Here Is Why The ECB Should Be Freaking Out

Tyler Durden's picture


Given the deterioration left, right, and center in Europe's core and peripheral economies, some question the sustained 'strength' of EURUSD. An under-the-table peg around 1.27 is the conspiracy chatter but we fall back to a tried-and-true recipe for comprehending what the market is thinking - the central banks are in charge and the EURUSD exchange rate merely reflects (as a main trend) the relationship between those two balance sheets (as monetary policy escalates downwards and they battle each other to 'defend' their own currencies' demise).


To wit, given the current ratio of the Fed and ECB balance sheets, we would expect EURUSD to be trading around 1.21. However, we know that the Fed will be adding $1.17tn to its balance sheet thanks to QE3 (and its inevitable QE4 extension to cover for Twist's expiration). The current ratio of Fed/ECB balance sheets is 0.95x, with the addition of the $1.17tn expected (to just over $4tn), the ratio rises to 1.33x.



The current EURUSD rate implies a balance-sheet ratio of 1.08x (see chart above) - which therefore means the market expects the ECB to expand its balance sheet by EUR740bn; this just happens to be the sum-total of Spanish sovereign debt (according to Bloomberg below - while our estimate is considerably higher).



So it seems, the market knows that once the ECB starts, it will not be able to stop and will end up taking the entire Spanish debt load onto its books.


Spain can perhaps deal with its existing debt in this way - but this appears to us merely incremental sustainability - and like in the US where the Fed is monetizing all long-dated Gross issuance, so the ECB will have no choice but to do the same with Spain in 2013 and 2014 - Treaty or no Treaty!!

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Fri, 11/16/2012 - 11:49 | 2987881 hedgeless_horseman
hedgeless_horseman's picture



..and like in the US where the Fed is monetizing all long-dated Gross issuance, so the ECB will have no choice but to do the same with Spain in 2013 and 2014 - Treaty or no Treaty!!.

Of course they will print.  What the fuck did you expect?  Real austerity?

Fri, 11/16/2012 - 11:51 | 2987895 GetZeeGold
GetZeeGold's picture



Real austerity?


Shirley you're joking.


Fri, 11/16/2012 - 12:04 | 2987962 Byte Me
Byte Me's picture

and don't call me Austerity..

Fri, 11/16/2012 - 11:52 | 2987903 LongSoupLine
LongSoupLine's picture

Gasp!!...Central Bank balance sheet expansion?!?!




Fri, 11/16/2012 - 12:00 | 2987942 Freegolder
Freegolder's picture

Are you blind?

Spain is at 20%+ unemplyoment, 50% youth unemployment.

At what level would you say austerity is feeding through to the economy? 40/80% maybe.

You ZHeeple are too funny.

Fri, 11/16/2012 - 12:40 | 2988216 Simon
Simon's picture

In fact more than austerity (which is used by governements only to increase taxes), what we need is cutting the spending.

Fri, 11/16/2012 - 11:44 | 2987859 Bastiat009
Bastiat009's picture

The ECB should freak out because most European countries are led by people who believe socialism works, who believe that debt is wealth and that freedom is just for the ruling class not the producing class. Anything else is verbiage.

Fri, 11/16/2012 - 11:46 | 2987873 aint no fortuna...
aint no fortunate son's picture

By 2014 the ECB will be having a lot more than Spain's sovereign debt clogging it's balance sheet to be worried about

Fri, 11/16/2012 - 12:51 | 2988284 Ghordius
Ghordius's picture

Are you sure you are describing the countries in the eurozone or just the caricature that is common usage in the US?

Particularly your "who believe that debt is wealth and that freedom is just for the ruling class not the producing class" sounds very foreign to me. Where can I get more easily a "get out of prison card", here in the eurozone or in Corzineland? Who is by now world famous for debt an McMansions?

And where comes the article's "will end up taking the entire Spanish debt load onto its books". The ENTIRE debt?

Hogwash. King Dollar is being supported by most other CBs, that's all. Nothing new since 1971, except in the increasing size of the support.

Just as a reminder: 1968 all the dollars outside the US were still convertible to gold - one million bucks to one metric ton of Au.

Fri, 11/16/2012 - 13:47 | 2988596 Freegolder
Freegolder's picture

Hello Ghordius.

Re: 'Nothing new since 1971, except in the increasing size of the support.'

I believe that support is on the wane a tad, hence the QE, mainly to give the primary dealers enough juice to keep buying those USTs. Certainly China is no longer accumulating.

We need not worry about the Eurozone, the UK or Japan will be the domino that topples the dollar construct.


Fri, 11/16/2012 - 11:45 | 2987866 Dre4dwolf
Dre4dwolf's picture

They should all just ditch the Euro for a new currency called the Newo as in New-0 New Zero Nada Nothing Zip

Fri, 11/16/2012 - 13:57 | 2988648 Freegolder
Freegolder's picture

Very funny.

Would you care to ascribe some value to the half a trillion Euro's worth of physical gold in the Eurosystem of central banks?

What you know of monetary matters will get you into trouble I fear.

ZHeeple, what are you like!

Fri, 11/16/2012 - 11:48 | 2987876 mrktwtch2
mrktwtch2's picture

nice head and shoulder formation o break of 126 this time takes it to 106..

Fri, 11/16/2012 - 12:05 | 2987967 Orly
Orly's picture

Not a chance.  Plus, I always fail to see where people read in a Head and Shoulders Pattern when it's simply not there...

Well, maybe if it were a hunchback?  H & S Patterns are very specific and can't be called willy-nilly style.


Fri, 11/16/2012 - 11:49 | 2987880 LongSoupLine
LongSoupLine's picture

Here is why Goldman should be freaking out.


fixed it.

Fri, 11/16/2012 - 11:49 | 2987885 tooriskytoinvest
tooriskytoinvest's picture

you guys should take a look back to US:

DERIVATIVE MARKETS CONTRACTING: Credit And Derivatives Are Decreasing At An Alarming Rate
Fri, 11/16/2012 - 11:53 | 2987900 JustObserving
JustObserving's picture

Apple - it's falling faster than the one that struck Newton. Hedge funds should be freaking out.

Fri, 11/16/2012 - 12:00 | 2987945 LongSoupLine
LongSoupLine's picture

like I said yesterday, "Bath-salt style margin calls" are coming.

Fri, 11/16/2012 - 11:53 | 2987910 Freegolder
Freegolder's picture

Fed gold on balance sheet = zero. (owned by the Treasury)

Eurosystem gold owned by central banks = c. half a trillion Euro's worth.


Fri, 11/16/2012 - 11:57 | 2987929 swissaustrian
swissaustrian's picture

QE is going to be expanded come January. That's going to push the FED/ECB ratio up.

Fri, 11/16/2012 - 12:07 | 2987986 Madcow
Madcow's picture

the senior currency strengthens in a deflationary depression.

the longer the depression lasts, the higher the currency will go - asuming that governments stop spending money and allow gravity to have its way.

Fri, 11/16/2012 - 13:48 | 2988604 Freegolder
Freegolder's picture

A clarion call that the end is nigh will be gold and the dollar rising at the same time.

soon one hopes.

Fri, 11/16/2012 - 12:31 | 2988160 Simon
Simon's picture

Thanks to french debt, the ECB will soon lead the race to ZERO.

Fri, 11/16/2012 - 12:46 | 2988249 GMadScientist
GMadScientist's picture

I smell parity....time for some castle shopping.

Fri, 11/16/2012 - 17:07 | 2989620 archon
archon's picture

They're seeing, and raising the Bernank's QE3.  Now it's the Bernank's turn to see their $780B, and raise another $1 T.

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