Why European Monetary Policy Is Now Impotent

Tyler Durden's picture


For the last year or so, Mario Draghi (the omnipotent head of the ECB) has discussed 'market fragmentation' as a major concern. The reason is clear - his easy money policies are entirely ineffectual in a monetary union when his actions do not 'leak' out to the real economy. Nowhere is this fragmentation more obvious than in the inexorable rise in peripheral lending rates (to small business) compared to the drop (over the last 18 months) in the core. Simply put, whether it is demand (balance sheet recessionary debt minimization) or supply (banks hoarding for safety), whatever the punch ladeled from the ECB's bowl, it is not helping the most needy economies. Of course, that was never really the point anyway - as we have pointed out many times; the actions of the ECB are (just as with the Fed) to enable the banking system to live long enough to somehow emerge from the black hole of loan losses and portfolio destruction that they heaped upon themselves. This chart is yet another example of proof that monetary policy is entirely ineffectual in the new normal - and yet the central planners push for moar...




The real divide within the euro area is the still broken monetary policy transmission mechanism. An Italian (or Spanish) and a German (or French) company having similar credit ratings are actually not in the same currency zone because the former would get medium term loans at 5.8% vs. 3.5% for the latter (prime rates for 1-5Y loans of less than € 1 mn, Italy and Germany). Note that this 230bp spread is roughly the same as the Italy vs. Germany spread for 2Y government bonds; a perfect illustration of the lethal link between sovereigns and banks within the euro area.


Politics aside, this divide is the main threat for the very existence of the euro because it is fuelling a vicious circle, making weaker countries suffocated by a credit crunch while stronger ones are drowned with liquidity. Since one-off effects-adjusted inflation is now significantly lower in Italy and Spain than in Germany, by around 30bps for Italy and a whopping 170bps for Spain, the real interest rate divide is even larger. The ECB has long ago identified the financial fragmentation of the euro area as its main monetary policy challenge. The medicine has been identified: it is the banking union, which should restore a level playing field for euro area companies.


The main fallout of the Cyprus deal is that it has revealed how much political leaders have become allergic to commit taxpayer’s money to bail out bankrupt banks. Welcome to the bail-in world. Yet, the Cyprus tree or even the bail-in grove should not hide the much larger and darker euro crisis forest. A 400 basis points differential in terms of the real cost of credit for companies within the euro area is not sustainable.

And with the bail-in becoming the new normal in Europe, we suspect the chance of a full banking union without significant pain from normalization of all banking systems (before Germany will submit to implicitly backing all European depositors) is the same as Florida Gulf Coast going all the way (well less actually).

Your rating: None

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Fri, 03/29/2013 - 12:09 | 3388623 fonzannoon
fonzannoon's picture

I had to read this article twice because it made absolutely no sense. then I looked at the title again and realized Tyler said "Impotent" not "important". 


Fri, 03/29/2013 - 12:13 | 3388627 camaro68ss
camaro68ss's picture

If only the ECB would print, everything would be much better.

sarc/ off

Fri, 03/29/2013 - 12:22 | 3388640 bank guy in Brussels
bank guy in Brussels's picture

The amount the ECB should print, is about €6 - €8 trillion, according to the money-printing pundits

Sort of a shame we will likely not get to see that, until the euro-zone starts breaking up ...

At that point Frankfurt will probably print up €3 - €4 trillion to save the German and other banks in the North

Even Dutch boy Diesel Bomb will go along when the Netherlands is about to sink into the North Sea

While every country on the Mediterranean finally basks in the sunshine of having sovereign money again ... poorer but wiser and with a chance at a future


Fri, 03/29/2013 - 12:36 | 3388663 knukles
knukles's picture

Credibility Trap
Liquidity Trap

In that order

Guess what's next?

It's bad people, very very bad.

Fri, 03/29/2013 - 12:44 | 3388683 Surly Bear
Surly Bear's picture

Wait. Wait. Wait! Isn't a 'bail-in' a sham? I mean the banks didn't have any money, right, and yet, there were all these deposits or debts on the banks balance sheet? So they confiscate the debt they can't pay thereby turning it into an asset they can't pay....and how does that fix the problem? Please, my degree is in finance...speak to me as if I am a dog or small child.

Fri, 03/29/2013 - 12:47 | 3388688 ekm
ekm's picture

"BAIL-IN" creates collateral for the banks so the ECB can buy it, thus creating money.

Fri, 03/29/2013 - 12:48 | 3388690 knukles
knukles's picture

Fletch, go fletch


Sham? It's theft, pure clean and simple
Such a travesty of the banking system, it cannot recover without severe reform
No, it won't happen... The reform

Welcome to the bare shelves at the end of the universe

Fri, 03/29/2013 - 12:50 | 3388697 Bastiat
Bastiat's picture

Your deposit with the bank is just a liability on their balance sheet.  The "bail-in" is just a partial or total default on the liability, discharging it by extra-legal decree.  So the balance sheet is that much better.

Fri, 03/29/2013 - 13:15 | 3388790 earleflorida
earleflorida's picture

hmmm,... kinda like going out and getting a vesectomy without telling your significant other, only to find out a year later she's pregnant with your baby

boo who?

Fri, 03/29/2013 - 12:41 | 3388667 ekm
ekm's picture

The only way to create money is to buy something, bonds in this case.


That would mean that euro countries would have to issue Eur 8 trillion bonds and then ECB would buy all of them, hence 8 trillion more debt.


As I said, all preparations are in place to crap the system.

Whether they will manage to control the crap is a different story.

Fri, 03/29/2013 - 13:04 | 3388748 fonzannoon
fonzannoon's picture

There is no reason to go after bank deposits here in the USA. Zirp is crushing everyone. The Government offers a 4% government backed immediate annuity and gives all it's citizens the opportunity to convert their IRA/401K accounts over to it.

Trillions will move. Problem delayed.

You are welcome TPTB,


Fri, 03/29/2013 - 15:43 | 3389236 amusedobserver
amusedobserver's picture

Time for the big flush.  I recommend a double dose of Metamucil, all around....

Fri, 03/29/2013 - 13:49 | 3388881 Clowns on Acid
Clowns on Acid's picture

Euro is finished...Long live the Rouble !

Fri, 03/29/2013 - 12:17 | 3388631 NotApplicable
NotApplicable's picture

That was how I initially read the headline. It was truly a WTF moment.

Fri, 03/29/2013 - 12:42 | 3388679 knukles
knukles's picture

They're synonyms, Fonz
Happy Easter

Fri, 03/29/2013 - 12:47 | 3388685 ekm
ekm's picture


Money needs COLLATERAL to come into existence, fake collateral like bonds or intrinsicly valued collateral like gold or crude oil.


Collateral is NOT created by ECB. ECB can only buy the collateral.


Fri, 03/29/2013 - 13:08 | 3388768 AynRandFan
AynRandFan's picture

There is no shortage of collateral.  Collateral is just paper in most cases.

Fri, 03/29/2013 - 13:12 | 3388778 ekm
ekm's picture

I think there is.

ZH has posted many articles about it.

Fake or not fake, that's how the system works, IMO

Fri, 03/29/2013 - 14:53 | 3389066 Sandmann
Sandmann's picture

Write some then.....

Fri, 03/29/2013 - 12:50 | 3388694 ekm
ekm's picture

Even if banks sold ALL BONDS at 100% value, their leverage losses are so humongous, that it is still by far not enough.


That's why I say, QE has a limit even if Brent Vigilantes are not taken into account.

QE simply buys up all good and bad collateral from the banks, but then..........banks are left with nothing. Hence, "bail in", convert deposits into collateral.

Banks need collateral to exist.


Fri, 03/29/2013 - 12:53 | 3388704 Bastiat
Bastiat's picture

Are the deposits collateral?  They could be converted to equity, or they could be turned into involuntary time depsosits, or they could just be written down, decreasing the liability on the balance sheet.

Fri, 03/29/2013 - 12:57 | 3388714 ekm
ekm's picture

Law and definitions matter no longer.

Deposits can be whatever the gov defines it to be.


People who have not lived in a fully authoritarian country in the past like I have, cannot believe that laws can be changes quite easily simply by two prime ministers deciding so over lunch.

Fri, 03/29/2013 - 13:09 | 3388737 fonzannoon
fonzannoon's picture

Ekm since we are so far down this hole, why can't the ECB for example...say "There is a statue of a greek god peeing that we found in Cyprus. It is invaluable to us. We will give the Cyprus government 1 trillion dollars for this statue, which we will then throw in the garbage".

Isn't it that easy to create money? Hence trillion dollar coins and other stupidity?

As you said, Laws and definitions no longer matter...

Fri, 03/29/2013 - 13:10 | 3388774 ekm
ekm's picture

I like your imagination.


Since I don't watch TV or play videogames, I can't go that far.

ECB is a bank, not a used car dealeship.

Fri, 03/29/2013 - 13:12 | 3388781 fonzannoon
fonzannoon's picture

Look at where things have progressed to. You can't tell me anything is impossible at this point. More importantly, faced with a complete blow up of the financial system, people will find a way to believe anything if it will avert/delay it.

Fri, 03/29/2013 - 13:16 | 3388796 ekm
ekm's picture

Check my comment on the "oops" post.


They are trying very hard to crash the system and but they want to channel/control the crash.


Nobody wants to avert anything.

Fri, 03/29/2013 - 12:13 | 3388626 LawsofPhysics
LawsofPhysics's picture

"this divide is the main threat for the very existence of the euro because it is fuelling a vicious circle, making weaker countries suffocated by a credit crunch while stronger ones are drowned with liquidity. "  -  Thanks captain obvious, did none of these people play monopoly as a kid?  That's how the game is played.  Head's I win, tails you lose.  Eventually, one player has everything and everybody else has left the game.

Fri, 03/29/2013 - 12:37 | 3388666 knukles
knukles's picture

That divide is supposedly just what the Euro was gonna cure
Buncha assholes in charge

Crimes against humanity

Fri, 03/29/2013 - 12:22 | 3388637 bsdetector
bsdetector's picture

OT but important. Used priceline to pay for a hotel. Priceline did not pay the hotel so the hotel charged me for the room. Is PCLN going out of business? No live bodies can be reached at Priceline by phone.

Fri, 03/29/2013 - 12:24 | 3388646 earnyermoney
earnyermoney's picture

Have you asked William "Captn Kirk" Shattner? I'm sure he knows.

Fri, 03/29/2013 - 12:30 | 3388653 bsdetector
bsdetector's picture

This sordid and unscrupulous business activity will tarnish Bill's name. Have you got a phone number for him, I'd like to let him know what PCLN is doing?

Fri, 03/29/2013 - 12:38 | 3388669 knukles
knukles's picture

Last heard he was picking Klingons off Uranus

Fri, 03/29/2013 - 16:26 | 3389379 de3de8
de3de8's picture

Knuckles:too funny!

Fri, 03/29/2013 - 12:24 | 3388647 Cycle
Cycle's picture

The ECB has not released its weekly stats for March, scheduled for yesterday. This might be an interesting weekend.

Fri, 03/29/2013 - 12:41 | 3388673 knukles
knukles's picture

Easter holiday
No news
Except asinine comments by the unelected leadership

Fri, 03/29/2013 - 12:40 | 3388677 ekm
ekm's picture


Fri, 03/29/2013 - 17:55 | 3389629 Gief Gold Plox
Gief Gold Plox's picture

I too am for some reason expecting the shit-storm to start come Tuesday morning. They like to tweak the system over weekends and this is a nice long one.

Fri, 03/29/2013 - 12:42 | 3388680 Debeachesand Je...
Debeachesand Jerseyshores's picture

It's only a matter of time before the EuroZone breaks up into a Northern and Southern Zone.

Fri, 03/29/2013 - 13:41 | 3388864 Go Tribe
Go Tribe's picture

You mean War Zone.

Fri, 03/29/2013 - 12:49 | 3388691 W74
W74's picture

Here's the thing: asking whether you would rather loan money to Spain or to Germany is like asking whether you'd be willing to loan money to a Korean Man or to a Black Female. 

Which do you think is more likely to pay you back, and which do you think is more likely to spend your money on jewelry and shoes?  I think the answer is obvious, hence a divergence in monetary policy, and that's even before considering individual (as opposed to soverign) credit ratings.

Fri, 03/29/2013 - 13:03 | 3388742 AynRandFan
AynRandFan's picture

Unlimited money.  That's what the U.S. has and Europe doesn't.

Escapes me how EZ members think they will provide sufficient liquidity to failed and failing economies without throwing free money into the system.  There is no way, ultimately, solvent members will agree to continue transferring their limited wealth to people, and cultures, that have little hope of reform.

Fri, 03/29/2013 - 13:18 | 3388799 LawsofPhysics
LawsofPhysics's picture

The EZ has ulimited money as well via the swap window.  The "dealer" really doesn't care which addict he is selling to.

Fri, 03/29/2013 - 13:37 | 3388848 bnbdnb
bnbdnb's picture

If all sovereign bonds are 100% backed by the ECB, why aren't all the rates the same?



Fri, 03/29/2013 - 14:52 | 3389065 Sandmann
Sandmann's picture

Again what is special about the ECB compared say to the Bank of England  and their unending support for Banks at the expense of real business and households.  Stewart Law LLP is filing  class-action suit against Royal Bank of Scotland for misleading Investors and breaching Section 90 of FSMA during a Rights Issue in 2008.

This when the FPC thinks British Banks especially RBS 82% State-owned and suppliers of LBO Credit to Kraft to buy Cadbury is in need of lots of fresh capital......good timing.

So Tyler, if QE is not seeping into the real economy and credit is being withdrawn yet Zombie Banks are out for more Capital is Britain any better than EuroZone Periphery ?

This is an issue you should address because you know London is a much bigger mess than Cyprus or Greece ot Spain or Italy and WHEN London implodes the USA and China and Japan are G O N E

Do NOT follow this link or you will be banned from the site!