Bank of England announces...greenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread
Here's what I put together about this Wall Street Journal article for today's Sanger's Review. This smells like a major power play. This was announced on Friday afternoon, (traditionally when news like this is announced, because nobody's paying attention) and I haven't seen reference to it anywhere else. Anybody want to take a stab at this? Andy? Mr. Decker?
-- This looks like pretty big news. While I'll admit that I don't understand all the specifics, the broader implications are clear.
"In a bid to protect London's markets from year-2000-related computer problems, the Bank of England will increase the pool of securities it will accept from banks as collateral by about 2 trillion pounds ($3.23 trillion), a whopping sevenfold increase... Some market economists also said the change -- particularly since the additional securities will be denominated in euros -- would enhance London's position as Europe's main financial center." Tony Norfield, global head of treasury research at ABN Amro Bank said, "It looks as if [Britain's central bankers] are setting themselves up to be a major liquidity provider in the major foreign-exchange financial center in the world... Despite the fact that Britain is outside the [European economic and monetary union], the Bank of England has made it clear that London financial markets won't be marginalized simply because the U.K." isn't a member of the 11-nation bloc that shares the common euro currency. The article then goes on to discuss the "range of Euro-demoninated securities" that it will accept, "repo operations" and "swap spreads," and other economic arcana. Based on all of this, George Magnus, chief economist at Warburg Dillon Read said, "People will draw the conclusion that the bank stands ready to stand behind the system."
The original can be found at:
U.K. Central Bank Widens Pool of Securities to Boost Liquidity. If you don't have a subscription to the WSJ site, and would like to read the entire thing, e-mail me, and I'll send it to you as an attachment.
-- pshannon (email@example.com), August 02, 1999
Don't know what it means, but with all the banking mooing and shuffling, something obviously is being put in place. By late September we will probably know. Watch the scramble ...
-- Ashton & Leska in Cascadia (firstname.lastname@example.org), August 02, 1999.
See also related thread:
-- Old Git (email@example.com), August 02, 1999.
It means that banks in the U.K will be able to use non-investment grade securities as the means to create more credit. This allows the english Central Bank to monitize or "print more money." This is important because it gives the appearance of respectable financial action. They could not just create more money out of thin air without negativly effecting their currency, by taking heretofor non-investment grade securities "junk", and saying that these are now good enough to use as collateral the Brits are trying to put one over on their people and on the Europeans in particular. They must have some underlying base of equity in order for them to lend money and justify the credit creation. This should have been all over the front page of every publication. The fact that it is reported but buried is scaring me even more. The British central bank is even more scared than I am I would wager since they took so drastic an action.
-- PJ (firstname.lastname@example.org), August 02, 1999.
It sounds rather like the FDIC's advice to banks for dealing with y2k.. urging them not to wait too long to identify available assets to use (sell?) to aquire neede liquidity. Sorry, don't have the link handy.
-- Linda (email@example.com), August 02, 1999.
So after they've handed out their last ha'penny to some deserving soul, the next person in line gets a tiny little piece of a junk Euro repo swap spread? Mmmmmmm, sounds delectable!
"We're hungry, Sir, and we want some more repos, if you please."
-- Mr Gresham (firstname.lastname@example.org?), August 02, 1999.
This is an important story. It means that they will be able to have their cake and eat it too basically. Think lender of last resort. You don't stay in business for over three hundred years by being stupid. Thanks for the post pshannon.
PJ: As far as an equity base, remember where the daily 'gold fixing' is done, and that London is where the metals and bullion exchange is. Also do not forget that the government has given the power to control and set interest rates to the CB.
-- Rob Michaels (email@example.com), August 02, 1999.
The Bank of England is obviously worried enough to bypass (normally) sound practices to prop up their banking system. They know what is at risk if the system collapses. Now we can hope that it works...
-- Mad Monk (firstname.lastname@example.org), August 02, 1999.
It's late and I'm drowsy, but if the "whopping sevenfold increse" is not a misprint, and if the banks in the UK take the B of E up on the offer, even if only by one or two of the sevenfold, it would seem likely that the pound will take a sharp nosedive. I can only hope that the report is misleading or inaccurate.
-- Jerry B (email@example.com), August 02, 1999.
Hmmm... Let's see. The Bank of England makes a major announcement about selling gold because it has lost its investment luster. They then turn around and start using instruments that can't even aspire to be junk bonds. I guess that they want to turn the pound into a toilet paper quality currency.
-- Mr. Adequate (firstname.lastname@example.org), August 02, 1999.
The key item is that the additional collateral will be denominated primarily in Euros. I would take this to mean that ,ultimately, the UK is going the way of the Euro. It is also likely that this is the first shot in the oncoming war to unseat the US dollar as the worlds reserve currency in favor of the Euro. I think that the Euro will ultimately win. The US Dollar is backed only by debt, and there are a lot of nations out there who don't like this, particularly in the gulf region, from where we get a lot of oil at cheap prices, but maybe for not much longer.
-- dave (email@example.com), August 03, 1999.
dave- I don't want to agree with you, but I agree with you. My bet is they know something we don't.
-- Gia (firstname.lastname@example.org), August 03, 1999.
Here's the full text of the article which I cut and pasted from the Interactive WSJ at the above link. Please note the Y2K reference in the last section of the article. It's starting folks. Get out of stocks now. If you can, get out of bonds and into cash as well. Get the money into preps as soon as you can.
Water, water, food...
Water, water, food...
Water, water, food...
LONDON -- In a bid to protect London's markets from year-2000-related computer problems, the Bank of England will increase the pool of securities it will accept from banks as collateral by about 2 trillion pounds ($3.23 trillion), a whopping sevenfold increase.
"Here's an example of a central bank marshaling resources in order to make them available, if necessary, to alleviate liquidity problems expected over year end," said George Magnus, chief economist at Warburg Dillon Read. "People will draw the conclusion that the bank stands ready to stand behind the system."
Some market economists also said the change -- particularly since the additional securities will be denominated in euros -- would enhance London's position as Europe's main financial center.
"It looks as if [Britain's central bankers] are setting themselves up to be a major liquidity provider in the major foreign-exchange financial center in the world," said Tony Norfield, global head of treasury research at ABN Amro Bank. "Despite the fact that Britain is outside the [European economic and monetary union], the Bank of England has made it clear that London financial markets won't be marginalized simply because the U.K." isn't a member of the 11-nation bloc that shares the common euro currency.
Range of Securities
In a statement Friday, the British central bank said that beginning Aug. 31, it will accept a range of euro-denominated securities issued by the 18 central governments and central banks of the European Economic Area in its daily "repo" operations, which involve the buying and selling of securities to meet the public demand for cash, adjust the amount of money in circulation and influence interest rates.
Repurchase agreements are short-term contracts to sell and later repurchase securities at a specified date and price. They are a major tool of many central banks' monetary policies. The EEA consists of the 15 members of the European Union -- Austria, Belgium, Denmark, Ireland, Finland, France, Germany, Greece, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and Britain -- and Iceland, Liechtenstein and Norway.
The Bank of England said its latest move was an extension of a process first announced last October, when the bank said it intended to increase the kinds of securities it would accept as collateral for loans. At the time, the bank extended the list of eligible securities to certain sterling-denominated bonds issued by EEA governments and international institutions such as the World Bank, Asian Development Bank and European Investment Bank. Last June, it began accepting international bonds issued by the same institutions and countries that were denominated in their local currencies, pounds or euros and that had been issued directly into Cedel and Euroclear, two European clearing houses for bonds and loan payments.
The bonds must be of prime credit quality, highly liquid and place no operational burden on the bank or its counterparties in repo operations, which are mostly financial institutions. Historically, the Bank of England accepted United Kingdom government sterling and foreign-currency securities and certain U.K. local authority securities and bank bills.
The existing stock of eligible securities comes to roughly 325 billion pounds. By adding two trillion pounds of domestic European euro debt, the central bank is increasing the collateral it will accept in its daily money-market operations to seven times that.
The central bank said that extending the range of eligible securities its counterparties can use would "assist the smooth conduct of its open-market operations" and "allow banks more flexibility and choice in the instruments they hold for liquidity purposes." It said that the overall initiative, "particularly the major extension announced [on Friday], will also be of material assistance to market participants in managing their liquidity over the coming millennium-change period."
But Warburg's Mr. Magnus said, "The trouble is that the erosion of liquidity is already starting, and it may be that Y2K is starting to have an effect already." He noted that swap spreads -- essentially the premium over government-bond yields that private corporations and banks pay to exchange fixed for floating rate debt -- "have exploded in the last three weeks to levels we haven't seen in a decade, and they are a multiple of what they were last autumn" after Russia defaulted on its domestic debt.
Other evidence of Y2K-related jitters include the widening gap between yields on corporate and government bonds, growing investor aversion to risk and a reduction in the volume of certain kinds of bonds dealers are willing to hold as inventory.
In a report to clients last week, Bridgewater Associates, a Wilton, Conn., money-management firm, noted that implied one-month euro, dollar and yen interbank European lending rates all shot higher for December 1999 before falling back for January 2000.
That in turn means that "many reference interest rates in Europe and on European assets are also rising due to Y2K related fears," Bridgewater said. Many interest rates, ranging from those on household mortgages to corporate and sovereign loans, are priced off these interbank rates, which banks charge one another for short-term loans.
-- nothere nothere (email@example.com), August 03, 1999.
In other words, Y2K is not a problem ... until it's a problem.
The trolls disappear and the investment bankers take over.
And we spent 1999's first half here swatting away mosquitoes...
-- jor-el (firstname.lastname@example.org), August 03, 1999.
Here's some similar articles about banking on this side of the pond:
FED Loans to Banks With Poor Collateral May Be Necessary - March 29, 1999
Direct link to story discussed by GN: http://www.sightings. com/ufo3/y2kfedd.htm
Another story: http://garynorth.com/ y2k/detail_.cfm/4976
SF FED's Y2K Bulletin Advises Planning for Worst-Case Scenario - June 11, 1999 [unfortunately the direct link in the article has expired]
And of course you can find much, much more on banking here:
-- Linda (email@example.com), August 03, 1999.
With the benefit of a night's sleep, plus the additional info posted here today, I would say that the "whopping sevenfold increase" is misleading, even if theoretically accurate. I would expect the securities in question to remain largely in banking systems outside of the UK (unless contintental banks hunger for the pound).
-- Jerry B (firstname.lastname@example.org), August 03, 1999.