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).

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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". 


camaro68ss's picture

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

sarc/ off

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


knukles's picture

Credibility Trap
Liquidity Trap

In that order

Guess what's next?

It's bad people, very very bad.

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.

ekm's picture

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

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

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.

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?

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.

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,


amusedobserver's picture

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

Clowns on Acid's picture

Euro is finished...Long live the Rouble !

NotApplicable's picture

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

knukles's picture

They're synonyms, Fonz
Happy Easter

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.


AynRandFan's picture

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

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

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.


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.

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.

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...

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.

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.

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.

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.

knukles's picture

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

Crimes against humanity

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.

earnyermoney's picture

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

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?

knukles's picture

Last heard he was picking Klingons off Uranus

Cycle's picture

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

knukles's picture

Easter holiday
No news
Except asinine comments by the unelected leadership

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.

Debeachesand Jerseyshores's picture

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

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.

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.

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.

bnbdnb's picture

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



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