From Credit Suisse, April 4:
Late last Friday afternoon, the following Bloomberg headline caught my eye:
*ECB TURNS DOWN ENERGY TRADERS’ PLEA FOR FUNDING SUPPORT
The recent bottlenecks in commodity funding markets are stemming from commodity traders exhausting and then asking for bigger credit lines from banks – surging commodity prices mean credit lines must be fully utilized to move cargo but when credit lines are fully utilized, you don’t have anything left to draw on to pay margin on more price-volatile cargo. Then you start to prioritize uses – you’ll use your credit lines exclusively to lease ships and to fill it up with cargo and you won’t hedge (because you exhausted your credit line and so cannot afford to hedge), which then means more uncertain price terms in the future...
...price terms in terms of the price level, that is, inflation!
In a bizarre twist of logic... ...commodities are core to price stability (a central bank mandate), but the liquidity needs of commodity traders that procure commodities were deemed peripheral by the ECB from a financial stability perspective. It must follow that if commodity traders ever get emergency liquidity assistance (ELA), they’ll get it for price stability, not financial stability considerations. Regardless of the reason, today we’ll try to imagine the price commodity traders might have to pay for ELA.
There is no free lunch.
Unlike the military and diplomatic protection to commodity assets and the global sea routes through which they are shipped, central bank liquidity is never a free externality. There is always a price you pay: implementing the Washington Consensus in Southeast Asia in 1997, where the IMF played the role of the global central bank (no swap lines back then); implementing Basel III after the Great Financial Crisis of 2008; and, perhaps, rules limiting leverage in the RV hedge fund community for the bailout received during March 2020 (no rules have been proposed yet, but they may be coming).
To start our emergency liquidity discussion, consider four facts.
First, as Perry Mehrling taught us, always and everywhere, finance is hierarchical, and as Katarina Pistor taught us, the laws that underpin the hierarchy of finance are flexible at the core and rigid at the periphery. Emergency liquidity assistance is hard to get when you are a non-bank: it was impossible to get it in 2008 if you were a conduit, a SIV, a primary dealer, a finance company, or a money fund, and once again it is impossible to get it today if you are a commodity trader. Commodity traders are at the periphery of the financial system, and the laws are rigid once again. But every crisis starts at the periphery and the bushfire....
....MUCH MORE
HT: Izabella Kaminska at The Blind Spot
