How The ECB Directly And Indirectly Monetized All Irish September Treasury Auctions

Tyler Durden's picture

One of the most bullish stories coming out of Europe last month was that Ireland, despite a drunk and disorderly finmin, and banks either increasingly more nationalized or on the verge of full scale restructuring, managed to fund its €25 billion in sovereign debt maturities. Of course, the European media took that as a sign of strength and from that point on it was off to the races for the EUR. Yet it appears the celebration was just a little premature. We learn today that virtually all of the maturities were funded indirectly by the ECB: in other words the monetization shell game so well mastered by the Fed is now being conducted by European banks everywhere. In September Irish bank borrowings surged from €95 billion to €119 billion, a €24 billion increase, and virtually a euro-for-euro match for all the new Treasury issuance. And since no demented monetization ploy goes unpunished, the action raised Irish ECB borrowings to 9% of liabilities, the same as Portuguese banks. As for the balance, as readers will recall we highlighted that last week the ECB purchased €1.4 billion of government bonds directly, therefore confirming that every single Irish bond auction would have been a 100% failure had it not been for Jean Claude Trichet's direct and indirect monetization scheme. But yes, somehow the euro is considered more viable than the dollar.

One day Germany will say "monetize away, Weimar be damned." That day will be very memorable for the dollar which has now become the funding currency of choice. That is the day when Europe will officially retaliate against endless US FX aggression, and the currency war will be really on.

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Nolsgrad's picture

no Donkey Kong?

Fish Gone Bad's picture

Ireland isn't even a real country, so their problems don't count.

SpeakerFTD's picture

While I can understand people being bearish the dollar vs. gold, I simply cannot comprehend the bullishness on the Euro.   All the same liability problems facing the U.S., plus a political structure with virtually no legitimacy in the eyes of the worker bees.   It is a disaster that has been waiting to happen since the creation of the Euro, and it is just a matter of time until the sweet-scented balsa foundations of the Euro collapse.

My prediction:  Not only will there be nothing like a Euro in ten years time, but we will see another major land war involving Western Europeans players within that time period.

Itsalie's picture

The euro is in equally bad shape as the toilet paper dollar, and I would add Yen in that basket - all 3 have structural problems well beyond resolution in the next 10 years. The market is gyrating to the tunes of the central bankers, and more importantly to the momentum and stories spun by the likes of Goldman - whose sole interest is to ramp up trading volumes in forex and fixed income - they have found the hedgies trading forex to be better providers of income than even their prop desks. And of course wall street love the retail traders - just think about it, daily turnover in FX is nearly $4tr last June, growing at over 20% yoy compounded since 2005, compared to less than $50b on NYSE (and shrinking fast). That is $400m of income per day at the most conservative 1 pip spread, at least $80b per year of virtually riskless income for the Goldmans of the world. It is the fastest growing industry the world has ever seen. Why wouldn't they issue reports every week to encourage this and that trade? 

RockyRacoon's picture

Some transparency would be nice in all markets, but then I'm not sure that we'd like what we'd see.  This mushroom economic strategy is proving to be irritating.  (Kept in the dark being fed shit all day.)

nuinut's picture

aw, c'mon, the mushrooms like it.

RoRoTrader's picture

This mushroom economic strategy..........Kept in the dark being fed shit all day.


LOL......most excellent choice of words, and wish I had thought of that.

VK's picture

Mushroom cloud economic strategy is more like it. It'll all go kaa-boom!

Freebird's picture

Yup. Kept in the dark being FED shit all day.

New_Meat's picture

Rock-then "watch 'em mature, and cut them off at the roots."

- Ned

Charles Mackay's picture

While it is true that the ECB has been basically monetizing 100% of new Irish debt,the ECB's regular open market operations have been cut back significantly.

As compared to the US, Japan, and China, the ECB is much more conservative in creating new money over the last year.

Therefore I do not find it at all surprising the Euro has rallied greatly the last few months.

Granted a new crisis of Euro confidence could start any time, but then we also have a new mortgage fraud crisis about to go mainstream here in the States - not to mention how is California going to make it through the next year.







Tyler Durden's picture

You are correct: indirect operations in which the ECB operates via host country bank borrowings lend much more credibility of the system.

Charles Mackay's picture

But I agree, at some point the ECB just won't want to the Euro any higher.

It's not clear though, if at first, they will resort to some form of QE to compete with the US - or will just try to interviene in the forex markets.  Eventually total debt problems will escalate enough that the ECB becomes the lender of first and last resort to all individual members - but probably not right away (the PIG countries not being a true test of how soon they bail out all of Europe).


nuinut's picture

at some point the ECB just won't want to the Euro any higher.

about 1.50, I'd say.

huggy_in_london's picture

well, they are already making noises at 1.40 so its unlikely to be 1.50 before they act

wisefool's picture

On the american news program called "This week with Christiane Amanpour" they had a French Lady who was some big shot finance minister. She basically said that Europe will implement austerity. And the Euro will rise. Not quite limit up, but the context was:

a) People feel bad about deficits/sovereign debt. Implying that despite the protests, the euros want the tough love after the temper tantrum. What was weird was her tone: Very patronizing along the lines of "The plebs are dumb if they thing Deficts/Debts are and issue, but we will respect their wishes"

b) She stated that people are protesting raising the retirement age 2-5 years, but People have been given 15 more years longevity since the age of retirement was set.

c) She sincerely and humbly stated that women are finally getting into the ranks of the super elite decision making bodies. And that will change policy. She did not say how. But she said things will be different moving forward.

I don't have the link to the video but it is probably somewhere on

I am going to get back in the game with a couple hundred bucks and go long Euro.

anonnn's picture

You meanFrenchFinance Minister Christine Legarde?

For a wierd, nay, telling time, go to this 2008 photo of the G-7.

The US reps, Bernanke and Paulson, appear as some kind of unwelcome outliers.Really.

Click the pic into full resolution, dload/magnify it and see what you make of the personalities. Each G-7 country's respective  FinMin/TreasSec and head of CB/Bank of X is identified. The polite ostracism is not well hidden. I'm sure it's my active imagination.

huggy_in_london's picture

The cut back is in part by specs not taking up more money to enjoy greater carry.  Bit hard to do if schatz are yielding 80bp and you are uncertain of what you are going to have to fund them at next year.

surfsup's picture

It will be interesting to see what effect Foreclosure Gate "realized" will have on USD.  Being that FASB has allowed asset prices to remain well above market, what would happen if suddenly market prices were realized?  If yet more FRN's are basically taken out of existence there are fewer of them going around.   The intellectual notion of weak USD in relation to the "hypothetical" aspect of foreclosure gate is one thing -- court discoveries leading to greatly diminished asset values may be another.  Look at it this way -- if any sort of mark to market were initiated there would be a massive black hole of USD's -- thus driving up their value as they chase the ever exponential amount of debt in the system as a whole.   

As it is, I'm sure Boeing is not complaining about current cross pond currency disparity!  747-8's just got a 10-12% discount compared to A-380's over the last few weeks!    


AUD's picture

Your assumption of a increase in the purchasing power of the USD, chasing "the ever exponential amount of debt in the system" is based on the quantity theory of money, which is erroneous.

The value of any liability is given by the quality of the asset which 'backs' it. The quantity of dollar denominated debt existing does not automatically mean a rise in the value of the dollar upon default, even against an equally as worthless liability of the ECB.

surfsup's picture

Thanks for the info -- you are correct.  I was only referring to a more short term "reactive" event like the 2008 USD rise -- not the overall inherent value.   Indeed it is a strange irony that debt creates a demand which can drive near term value in certain conditions.  

Madhouse's picture
 Czech Republic 156.9 -3.2 1,878 2  Ireland 131.1 -7.1 521 3  Germany 115.8 -3.2 9,555 4  Australia 109.9 -7.6 1,678 5  Austria 108.3 -3.6 855 6  United Kingdom 99.0 -3.6 5,920 7  Belgium 93.0 -4.7 970 8  Denmark 89.9 -9.8 486 9  Finland 85.0 11.7 437 10  Luxembourg 84.4 -0.5 39 11  Slovakia 84.1 -8.5 456 12  Spain 83.8 0.9 3,376 13  United States 81.6 -0.3 23,974

I see our problem. We have to drink more beer. We are 13th for cripes sake...a bunch o goddam wimps...

Per Capita Beer Consumption:

1Czech Republic 156.9 -3.2 1,878

2  Ireland 131.1 -7.1 521

3  Germany 115.8 -3.2 9,555

4  Australia 109.9 -7.6 1,678

5  Austria 108.3 -3.6 855

6  United Kingdom 99.0 -3.6 5,920

7  Belgium 93.0 -4.7 970

8  Denmark 89.9 -9.8 486

9  Finland 85.0 11.7 437

10  Luxembourg 84.4 -0.5 39

11  Slovakia 84.1 -8.5 456

12  Spain 83.8 0.9 3,376

13  United States 81.6 -0.3 23,974

gwar5's picture

I'm pulling for the Irish. Greece has had enough history for one country.

tom's picture

Tyler's right that the ECB mostly just likes to pretend that it's prudent. Instead of buying periphery government bonds, it takes them as collateral against loans to periphery banks. It's ultimately part of ongoing financial sector bailout, just like the Fed's POMO.

But Charles is right that the ECB is overall tighter than the Fed. Excess reserves were never so huge and have been coming down fast. When you're in a prudence contest with helicopter Ben, it's hard to lose.

Besides, the Eurozone hasn't got any massive trade deficit. It doesn't rely on financial inflows from abroad to prop up its currency the way the US does.

That said, I don't see the ECB sticking to its tightening guns after $1.45.

theyenguy's picture

I have a comment and and an application.

First the comment: It's important to understand the greater picture. Through waves of yen based carry trade investing, and waves of free trade legislation, such as CAFTA and NAFTA here in the US, as well as through the announcement of the Framework Agreements at various Summits both in the US and in Europe as well as Asia, globalization has effected the loss of national sovereignty and the rise of global governance manifesting in regions of global government.

World leaders are communicating the call of the Club of Rome made in 1974 for ten regions of global governance; three have emerged so far:

1)  The North American Continent was announced as a region of global governance at Baylor Baptist University by the leaders, Vincent Fox, Paul Martin and George Bush, with the Security and Prosperity Partnership of North America on March 23, 2005.

2) Those in the ASEAN trading group were knitted together as a region of global governance in May 2010 as they accepted China’s currency, as the basis to trade, as reports in article Japan, China, S Korea Trade Ministers See Investment Pact In ’10

3) The Eurozone became a region of global governance on May 10, 2010, as the EU Finance Ministers announced European Economic Governance and called for a monetary union with seigniorage authority to issue eurobonds.

Global governance is the political driving force of this age as Flash News Today provides The Hindu report India To Participate In Asia-Europe Dialogue: “On Monday, October 4, the leaders will convene “the eighth Asia Europe Meeting (ASEM) Summit in Brussels and will address “priority number one” — moving towards a declaration calling for more effective global financial and economic governance.”  ConsiliumEuropa provides the PDF transcript of the Herman Van Rompuy speech More Effective Global Financial And Economic Governance given at the 8th Asia-Europe, ASEM, Summit held in Brussels.  And, Stock Market News Australia reports Chinese Premier Wen Jiabao said at the Europe Asia Summit: “We must explore ways to establish a more effective global economic governance system”.  

Many today would like to dismantle the Eurozone by one means or another. My reply to them, is that there are indeed many problems in the Eurozone, these include different rates of productivity, growth, inflation, sovereign debt interest rates, taxation and others issues such as you write here in this article: the ECB's action raised Irish ECB borrowings to 9% of liabilities, the same as Portuguese banks.

In my mind, there will never, repeat never be any dismantling of the Eurozone, nor will ever be any default of either sovereign debt or banking debt by Eurozone members.

The periphery countries, particularly Greece, Ireland, Italy, Portugal, and Spain indeed have significant issues, but they will never voluntarily leave of their own accord.

Herman Van Rompuy, President of the  European Council, presents a video reporting the accomplishments of the task force on economic governance which took place in Brussels on Monday July 12, 2010; and he specifically said that at the current time, sovereign debt default is out of the question -- sovereign debt default would imply separation from the Union. And EuroIntelligence has it right as they report on October 8, 2010: No bond holder participation in Ireland: “It sounded like an exciting piece of news, when Ireland’s regulator pronounced that Ireland may after all participate the senior bondholders in the rescue costs. Ireland’s finance minister Brian Lenihan yesterday not only contradicted this. He also outlines the rules for the subordinate bondholders, which suggests that even those will not really be participating. It would only apply to institutions which are not listed on a recognised stock exchange, are in 100 percent state control and could not survive in the absence of total state support. That exempts pretty much anybody.  So the Irish bank bailout is de facto finance to 100% by the tax payer.”

Ambrose Evans-Pritchard in Telegraph article Europe Prepares Nuclear Response To Save Monetary Union, writes provided an astute observation:  “The walls of fiscal and economic sovereignty are being breached. The creation of an EU rescue mechanism with powers to issue bonds with Europe’s AAA rating to help eurozone states in trouble — apparently €60bn, with a separate facility that may be able to lever up to €500bn — is to go far beyond the Lisbon Treaty. This new agency is an EU Treasury in all but name, managing an EU fiscal union where liabilities become shared. A European state is being created before our eyes.”

Yes, Mr. Evans-Pritchard has it correct: national sovereignty was waived as the EU Leaders announced their agreement, just as in the United States, in March 2005, the three leaders of the North American continent announced the Security and Prosperity Partnership of North America, The SPP, at Baylor Baptist University; in so doing they abrogated Constitutional law; and waived sovereignty, and established a home, or better stated, a homeland for the continent’s people.

The future has been set; it is as Angela Merkel said, “If we are to have a global order and global governance we need to have an understanding for each other.” according to BBC report Germany’s Merkel Calls For Tougher Finance Regulation.

Second, the application, is that the word, will and way of politicians, government administrators and banking leaders is emerging as the governing principle in economic affairs. Observant Minds should look for a Financial Regulator, acting in concert an unannounced council of stakeholders, specifically elected officials, bank presidents, SEC/ECOFIN officials, and GSE administrators to effect policy that sustains an intertwined state corporate rule, that maintains the interest of the political and economic elite. One of their goals is to maintain the value of banking and real estate assets at the current levels as much as possible; and as such they effect policies to mitigate deflation.

For those interested in issues of sovereignty and seigniorage, I suggest reading of my blog EconomicReview Journal.  

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