Friday, December 9, 2011

Is the ECB Backing Up the EuroZone via the Backdoor?

Yesterday in the EPJ Daily Alert, I wrote:
Reuters is reporting that that overnight emergency borrowing by commercial banks in the EZ jumped to over 9 billion euros ($12 billion). translation: EZ banks are still scared to loan to each other.

The big guns need to be moved into position, or at least that's the way the banksters see it. And indeed that is what appears to be developing. Reuters is running with a leaked ECB story that the ECB may loosen collateral criteria to give banks greater access to cheap cash and offer longer-term loans. Reuters said the leak comes from "three euro-area officials" with knowledge of the deliberations.

This looks to me like the bazooka being put in place and that it is going to be used. All that junk paper the EZ banks have on their books will be allowed to be traded in for newly printed euros. The one caveat is that it must be newly printed euros and not just another sterilization program by the ECB, to get the economy going (in manipulated fashion). It sounds like it will be newly printed money,but we won't really know for sure until a few weeks down the road when the ECB balance sheet is examined to see if it has expanded.

This morning, in the Alert, I wrote:
... reports indicate the ECB has capped the maximum purchase of euro zone sovereign bonds at 20 billion euros a week for now and is not considering bigger action in response to the EZ plus 6 agreement.

That said, the ECB appears willing to back up EZ debt via the back door, as it has agreed to accept more types of debt securities from banks in discount operations. This could prove to be a very profitable arbitrage for banks, as they could buy high yielding paper off the market and have it financed by the ECB at low rates. The key will be to monitor the ECB balance sheet to see if this is going on. ECB direct sovereign bond purchases are not enough to hold the EZ together, especially given the fact that the ECB is sterilizing its purchases by draining from other sectors of the economy.

A report fro the Telegraph's Ambrose Evans-Pritchard suggests that Tim Congdon from International Monetary Research is thinking along the same line that I am. Pritchard writes:
Mario Draghi, the ECB’s president, said the bank had not agreed to any sort of “Grand Bargain” with EU leaders to act as lender of last resort for sovereign states, insisting that it does not have a legal mandate to rescue sovereign states in trouble.

“We have a treaty and Article 123 prohibits financing of governments. It embodies the best tradition of the Bundesbank. We shouldn’t try to circumvent the spirit of the treaty,” he added, warning against the use of “legal tricks” to bend the bank’s mandate.

The comments caused consternation on trading floors, where expectations for a “shock and awe” action by the ECB have been running ahead of reality. Mr Draghi had earlier hinted that the ECB might be willing to do more if politicians deliver on a “fiscal compact” to anchor budgetary discipline at today’s summit in Brussels.

“This is big, he’s basically pulled the rug out from under the market,” said Brian Dolan at “There’s a sense of shock right now because he previously suggested that if EU leaders got things together, the ECB would step up bond purchases.”...

Almost lost in the drama, the ECB cut interest rates by a quarter of a percentage point to 1pc and offered sweeping measures to shore up the eurozone’s €23 trillion (£19.6 trillion) banking system and avert a dangerous credit crunch.

It extended its unlimited credit to banks (LTRO’s) from one year to three years, and halved the reserve ratio to 1pc to free up more than €200bn in extra liquidity. It will relax collateral rules to allow wider use of asset-backed securities, a life-saver for distressed banks that were running out of eligible “kit” for the lending window.

Mr Draghi said banks were facing “serious funding pressures”, compounded by the rush to raise core Tier 1 capital ratios to 9pc. The measures to shore up lenders are intended to avoid acute “deleveraging” as banks shrink their loan books and prepare to roll over €230bn in bonds in the first quarter of next year...

Tim Congdon from International Monetary Research said the ECB bank’s support is highly significant and could prove a transforming moment in this crisis. The steps help to shore up the whole interlocking edifice of bank debt and sovereign debt, giving back-door support for governments.

“ECB lending to commercial banks can act as an important safety valve for the single currency project. It could gain valuable breathing space,” he said.

“The ECB is bending over backwards to help banks, reversing the crazy withdrawal of special credit facilities early last year. The banks can now borrow for three years at 1pc or so, and use the money to buy bonds at yields at 5pc, with gearing. It encourages them to purchase the bonds because returns could be fabulous provided the euro holds together.
As I said in the EPJ Daily Alert, let's see by how much the ECB balance sheet expands in coming weeks. If Congdon and my suspicions are correct, Draghi has opened the door for European banksters to make some EZ money, which will at the same time, through backdoor money printing, prop up the sovereign debt of the PIIGS. All very inflationary and dangerous, of course.


  1. They will accept hyper-inflation before they accept a breakup...They will murder everyone in order to continue the EZ. Wouldn't you? They have been working toward the EU Borg Collective hard for many decades.

  2. Very dangerous indeed. It's like they're building a powder keg. Things could get rather messy. What's been amazing to me is how gold has stayed so low. Makes me wonder if there isn't something funny going on there.

  3. the euro will devalue ALOT when all is said and done but will likely devalue much less than say the US$, which, contrary to faustian Krugman, will inevitably hyperinflation but only after loss of confidence takes hold...ECB marks to market gold on its balance sheet unlike the US at $42.22...currently gold make up about 66% of its reserves...the union of Europe is a long stated goal and nothing imo will get in the way of this...euro currency has severed its link to the nation state and severed its link to gold - with the former, ECB will bail out banks with 'good' collateral but will not fund the profligacy of member states.

  4. Both The Economist and the BBC of late have articles warning of the danger of relying on technocrats to rule. It is better to have experts on tap rather than on top. The Spectator even call all this part of a 'technocrats' coup' and their language columnist outlines the disreputable past of the term 'technocrat' itself.

    Papademos the technocrat prime minister of Greece includes in his resume Trilateral Commission membership, Harvard prof job and US Fed worker bee. Italy's Monti's resume is similar but throws in some time at Goldman Sachs as well.

  5. LOL! Everyone knows the only way to resolve the crisis is debt destruction. It's rather amusing to watch all the Keynesian economist go to the ultimate extreme of their folly (especially as the US has already gone down this road and where has monetization left it?). Maybe afterwards we can go back to sound economics and sound money.