Tuesday, June 29, 2010


This is very dangerous news (Note: Markets were going down in Asia before this very negative news, but this is very serious.).

FT reports:

The European Central Bank’s latest attempt to sterilise its government bond purchases has landed with a resounding thud. Results from the ECB’s Tuesday one-week fixed-term deposit (FTD) auction, in which it planned to drain the €55bn of extra liquidity created by its €55bn of bond-buying, are in.
And they are not pretty.

The ECB failed to auction the €55bn in fixed term deposits it had planned to, and what it did auction (€31.86bn) was at a much-higher rate (0.54 per cent) than what it offered at the start of its Securities Markets Programme (SMP). The market seems to be holding tight to liquidity.
This is just stunning. The only way the ECB is going to pull this drain off is at much higher rates, since the drain will have to suck money from other sectors. The FAIL here means there is no loose money around to be sopped up. It is going to have to be ripped out of the heart of the EU economy. Not good. The alternative? Leave the money in the system and start a huge wave of inflation.


  1. Any danger the fed will step in and buy these "assets" ?

  2. Uh, my friend wants to know, what *exactly* does it mean when the ECB auctions off a "fixed-term deposit"? Like, does the ECB say, "We'll take 10,000 euros from you, sir, and then pay you back 10,001 euros in one month"?

  3. @BobMurphy

    Yes. Tell your friend to go to the head of the class.