From Izabella at Alphaville
Fresh off the wire on Wednesday:
RTRS – ITALY TREASURY SAYS TO LAUNCH AUCTIONS TO LEND OR BORROW SIGNIFICANT AMOUNTS OF CASH ON MONEY MARKET USING TRSY’S ACCOUNT AT BANK OF ITALY
RTRS – ITALY SAYS AUCTIONS TO NORMALLY OFFER OVERNIGHT MATURITIES WITH CREDIT LIMITS, WILL HOLD MORNING AND SOMETIMES AFTERNOON AUCTIONS
RTRS – ITALY TRSY SAYS NEW SYSTEM OF LIQUIDITY MANAGEMENT THROUGH AUCTIONS STARTS TODAY
An interesting announcement by the Italian Treasury indeed.
For two reasons.
First, it reveals that the Italian Treasury is prepared to intervene in the money markets directly — presumably to ease tensions, a job usually reserved for the central bank.
Second, the facility sounds awfully like the Supplemental Financing Program which was introduced by the US Treasury in cooperation with Fed in the fall of 2008. The move could therefore be designed to give the Italian central bank a little more fighting power and control of money market rates.
What’s key to note here is that this operation is being done in by the Italian Treasury in conjunction with the Bank of Italy. Which is to say it is not just illiquidity in the money markets, but idiosyncratic illiquidity.
Within a single currency zone money should wash across borders so that if the ECB injected liquidity anywhere it would show up everywhere. That is not what is happening. This implies that the ECB is effectively not managing monetary policy in the Eurozone.
The marginal cost of funds – the key instrument in monetary policy – is diverging between countries and local central banks and governments are having to step in to attempt to solve the mess.
Izabella is cautious in her wording and that is a good thing. However, because I was cautious last time this happened – and roundly ignored – I will be loud this time.
The Eurozone is now a single currency area in name only. Worse, the national central banks do not have the power to control monetary policy. Which means by American or British standards there is no monetary policy in Europe right now. There is regimented chaos.