ECB Capping Rates on PIIGS? Wait Till Traders Call Its Bluff

EconMatters's picture


By EconMatters


The big buzz about the debt-embattled Euro Zone on an otherwise quiet Sunday came from German news magazine Der Spiegel that ECB is considering measures to cap the borrowing costs of the crisis-central PIIGS countries.  According to Bloomberg,

The European Central Bank is considering setting limits on yields of euro area sovereign debt by pledging unlimited bond purchases, Germany’s Spiegel magazine reported without saying where it obtained the information. The policy will be decided at the September meeting of the ECB’s governing council, Spiegel said.  

Earlier this month, U.S. Treasury Secretary Geithner has already put on the pressure saying "the eurozone must take steps including bringing down interest rates in the countries that are reforming." 


With the PIIGS sovereign bond yields rising to unsustainable levels (See Chart Below), it is understandable why ECB resorts to this "big bazooka" plan partly making good on ECB President Draghi's bold promise to do "whatever it takes" to save euro.  However, it also demonstrates how the Euro Zone seems to be at its wit's end to effectively restore market confidence.




Instead of simply a problem of higher bond yield, central to this crisis is PIIGS nations have had years of excessive spending relative to revenues,  If these debt-problematic countries have control of their own currency, then they might be able to follow the debt restructuring model such as Argentine to slowly dig themselves out of the hole.  However, this is not the case for the Euro Zone.


This sugar-pill proposal of "unlimited bond purchases," if implemented, will most likely relieve the rate pressure in the short term, but the rudimentary issue is that the Euro Zone is nowhere near getting these PIIGS countries to really commit to getting spending under control.





Now, ECB's balance sheet has ballooned to 3.087 trillion euros, or USD $3.8 trillion (See Chart Above), so the more important question is how much longer can ECB keep this bond buying spree?    


Eventually traders and bond vigilantes will call ECB's bluff dragging down the entire Euro Zone, and here are some likely events that would follow: 

  • The problematic nations could continue piling on debt with ECB as the "sugar daddy." 
  • ECB would continue wasting good money (ultimately from the European taxpayers) on bad "solutions," instead putting into promoting GDP growth.
  • Even if PIIGS countries come to agreements on austerity measures, that would still take a decade before any meaningful signs of recovery.  
  • Europe would be pushed deeper into a recession or even a depression.  

Since the Euro Zone is bound by a single currency, the member countries in the zone sink or swim together.   Market fears of the bloc's difficulties have prompted Moody's to threaten cutting the hard working and earning Germany's AAA sovereign credit rating.


For now, the Euro Zone will try to stay together for as long as they can.  Kicking the can down the road is one thing world politicians love to do until it blows up in their faces, and that's when everything hits the fan-- fast and furious.    


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NEOSERF's picture

As I keep saying...There are NO rules at your own a very high level...ALL concessions made by the AAA countries have to be made otherwise FLOW stops...FLOW seems to me to be chunk sums to insolvent counties who then CONTINUE to pay AAA banks to keep this game going.  If they stop the chunk sums to countries, the game ends...expect Greece to continue to get its money, Spain will get its bailout, the ESM will get ratified and Europe will continue to fritter away the time they are given to avoid the headline we no doubt will wake up to some Sunday "Credit Agricole bankrupt -being nationalized"...

falak pema's picture

Are there any traders left to call the bluff of CBs and the Squid cabal if it decides to join that team?

The squid will join any team if there is a kick back; after the election....

WaEver's picture

Since when did financial markets care about underlying economics ? Its a world/game on its own : you buy you sell and that's all there is. In this case : do you want pick a fight with the ECB that has deeper pockets than yourself. Look at all those doomsayers who said the fed would not be able to lower yields without a dollar collapse as printing money would destroy its value : they have been proved quite wrong and a costly mistake (they might still be right in the end but then again when you play this game is not about being right but about timing). Even Pimco know this and loves frontrunning the next Fed move no matter how hard bill shouts that QE is utter madness.....

Bear's picture

We are robbing from our children to pay for a global bank bail out ... The ECB and the FED have to print to keep their constituents solvent. They all have to print or it all crumbles.

The only real question is will they quell the gold/silver demand by selling futures? If they print money, I suspect that they will be able to continue selling enough gold/silver to keep the lid on ... but for how long?

What will be the trigger for the run?

Will confiscation occur as we transition to a gold standard?

Will the futures market default to nullify all the naked shorts that have to be rolled over every month? Margin increases for non-bank customers, or zero margin on bank trades?

KidHorn's picture

We're not robbing our children. They'll never have to, or be able to, pay back the debt.

Bear's picture

Unlimited bond purchases ... isn't this the FED on steroids. Isn't this tantamount to announcing 'unlimited' printing? Why isn't ES up 20+?  

jimmyjames's picture

Now, ECB's balance sheet has ballooned to 3.087 trillion euros, or USD $3.8 trillion (See Chart Above), so the more important question is how much longer can ECB keep this bond buying spree?    


I think your ECB chart is a bit out of date-


The ECB balance sheet is more than double those numbers-

masterinchancery's picture

There have been many episodes of currency debasement to support deficit spending in the past--see Ken Rogoff's book, This Time It's Different.  Why do you think that it has never been good for anything except bankrupting the middle class? And making fortunes for the printers and their cronies.

Clever Name's picture

Copying my own comment in the other article about capping rates to get comments/answer...


Maybe I am just an idiot and dont understand the whole bond issuance/buying process, but I see this as either:

1) An end around on unlimited CTRL P, without actually saying it, maybe by leaving that part out of an official statement

2) An attempt to drive the 'public' out of the PIIGS bond market, so they (ptb) end up controlling it to set the rates themselves without 'interference' from the 'market' (lulz!)

My limited understanding is that the bond rates/prices are still at least somewhat set by the 'market', but that the bulk of it is made up of some kind of bs scheme where the banks buy them to sell back to the gubt or some such crap. If the rates are capped by whatever means (and wouldnt all this apply to the US also?) why would anyone whos not involved in the whole scheme even participate? Then once you have driven out anyone who would demand a higher rate they can play their games indefinitely? Is this whats going on in the US and Japan, or am I missing something or just stumbled into something that everyone already knew?

Or just plain wrong?

jimmyjames's picture

My limited understanding is that the bond rates/prices are still at least somewhat set by the 'market',


Yes they are and the Fed can only follow the market-

Greenspan thought he could influence the bond market-he got spanked--

I think bond buying by the Fed is nothing more than to be seen doing something-

Bonds are a place to park cash and you can see by the M2 velocity that there is big demand to hold cash and cash equivalents-

Dareconomics's picture

Let me get this straight. The ECB plans to monetize the debt of its member countries to maintain a band on sovereign debt rates, and why would this be good for the value of the Euro? In the short-term, exuberance will bid the euro up, but in the long-term the euro’s value will take a fall. Inflation has already been creeping up in the Eurozone, particularly the price of oil.

I already discussed the logical endgame to Eurozone bond buying. It ends with everyone getting out of their Eurozone bonds at a good price and the ECB left holding the bag:

Aquaman's picture

It is said that the bond market is the ultimate arbiter in capitalism. If that is true then we will soon find out to what level the system is corrupted (Spoiler Alert: Its all the way corrupted, so dont expect anything unusual to happen)

TPTB_r_TBTF's picture


If "it's all the way corrupted", then

we have neither a "market" nor "capitalism".

so dont expect anything unusual to happen

yawn ... what, me worry? ...

Under Central Planning other people worry about the details.

steve from virginia's picture


What the central bank does is take its clients' insolvency onto itself, onto its own balance sheet. At some point the central bank is as insolvent as its clients.


Then what? There is the perception of no lender of last resort now: the evidence is both temporal and intertemporal bank runs: out of bank but still in euros, out of the euro altogether. This is what happens when there is no lender of last resort, a situation that was part of the euro construct from the very beginning.


With €50 billion in capital the ability of the ECB to offer unsecured, leveraged loans is nil. It is already massively overleveraged and could not withstand any loss of worth on its assets. What are its assets? Its customers' bad loans.


If the ECB decides to offer leverage or to launder leverage by way of the ESM the bank runs will accelerate, Target2 will fail, that institution's paper imbalances would become direct losses to Germany and the entire euro establishment would blow up at once. The process might take 6 weeks or 6 minutes but the end would be the same: no central bank, capital flight and the end of the euro in a gigantic crash that would destroy all of Europe's banks.


Norway, Switzerland and the UK would take enormous F/X losses, probably enough to bankrupt these countries and the giant banks in the US would need more Federal monies to cover US$trillion losses on derivatives. Interest rate gyrations and their effect on currency and interest rate swaps might be enough to bankrupt the entire US as 'rescue' would be in the form of massive currency depreciation.


Even the Fed cannot bail out the banks' swap exposure as what the Fed can offer is loans only. The Fed cannot afford to offer loans on a scale that would make a difference and the banks could not afford the associated liabilities.


Draghi reaches for the handle, he must know what the consequences are of pulling on it. If he doesn't he should shoot himself first because he will likely shoot himself afterward.

falak pema's picture

the FED, BOE, BOJ can print money as they all work in a sovereign state environment. ECB not so.

Draghi wants it to be so. Basically says to Merkel, "Frau you are already de facto behind the curtain all in to save YOUR banks in case of euro contagion; so lets say it to the market openly!" 

If the ECB becomes a junk HF it will then run into the skirts of the FED and hope that joint and several CBs will club up to print and print and print until hell freezes over for 30 years. If we are heading to CB dictat despotism, the makets and currency arbitrage mean nothing. Its a private club of Oligarchs and they do what they like with our money to save THEIR skins and their banks. Period. 

devo's picture

10 years of furious printing and propaganda, and 99% of people still have no clue. I think this charade can go on for a long time.

ghenny's picture

How about a crazy notion.  Maybe if the Europeans pull out the big Bazooka with smart conditions the program just might work as it has in the US.  Do you guys really think you are smarter than Geithner and Merkel and Draghi?  I don't think so.  The stock market in the US is making a mockery of all your doom and gloom and I bet the Europeans do the same.  There is a reason why you guys hide out here on Zero Hedge because you basically missed the boat on  the recovery. You just like to be in this negative echo chamber where you hear your negative/wrong views repeated back to you by other losers.  We are heading for Dow 14000 or higher and a virtuous round of economic improvement.  Unemploymen may stay somewhat elevated due to automation and outsourcing but not so elevated that the 92% who are employed in the US can't up their incomes and consumption.  As my friend at Raymond James reminds me.  Fortune always favors the optimists in the end.  So tough noogies to all you pessimists.  Your about to eat crow.

masterinchancery's picture

Yes, I am smarter than those criminals you mentioned.

StychoKiller's picture

Here's a crazier notion:  $15+TRILLION in the hole and counting...

“Rebellion to tyranny is obedience to God.”-ThomasJefferson's picture

@ghenny, Cheers to you and your probably $2,500.00 equity portfolio along with your +/- 3 US Gold Eagles.  Make it work for you buddy!  You sound like a real modern day John Pierpont Morgan or Andrew Carnegie.

papaswamp's picture

The 20% of the country at or below the 125% poverty level seem to have missed this recovery you speak of....

Here is why:

aleph0's picture

"66 million Americans (over 20% of the US population) "

2011 Working population is 128 Million according to this :

So wouldn't this be more significant ?
" 66 million Americans (over 50% of the US working population) "

ghenny's picture

Yes they did miss the recovery and I am sad about that.  I am trying to help with various projects but the fact remains that the other say 60 percent are doing fine and will do better.  The stock market caters to the top ten percent and things are terrific for them.  Believe me I am mostly out of the market myself and have been for a few months so I have nothing to gain by saying what I said. In a sense I am one of the losers or people who miscalculated and bought all the pessimmism. I am owning up to my error.  Perhaps some others should follow me on this.  But facts are stubborn and talking them away does not change reality.  the US is in full blown recovery and the ZH doomers better find a better set of arguments.

rufusbird's picture


Every day I watch more and more people on bicycles pulling their trailers or shopping carts full of bottles and cans up to the recycle center for redemption. Every day I see more and more women and families riding past my house on bicycles that is obviously their only means of transportation. I can tell because they are transporting belongins etc. Dead houses are blightig the neighborhoods, my City government has just been added to the bankruptcy watch list, my state governemet is getting national news about it's insolvency and your talking "full blown" recovery?

Your comment reminds me of the tale about the man who needed a new pair of sandals and measured his feet and then walked five miles to the village to go to the shoe maker. When he got there he realized he had forgoten to bring his measurements and walked home to get them. He trusted his measurements more that he trusted the size of his own feet.

Element's picture



I am trying to help with various projects but the fact remains that the other say 60 percent are doing fine and will do better.  The stock market caters to the top ten percent and things are terrific for them.


So it's only 30% that's left having a shitty time or about 100 million people in the USSA then?

yep ... full-blown ... something.


Ned Zeppelin's picture

"Your about to eat crow." If you mean, "you're" then you should write that.

You are clueless as to what is really going on in the US.  Yes, there is a real economy where people have jobs in the US.  Beyond that, there is no growth there at all, and there is no driver for it whatsoever.  A lot of people surviving on government cheese and cashed in IRAs and 401ks.  That is reality. Period.

Tell "your" friend at Raymond James, a sell-side knuckle head, to eat it.   He is wrong - a hard rain's gonna fall.

clcmae's picture

You raise a good point about being wary of "confirmation bias" - looking for data that reinforces an opinion we already hold, and discarding evidence to the contrary.

Regardless what happens in the Eurozone, can one still deny certain clouds on the horizon:

- fiscal cliff approaching without any obvious remedy;

- evidence that China heads toward a hard landing.  Their are signals emerging wide and fast and the pump is primed for a crisis in the form of WMP's and a lack of financial regulation.  The Baltic Dry index continues to plummet, commodities are being stockpiled, and Chinese iron ore costs are plummeting;

- even if the Euro sovereign debt problem is 'cured', this doesn't remedy the high levels of unemployment, nor the massive asset write-downs necessary within the financial system related to growing bad debts associated with real-estate;

- Monti is subject to depart in early 2013.  While an outside observer might believe that their is implicit goodwill to finding a solution to the crisis, certain political parties (read: Berlusconi's) have much more to gain by sabotaging these efforts.  As an analyst commented on Bloomberg, the reason the markets cannot figure out the Euro situation appropriately is because markets do not have a refined awareness of political motives and functioning.

The only bright sign on the horizon has been the US economic surprises of late.  The reports of late have been rather self-reinforcing, however.  Sales being the most substantial gain was subject to a large and unusual upward adjustment due to the July 4th holiday.  Similarly for the non-farm payrolls.  And both of these were the largest contributors to the leading index exceeding expectations.  Hope is that the adjustments were appropriate.

That leaves QE.  We know from all the evidence that QE benefits markets, but not the economy.  With such high expectations at this point, buy the rumour...sell the news is a real possibility...especially if the actual digestion of QE news quickly translates into an awareness that it really won't help the economy or actual earnings.

Shelby Moore III's picture

There are no significant bright signs in the US economy, just lies in the numbers.

oogs66's picture

ZH and CNBC are in full agreement that it won't work.

SwingForce's picture

But but but... hold on, bond purchases are not a certainty regardless of interest rates....   Keep your eye on the ball, don't let the sound of my voice distract you....Who in their right mind would buy those bonds? The German & French backed EFSF? The US backed IMF? NOBODY!!!!!!  Shut these bastidz up.

123dobryden's picture

Hitler’s speeches repeat the same themes: that Germany has been betrayed by the leaders who surrendered in the last war as well as the Communists, Jews and immigrants who are destroying the country from within. Gradually, his popularity as a fiery orator significantly expands the party’s membership and attracts the attention of wealthy entrepreneur....

Tango in the Blight's picture

I'm waiting for the moment when something really changes instead of this zombie economy we're currently experiencing.

StychoKiller's picture

[quote] "the eurozone must take steps including bringing down interest rates in the countries that are reforming." [/quote]

What crap!!  A previous article on this very site has already shown that NO SPENDING CUTS have been made!  Some "austerity!"

Shelby Moore III's picture

The plan is to play the core (lender/exporter) and PIIGS (borrower/importer) politics off of each other, to achieve fiscal union:

It is a divide-and-conquer strategy.

I agree with this article that it won't stop the implosion of Europe's economy.

But I disagree that it will end in disintegration of the union, as seems to be implied near the end of this article. Why does a shared depression have to end in disintegration? As long as the core feels the PIIGS were forced towards fiscal oversight, and the PIIGS feel they got more debt, then all the collectivists are satisfied.

You see collectivists really love destroying themselves. They won't admit that, because it all about their obstinate pride for the ideal of statism (that man can build a better society). And of course it is about being able to steal from each other without calling it stealing. It is about being proud of ones goodness (making a better society and union), while one steals.

By the time Germany loses its AAA rating, everything will be cast in stone in terms of these new EU agreements. The core and PIIGS they will ride down into depression abyss "one for all, and all for one".