Another Flashing Red Light: Euro Liquidity Shortage Leads To First ECB Sterilization Failure Since November 2011

Tyler Durden's picture


The ECB's original bond monetization program (the SMP) may now be defunct, having been replaced with the mythical OMT which will work as long as it never has to be used (see Spain), but its aftereffects linger on. Specifically, the aftermath of the SMP manifests itself in the weekly sterilization of accrued SMP bond purchases, which at last check amounted to some €208.5 billion. Why do we bring this up? Because a few hours earlier, the ECB failed, for the first time, to find enough demand and interest to sterilize the full amount of rolling peripheral bond purchases, and was instead able to find only enough bidders, 43 of them or the lowest in a year, to "sterilize" just €197.6 billion of the total weekly allottment. The last time the ECB failed in a sterilization action? November 29, 2011, one day before the coordinated global central bank bailout of 2011.

In other words, just like last year when things were going from bad to worse in Europe, the old continent's banks are suddenly facing a major liquidity shortage, which however would not be news to anyone who read our piece from yesterday "Surge In Marginal Lending Facility Usage To One Year Highs Confirms Year End EUR Repatriation" in which we said that Europe's banks "suddenly find themselves needing gobs of liquidity - not USD-denominated liquidity, but domestic, EUR-based." Sure enough, today we just got confirmation of how truly bad this issue is.

But what makes things much worse is that sterilization failures like today are not supposed to happen in a post LTRO 1 and 2 world in which the European banks are flush with €1 trillion in excess liquidity. And yet it did.

This is how the historical weekly sterilization have looked in the past year. What is obvious is that despite our speculation that this is merely a year end window dressing event, since the last such failure in November 2011, there has been no seasonality to the Bid to Cover pattern, which instead has deteriorated in virtually a straight line since one year ago. Anything below 1.0x on the right (Bid to Cover) axis means a sterilization failure as there were not enough bids tendered to cover the full needed amount.

Here is how the WSJ described the last time, in November 2011, there was such a dramatic failure of the ECB to telegraph liquidity sufficiency:

The data suggest that banks are hoarding cash amid the euro zone’s intensifying debt crisis.

The ECB only drained EUR194.199 billion in its weekly operation, below the target of EUR203.5 billion. The target amount equals the total volume of purchases under the ECB’s program for buying euro-zone government bonds on the secondary market.

It is the first time that the ECB has missed the mark on a draining operation since May and only the sixth time since the ECB started its bond-buying program in May 2010. It is also the first time that the draining operation has failed since the ECB revived the program in August.


Peter Chatwell, an Interest Rate Strategist at Credit Agricole CIB, said banks’ concerns about collateral may have prompted them to use their cash differently than they have in the past. Banks right now may “not want to give money to the ECB when there are [treasury] bills on offer and they can be used as collateral at the ECB.”


Following the announcement of the failed operation, the euro dropped against the dollar, reversing gains made earlier Tuesday after Italy’s debt auction.

Ironically enough, today the EUR has soared in the aftermath of the sterilization failure.

Which means two things:

i) either the Bank of International Settlements is actively manipulating the EUR higher in hopes of making market participants ignore this development, as it has done in the past (documented here), or

ii) the surging EUR, as we have speculated repeatedly, is nothing but a function of accelerating asset repatriation as European banks scramble to procure EUR liquidity.

Of course by rising, the EURUSD drags higher all correlated risk pairs, which in turns sends global markets higher. Sadly, this is happening for all the wrong reasons, and reminds us of the quarterly bank DVA/CVA fudge where a bank's bottom line is better the worse a bank's current viability is (as defined by its credit spread risk).

Because what is happening behind the scenes is some confused DE Shaw or GETCO algo is interpreting yet another European liquidity shortage as a risk on signal.

Which, in turn, once again shows what a total farce this market has become.

Source: ECB

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Fri, 12/28/2012 - 10:39 | 3101432 GetZeeGold
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Brilliant plan.....if Euroland goes down first maybe no one will notice the US going down.

Fri, 12/28/2012 - 10:42 | 3101442 CPL
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I believe there are a couple of ZH articles mocking the sterlization attempts.  Tyler called the game plan two years ago.

Fri, 12/28/2012 - 10:52 | 3101477 ArkansasAngie
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And ... yet ... the game continues.

They don't need us any more to play.  Nobody says stop.  Wait a second .  You can't do that.

Fri, 12/28/2012 - 13:07 | 3101927 saturn
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I blame Trichet and Draghi.

Fri, 12/28/2012 - 11:03 | 3101485 TwoShortPlanks
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Well fuck me! That's the first time I've seen a swipe at the BIS...not 3 days after I pointed out that ZH has never attacked the BIS for anything...and the Tyler's are smart enought to know that the BIS is the epicenter of the whole fucking conservative as they may be, they're still the Guelph Black Nobility, Templar, Committee of 300 etc.

Fri, 12/28/2012 - 11:04 | 3101525 GetZeeGold
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We'll attack the BIS....just as soon as we figure out what country they belong too.

Fri, 12/28/2012 - 11:06 | 3101530 CPL
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BIS ain't what it was 30 years ago.  It full of other people's children who's motivations are not necessarily in sync with one another's goals.  Think government, but everyone comes from big money, have been spoiled their entire lives and everyone is trying to give instructions to one another.  It runs about as well as you think it would.  


Nobody is running the show anymore.

Fri, 12/28/2012 - 12:49 | 3101881 Ghordius
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the BIS? come on, the BIS is just the "handmaiden" of the central banks

sure, she does the dirty laundry, but only on it's customer's bidding

btw the link called "BIS" goes directly to the eurosystem/ECB site - edit: corrected, now

"Guelph Black Nobility" my furry ass, btw

Fri, 12/28/2012 - 10:43 | 3101445 Lets_Eat_Ben
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Brilliant plant....If the US is balking over this "Fiscal Cliff" mabye no one will notice how fucked the Eurozone is.

Fri, 12/28/2012 - 10:44 | 3101451 Super Broccoli
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it's like a kid coming home with an F saying "hey dad you know what ? my friend Bozo got an F minus"

Fri, 12/28/2012 - 10:47 | 3101461 Lets_Eat_Ben
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They have F- now? Glad I'm old.

Fri, 12/28/2012 - 10:56 | 3101490 Eireann go Brach
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Europe needs to elect a Kenyan with no experience to grow out of this crisis! Look how well the US is doing!

Fri, 12/28/2012 - 11:21 | 3101582 BlueCollaredOne
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I like making fun of Obama as much as the next guy, but let's not pretend the head of the executive branch is anything more than a puppet position who simply reads what is put in front of him by TPTB.  This is ZH, not an article linked to by drudge.

Fri, 12/28/2012 - 11:32 | 3101632 Dr. No
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Well they both have Peace Prizes now.

Fri, 12/28/2012 - 11:39 | 3101666 Zero Debt
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Not to worry, Super Mario is on the case

Fri, 12/28/2012 - 10:40 | 3101435 swissaustrian
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Wolfgang Schäuble, German finance minister, gave an interview to Germany's largest newspaper "BILD" titled "The worst of the Eurocrisis is behind us".


As Jean-Claude Juncker said: When things become serious, you have to lie.

Fri, 12/28/2012 - 10:59 | 3101502 ArkansasAngie
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That is not an excuse for telling lies all the G... D ... time.

Fri, 12/28/2012 - 11:35 | 3101644 Salon
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Plus 100

Fri, 12/28/2012 - 10:44 | 3101447 El Oregonian
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Fri, 12/28/2012 - 11:43 | 3101680 mendigo
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Ben caught with pants down

Fri, 12/28/2012 - 10:45 | 3101452 Lets_Eat_Ben
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Allotment Method: MULTIPLE_RATE
Is this normal?

Fri, 12/28/2012 - 10:45 | 3101457 _ConanTheLibert...
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I can smell the end game. Bring it on!

Fri, 12/28/2012 - 10:47 | 3101460 fonzannoon
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"I can smell the end game. Bring it on!"

 - fonzannoon 2010

Fri, 12/28/2012 - 10:49 | 3101465 Dr. Engali
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You weren't wrong...just early.

Fri, 12/28/2012 - 10:57 | 3101493 Lets_Eat_Ben
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He wasn't early.

Fri, 12/28/2012 - 11:30 | 3101581 Monedas
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Maybe that idea occured to Conan independently .... that happens to me .... so many times .... I can't count them !

Fri, 12/28/2012 - 10:52 | 3101476 bnbdnb
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There is no early. It will take 20 years for this problem to hit bottom.

Fri, 12/28/2012 - 11:39 | 3101661 Salon
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But it will.

It is impossible to fill a black hole.

Fri, 12/28/2012 - 10:57 | 3101478 Lets_Eat_Ben
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_Err Duplicate_

Fri, 12/28/2012 - 10:56 | 3101489 TideFighter
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How many versions of the shell game are there?

One, just one. Powerful operators teasing blind marks.

There should be organ music, snow cones, elephant ears, ferris wheels, and that game

where the mouse runs down a numbered hole.  

Fri, 12/28/2012 - 10:58 | 3101498 Lets_Eat_Ben
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That would be waaay more fun.

Fri, 12/28/2012 - 11:06 | 3101531 Bastiat009
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So, banks are hoarding cash and are in desperate need of cash ... what???

Fri, 12/28/2012 - 12:32 | 3101835 viahj
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when the financial thieves are hoarding cash, i get a sense of impending doom of some sort.  something is going to burn.

Fri, 12/28/2012 - 11:07 | 3101532 Jason T
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M. Armstrong getting more and more antsy about 2013 being a crazy year.. Japan especially kicking it off.

Fri, 12/28/2012 - 11:07 | 3101534 NEOSERF
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I call Lichtenstein if we are grabbing countries...

Fri, 12/28/2012 - 11:17 | 3101570 francis_sawyer
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Only two things come from Lichtenstein... Steers & Queers...

Fri, 12/28/2012 - 11:08 | 3101535 savagegoose
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so banks would rather lose their money in US bonds, than  lose it in weuro bonds?  it nice to have choices.

Fri, 12/28/2012 - 11:24 | 3101591 mktfizx
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I don't recall who posted this projection of the additional easing timeline, but it was remarkably accurate.  Based on a fib projection of the half-life of easing announcment's affect on the market.  Thought is was worth re-sharing.



Run-up in days     Ending Date

78 9/26/12

48 11/13/12

30 12/13/12

18 12/31/12 (Happy New Year)

11 1/11/13

7 1/18/13

4 1/22/13

2 1/24/13

We are so f&cked 1/25/13

Fri, 12/28/2012 - 11:30 | 3101611 francis_sawyer
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How is that a fibonacci sequence?... If that's a fib sequence [even in reverse], the Mayans must have been using fibonacci numbers to predict the end of the world...

Fri, 12/28/2012 - 11:40 | 3101667 mktfizx
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I might have mispoken about the fib sequence or projection.  It was someone else's post from sept.  Just remembered it, looked at it in my notes, and realized that QE4 was announced just one day off of this schedule.  If we got coordinated easing on Monday as the article suggests, it would be a small coincidence.  That is all. 

Fri, 12/28/2012 - 11:24 | 3101592 Monedas
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I spent Christmas with ex-wife #2 .... all I can say is .... snoring is like bad breath for the ears !

Fri, 12/28/2012 - 11:30 | 3101622 francis_sawyer
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shoulda spent it with 'future ex-wife' #3...

Fri, 12/28/2012 - 11:38 | 3101656 Monedas
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That would have to be #4 .... you don't seem to grasp what a loser I am ?

Fri, 12/28/2012 - 11:52 | 3101720 francis_sawyer
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Well if you'd been going true fibonacci style [as above], you'd have skipped from #3 to #5, which, by consequence would make the 'future ex' #8, & qualify you to marry the widow next door...


Fri, 12/28/2012 - 11:31 | 3101609 Quinvarius
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2 QEs in a month, a failed but obvious gold smackdown, and active currency.  Panic mode.  They are in "do anything" mode right now.  But as soon as they smacked gold, they messed up their who reflation plan again.  They just don't get it when it comes to what gold does for the system yet.  When they mess with gold, the destabilize absolutely everything financial until gold recovers.

Fri, 12/28/2012 - 11:34 | 3101641 Monedas
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Gold is like a pretty step sister .... no matter how many times you smack her .... she just gets prettier .... Cinderella !

Fri, 12/28/2012 - 11:31 | 3101625 Salon
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Liquidity potential.

So hard to define. Especially when organic liquidity is manipulated by attempts to mimic it with fiscal and monetary policy

But it is drying up slowly, everywhere, in fits and starts.

My crystal ball says a 6 month retrenchment in non food commodities is coming.

Fri, 12/28/2012 - 11:32 | 3101626 scatterbrains
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The flusher handle is down but there's just too many turds.

Fri, 12/28/2012 - 12:25 | 3101814 carambar
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Well, we are in the last days of the year and typically some cash hording wont hurt if it shows up on dec 31st.

End of story...

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