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ECB Conducts Third Sterilization Procedure, To Withdraw Another €35 Billion In Liquidity

Tyler Durden's picture




 

The ECB just can't make up its mind these days. First it launches a preemptive form of QE, then its directors write lengthy essays against those (cough, Germany, cough) who say its policies are flawed and inflationary, and now after flooding the market with cash, it continues to rush to take the extra liquidity out of the market. As announced earlier on its website, the ECB will withdraw another €35 billion in liquidity in the form of a one-week variable-rate tender capped at 1%, to be conducted on June 1 at 11:30 am. This is the same as the amount of government bonds purchased by the bank in the prior week, thus undoing all temporary QE benefits in the span of 7 days. This is the third and so far largest "sterilization" tender conducted in the past three weeks: the first and second were for €16.5 and €26.5, respectively.

From the ECB:

As announced by the Governing Council on 10 May 2010, the
ECB will conduct specific operations in order to re-absorb
the liquidity injected through the Securities Markets
Programme. In this regard, the ECB will carry out a quick
tender on 01 June at 11.30 in order to collect one-week
fixed-term deposits with settlement day on 02 June. A variable
rate tender with a maximum bid rate of 1.00% will be applied
and the ECB intends to absorb an amount of EUR 35 billion.
The latter corresponds to the size of the Securities Markets
Programme, taking into account transactions with settlement
at or before Friday 28 May.
The benchmark allotment amount
in MROs takes into account the liquidity effect of non standard
measures, assuming an unchanged size of the Securities Markets
Programme and full sterilisation of this amount via the above
mentioned liquidity-absorbing operation. Fixed term deposits
held with the Eurosystem are eligible as collateral for the
Eurosystem's credit operations. The ECB intends to carry out
another liquidity-absorbing operation next week.

The problem is the ECB has no clue what is being percevied as more favorable by the market - the injection of liquidity or the withdrawal. With a 168 hour full cycle from QE to fixed-term tenders, the market basically knows the fully discount any short-term liquidity activity by the schizophrenic bank, which is demonstrating the kind of indecisivness that our own Fed hates, and an on-again/off-again accomodative relationship with Germany, which however may be too little too late.

 

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Mon, 05/31/2010 - 12:53 | 383938 Hughe Crapper
Hughe Crapper's picture

I think you are so wrong Tyler.

The FED still thinks that the business cycle is linear.

I'm glad the ECB found out that deflationary forces counter the inflationary forces they themselves provide to the market. As liquidity constraints are diminishing, as monitored by their oversight, the liquidity is absorbed again.

Now that is dynamic policy! TOP

Mon, 05/31/2010 - 12:56 | 383947 Tyler Durden
Tyler Durden's picture

Monetary policy is based on expectations not outcomes. The Fed is wrong, but at least, as we have claimed before, it will go down in flames with 100% conviction and 1,000,000% money printing. The ECB is telegraphing indecisiveness which for a continent in a liquidity crisis is suicide.

Mon, 05/31/2010 - 12:58 | 383955 Cursive
Cursive's picture

The ECB is telegraphing indecisiveness which for a continent in a liquidity crisis is suicide.

Agree with that conclusion.  Furthermore, if the EMU fails, our currency and bond markets may rise, but all other markets will implode, i.e. Risk OFF.  BTW, TD, excellent month for ZH.

Mon, 05/31/2010 - 13:08 | 383983 Fish Gone Bad
Fish Gone Bad's picture

I am thinking that the (bipolar) plan is to actually make sure no one makes any money from the failure of others. 

Mon, 05/31/2010 - 13:29 | 384047 egdeh orez
egdeh orez's picture

Even if ECB is showing indecisiveness etc. doing this, I actually give them credit for trying to use liquidity responsibly... unlike the fed.

+1 for ECB

Mon, 05/31/2010 - 13:03 | 383968 Hughe Crapper
Hughe Crapper's picture

Think about what you just said.

Liquidity is not permanent mate. Its merely to maintain the system. As soon as the crisis mode passes, the liquidity is excess. Absorp it and voila, the system gets rid of bad incentives, the easy credit that is.

I disagree.

Mon, 05/31/2010 - 15:32 | 384480 Mark Beck
Mark Beck's picture

Tyler, in my estimation there is no FED monetary policy, in the sense to advance a macro-economic goal. The only real consistant strategy for FED monetary action is to support the member banks. Interest rate accommodation supports member bank spreads. Once bank profits are restored then they look at plan B. But, they never really seem to get to plan B, over the past 15 years. 

If you look at the actions taken by the FED, and how it may work towards producing a desired economic outcome, it never adds up. Either the amounts are wrong, or the injection is ill-placed, or the economic benefit is ineffective. 

Time and time again the FED looks to equities as a way to vindicate economic success, or blame "unforeseen gobblins" upon failure.

No, the FED is unconcerned outside the sphere of its member banks. Economics is supported from the standpoint of PR, nothing more.

Mark Beck

Mon, 05/31/2010 - 12:56 | 383948 Cursive
Cursive's picture

Some form of institutional psychosis.  Multiple personality disorder or split personality disorder?

Mon, 05/31/2010 - 22:01 | 385346 StychoKiller
StychoKiller's picture

It's getting to the point that if someone were to draw a flowchart of what's going on -- limited to Europe even -- that it would look like a plate of spaghetti!

Mon, 05/31/2010 - 12:58 | 383957 knukles
knukles's picture

Another Broker/Dealer Enrichment scheme.

Buy bonds with one hand, injecting cash into the system, sterilize the proceeds of the purchases by selling currency on the other.  Net net, the monetary condition is unchanged, whilst incurring transaction costs.

"As a dog returns to it's vomit, so too a fool returns to his folly."
-Proverbs 26:11

Mon, 05/31/2010 - 18:27 | 384940 MaximumPig
MaximumPig's picture

I thought the point of the intervention was to reduce yields on weak eurozone members' bonds without adding inflationary pressure.

Mon, 05/31/2010 - 19:37 | 385075 jm
jm's picture

I agree that spread compression was the stated policy goal, but events are getting ahead of them. 

The deterioration of bank balance sheets is not slowing down, and will require even more recapitalization effort on the part of governments.  "Austerity" is impossible here if the financial system is to be saved.

Central banks wll continue rotating out of euro-denominated government securities and more into treasuries.

I could go on with more examples.  That the ECB worries about sterilizing their QE just shows how behind the curve/disconnected from reality they are.

Mon, 05/31/2010 - 13:07 | 383977 TexDenim
TexDenim's picture

With European central banks in near-panic mode, isn't it premature to start sopping up the extra liquidity? Why can't they wait a few weeks? I don't get the timing at all.

Mon, 05/31/2010 - 13:12 | 383995 Ropingdown
Ropingdown's picture

Note that the certificates issued in the "sterilization" qualify for immediate use as collateral for more ECB loans.  Result?

Mon, 05/31/2010 - 13:31 | 384050 M.B. Drapier
M.B. Drapier's picture

But aren't those repos in turn somewhat self-sterilising in that the loan gets paid back (if it gets paid back)? Or no?

Mon, 05/31/2010 - 21:07 | 385237 Ropingdown
Ropingdown's picture

If any southern country is making net pay-backs, I haven't heard. Perhaps someone else has found such a case.  To me the current system seems to help nothing but the flight of the rich and the de-risking of banks.  Perhaps these are what is required for the future?

Mon, 05/31/2010 - 21:10 | 385242 Ropingdown
Ropingdown's picture

I should add the obvious, that even to the extent the ECB actions are liquidity neutral, the location of the liquidity, in whose hands the liquidity temporarily lies, has changed.  That is not a trivial fact, and it will have costs, new risks, no?

Mon, 05/31/2010 - 22:36 | 385345 M.B. Drapier
M.B. Drapier's picture

Oh, ab-so-lutely. I've been waving my arms about this very point here for months now. In fact, a liquidity-neutral ECB bailout/prop-up strategy is a lot more dangerous than one based on QE, as far as I can see.

Mon, 05/31/2010 - 13:33 | 384036 M.B. Drapier
M.B. Drapier's picture

The ECB's intention is to bail out and prop up insolvent banks and sovereigns in a liquidity-neutral fashion. It's been following that strategy for the past couple of years, mainly through repos. Just because it's a central bank doesn't mean it's automatically obliged to print its bailout money; it can just nuke its balance sheet. What's at all inconsistent or schizophrenic about that? A better word would be unsustainable.

Mon, 05/31/2010 - 13:40 | 384097 Temporalist
Temporalist's picture

Asianomic's Jim Walker Says Euro May Fall to 85 U.S. Cents

http://www.bloomberg.com/avp/avp.htm?N=av&T=Asianomics%27s%20Walker%20Sa...

Mon, 05/31/2010 - 14:53 | 384383 Amsterdammer
Amsterdammer's picture

To answer M.B Drapier's comment, no, it can not

as the FED nuke up its balance sheet

This just published Der Spiegel explains why:

ECB buying Greek bonds German Central bankers

suspect French intrigue / Eurozone's "bad bank"

http://www.spiegel.de/international/europe/0,1518,697680,00.html

 

 

 

Mon, 05/31/2010 - 21:29 | 385276 M.B. Drapier
M.B. Drapier's picture

Nice article; it's good to see journalists finally looking at this. A few points, though. (Note, I make no claim to be a financial or economic expert: as far as I can tell all these points are generally uncontested.)

  1. So far the direct purchases remain a sideshow to the emergency repos, which have been going on for years longer and are still much larger.
  2. So the ECB has been undermining its balance sheet since 2008; the only question is whether it will continue to do so.
  3. From the Spiegel article you'd get the impression that German banks aren't being bailed out by the ECB. In fact, while they may be "voluntarily" holding on to their Greek debt I'm not aware that they've been refusing any of the other handouts, including the aforementioned repos.
  4. no, it can not as the FED nuke up its balance sheet

    The Fed is monetising (some of) its bailout expenses away, while the Eurosystem is (by and large) constipating its balance sheet with the poor-quality debt it buys and repos for that purpose. So it would seem that the Eurosystem is damaging its balance sheet more, at least bailout-dollar-for-bailout-dollar (or euro-for-euro).

  5. But in pursuing the policy, the ECB has backed itself into a corner. What will happen if it stops supporting the market? Will the prices of the bonds of highly indebted countries then hit rock bottom?

    The question may be not so much whether the ECB will decide to continue the bailout as whether the ECB will be able to stop it.

  6. Put that together with
    If [a sovereign haircut] happened, Ackermann said, the ECB itself could be in jeopardy. The central bank's capital, currently about €70 billion, most of which is invested in the national central banks, would be severely affected or even completely exhausted, depending on how much longer the central bank continues to buy Greek bonds.

    . So the more the ECB bails out the financial system the more vulnerable its balance sheet becomes ... and the more vulnerable its balance sheet is, the more needs to continue bailing out the financial system? That V-shaped recovery had better be coming soon.

Mon, 05/31/2010 - 15:32 | 384481 Coldcall
Coldcall's picture

boring...we want more on jews and muslims!!!

fight fight fight! :-)

Mon, 05/31/2010 - 16:16 | 384615 Rusty_Shackleford
Rusty_Shackleford's picture

HA!

Mon, 05/31/2010 - 16:41 | 384680 steve from virginia
steve from virginia's picture

All the hooply about gold and Gaza and this is where the deflationary rubber meets the road.

The monetary axle around which all (non-) policy turns is the more or less fixed relationship between dollar and crude oil.

Crude oil is not going to be expensive in dollar terms, dollars will instead disappear along with them the means to buy oil and oil products. Unemployment will become much worse. Nobody will have any money except gangsters. The fuel- waste- based economy will grind to a halt with no customers for any businesses that use fuel in processes or transport. Nobody will be able to afford anything but basic necessities and this only with great difficulties.

Do you have a young daughter you can sell into 'marriage'? 10 is a good age.

Europe wastes just as much crude as the US does. The Euro fuel bill is around 400 billion euros a year. Since Europe produces near zilch oil, that is what Walter Bagehot would call a foreign drain. What do the Europeans do with 400 billion dollars worth of non- renewable fuel?

Waste it, and call the result 'Progress'. There is your (non-) monetary policy right there. Sometimes Bernanke is in front of Trichet and sometimes it's the other way around. Doesn't matter; both are irrelevant, events are calling the shots now.

Everyone is the entire world is going broke as fast as possible. There isn't a goddamned thing any central bank can do about it. The problem cannot be solved with gold or paper, only conservation.

One way or the other, easy way or hard, it's coming.

Mon, 05/31/2010 - 17:07 | 384736 MichiganMilitiaMan
MichiganMilitiaMan's picture

+1 "both are irrelevant, events are calling the shots now"  For a generation or more the MSM created the appearence that policy makers call the shots rather than the events, but the truth is about to be learned.

Mon, 05/31/2010 - 18:44 | 384969 anony
anony's picture

Why aren't militiamen taking out the likes of Lord Blankfein, J. Dimon, Joe Cassano, Bernanke and Paulson?

What good's a militia if it will not act?

Mon, 05/31/2010 - 18:03 | 384890 ZackAttack
ZackAttack's picture

Meanwhile, Spanish bonds widen to +160 bp over bunds.

Where have we seen this movie before? I think I know how this comes out... 

Mon, 05/31/2010 - 22:01 | 385347 Snidley Whipsnae
Snidley Whipsnae's picture

Let us not forget the interest rate clause for soverign debt in the bail out provision for the PIIGS.

Mon, 05/31/2010 - 20:43 | 385196 metastar
metastar's picture

Euro Zone is experiencing fibrillations. Break out the paddles.

Mon, 05/31/2010 - 23:28 | 385546 snowball777
snowball777's picture

Clear! (pun intended)

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