Backstop fuckup and repo fuckup

Backstop

The EU has warned that the British government’s Brexit proposals fail to meet all of its basic tests for avoiding a hard border in Ireland and protecting the island’s economy, heightening the risk of the UK crashing out of the bloc without a deal on October 31. Speaking after negotiations on Friday, EU officials criticised British proposals to shelve some discussions over the Irish border until after the UK’s departure. They also warned that UK plans now entailed “a regulatory and customs border on the island of Ireland”, complicating efforts to keep trade flowing after Brexit. Despite a difficult week for Boris Johnson, the UK prime minister has been talking up the chances of securing a deal with Brussels after submitting informal discussion papers — known as “non-papers” — outlining plans to replace the contentious Irish backstop — the insurance policy to avoid a hard border in Ireland after Brexit. However on Friday the European Commission said the three “non-papers” did not provide the “legally operational solutions” that Brussels was seeking. “We are far from anything that could work,” said one diplomat present at a debriefing session with the commission. The debrief came after more than one hour of talks on Friday between EU chief negotiator Michel Barnier and UK Brexit secretary Stephen Barclay. We have a commitment from the British government over and over and over again — in writing and verbally — that they would work with us to put the issue and the anxiety around the Irish border question to rest now Simon Coveney, Irish deputy PM The commission told diplomats that current UK proposals “fall short of satisfying all the objectives” the backstop was designed to achieve, according to a diplomatic note seen by the FT. The commission told EU27 diplomats that the British proposals amounted to the UK getting huge carve-outs from EU single market rules by allowing for customs checks away from the border and on the site of companies. The UK also wants new simplified electronic trusted trader schemes to operate across the Northern Irish border. “These ideas are not compatible with the EU custom codes” said the commission. UK government officials pushed back on the suggestion they had not put forward serious proposals. “The ideas that we’ve put forward to avoid a hard border are serious and workable,” one official said, adding that “leaks from Brussels on Twitter are par for the course. You can set your watch by them.” The impasse sets a gloomy stage for talks between Mr Johnson, European Council president Donald Tusk and German chancellor Angela Merkel at the UN General Assembly next week.  EU diplomats said the UK’s proposals left them more pessimistic about the chances of striking a deal than at the beginning of the week. “Things are going backwards,” said one senior EU diplomat. Another official described the state of talks as “horrible”.  While Jean-Claude Juncker, commission president, insisted this week that a Brexit deal was possible, there are scant signs of any breakthrough emerging before the Conservative party conference at the end of this month. Mr Johnson began the week by failing to offer any fresh proposals for ending the impasse over the Irish backstop in a lunch in Luxembourg with Mr Juncker on Monday. Mr Barclay went on to alarm other EU capitals on Thursday by questioning whether the UK needed to produce a formal legal text before October 31, in a speech in Madrid that was shot through with dark predictions over the damage a no-deal Brexit would do to Spain.  The UK “non-papers” cover the creation of an all-Ireland zone for agriculture and food, as well as arrangements for customs checks and regulatory checks for manufactured goods. An EU official said the UK “non-papers” were one-page in length . The commission said the plans would not avoid a hard border in Ireland, protect the all-island economy, or preserve the integrity of the single market.  One EU official said the UK plans would effectively force the EU to change its own rules and legislation. “If ever we would be crazy enough to accept that” the proposals still “fall short” of the backstop, the official said.  Recommended Camilla Cavendish The time for compromise on Brexit is fast approaching Simon Coveney, Ireland’s deputy prime minister, stressed on Friday that Dublin wanted the Irish border question put to rest now and not left open for months or years in the hope that a resolution could be found later.  “We have a commitment from the British government over and over and over again — in writing and verbally — that they would work with us to put the issue and the anxiety around the Irish border question to rest now,” Mr Coveney told the BBC.  Mr Barclay insisted after the talks on Friday that both sides want a deal “and we are working hard on that. The technical teams will meet again early next week to continue working on that detail.”  In another source of tension between the two sides, the UK is insisting any position papers are not shared beyond the small team of negotiators and kept away from the eyes of member states. “The UK labelled the documents as HMG property and requested us not to do any onward disclosure,” the commission said in an email to diplomats on Thursday.  The move infuriated many of the UK’s partners who said it transmitted a lack of trust and made it more difficult to assess Britain’s plans. 

FED

the Federal Reserve Bank of New York is examining why banks with excess cash failed to lend to the overnight money market, following a week that revealed cracks in the US’s financial plumbing. John Williams, president of the New York Fed, on Friday questioned the hesitance of the banks in an interview with the FT. “The thing we need to be focused on today is not so much the level of reserves [held at the Fed],” he said. “It’s how does the market function.” Overnight borrowing rates rose as high as 10 per cent on Tuesday morning, prompting the New York Fed to intervene in the overnight repurchase, or repo, market for the first time since the financial crisis, injecting cash in an effort to unblock the system. Reserves are concentrated, . . . and the key question is how those reserves, as the level was coming down, would get redistributed Lorie Logan. senior vice-president at the New York Federal Reserve © Bloomberg It has since repeated the operation every morning, helping ease pressure in the market, and announced on Friday that it would also offer up to $90bn in two-week long loans to further reduce strain ahead of the end of the third quarter. Some market participants have claimed that the week’s volatility arose from a shortage of cash in the financial system, stemming in part from the unwinding of the Federal Reserve’s post-financial crisis intervention. However, Fed officials are focused on the role of the banks. Mr Williams and Lorie Logan, senior vice-president in the markets group at the New York Fed, said officials were looking at why cash failed to move from banks’ accounts at the Fed into the repo market, where banks and investors borrow money in exchange for Treasuries to cover short-term funding needs. Ms Logan pointed to the concentration of excess cash at a small number of banks as one potential issue. “Reserves are concentrated, the excess reserves relative to the minimum level each bank is demanding is concentrated,” she said. “And the key question is how those reserves, as the level was coming down, would get redistributed, and how smooth that redistribution process would be.” Fed officials expected some pressure in the market this week as a result of corporate tax payments and Treasury settlements, which would drain cash out of the system. As it monitored short-term lending markets, the New York Fed paid particular attention to the amount of reserves available. Ms Logan said the expectation had been that as repo rates rose, banks would withdraw excess cash held at the Fed and lend it into the repo market to earn the higher rate of interest. Instead, the New York Fed had to step in to provide that cash as banks remained on the sidelines. In recent years, the markets desk at the New York Fed has been conducting surveys and holding regular conversations with banks to determine their “lowest comfortable level of reserves”. In a speech this year, Ms Logan flagged the difficulty of making such estimates, and the possibility that reserves could be distributed inefficiently among banks. JPMorgan Chase and Citigroup, both large holders of excess reserves, declined to comment. Bank of America was not immediately available for comment. A person at one US bank said that while it been “net lenders into the market” this week, they “have to make economic decisions for the company”. That means that the cost and return of deploying cash in the repo market is assessed relative to the cost and return of using funds for other things, like investing in currencies overnight. Recommended Federal Reserve Fed announces new effort to soothe money markets On Friday, the New York Fed said that it would expand its interventions beyond overnight loans after the lending rate for two-week funds rose sharply — to 2.7 per cent, up from 2.35 per cent in previous days. Analysts described the spike as an indication that investors were anticipating a fresh financing squeeze at the end of the quarter, when companies and traders settle their accounts. The new two-week loans will be offered by the New York Fed next week in three operations on Tuesday, Thursday and Friday. Friday’s overnight repo auction by the New York Fed saw a lower level of demand from borrowers than the previous two days. Bids came in at $75.6bn, down from $84bn on Thursday and $80bn on Wednesday. On Tuesday, the first day on which the $75bn overnight repo facility was offered, the New York Fed saw $53bn of bids. The overnight repo rate receded to 1.95 per cent on Friday.