, the Bundesbank president, has put himself on a collision course with European Central Bank policymakers by arguing publicly in favour of extending emergency help for eurozone banks until at least next year.

The comments by Germany’s central bank head were unusually forthright and suggested he wanted to assert his authority ahead of a decision next year on a successor to Jean-Claude Trichet as ECB president.

Mr Weber told Bloomberg Television in an interview broadcast on Friday that the ECB should continue providing unlimited liquidity on a weekly, monthly and three-monthly basis until at least the start of 2011. Discussion on the ECB’s “exit strategy” would be “focused on the first quarter” he said.

Other members of the ECB’s 22-strong governing council are likely to agree with Mr Weber’s cautious approach, which on Friday drove the euro lower. But he will have created annoyance by pre-empting discussions at the council’s next meeting on September 2.

ECB: Purchase programme for covered bonds

Following-up on its decision of 7 May 2009 to purchase euro-denominated covered bonds issued in the euro area, the Governing Council of the European Central Bank (ECB) decided upon the technical modalities today. These modalities are as follows:

  • The purchases, for an amount of EUR 60 billion, will be distributed across the euro area and will be carried out by means of direct purchases.

  • The purchases will be conducted in both the primary and the secondary markets.

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