The ECB's "Unlimited, Open-Ended" Bond Purchase Program Gets A €524 Billion Limit

Tyler Durden's picture

One year ago, the ECB faced with an imminent collapse of the house of peripheral cards literally made up a bazooka: one so big and loud the market had no choice but to assume Draghi and company were not joking and actually knew what they were doing - it was the Outright Monetary Transactions (OMT), the successor to the SMP program, which was unique in that it was open-ended and unlimited. It was literally, "the kitchen sink" conceived to put a halt to the relentless selling which last July sent peripheral bond yields to record wides by instilling the fear of god, or in this case his monetary messenger on earth, Mario Draghi into the hearts of bond sellers.

Unfortunately, like everything else in Europe, this was merely the latest ad hoc made up rescue mechanism, and which as Mario Draghi reiterated on Thursday, still has no legal term sheet (but one is coming out "shortly", as he said in March and every time before that).

However, as we got closer to June 11/12, the date when the German Constitutional Court will conduct a public hearing on the various challenges to the ESM and OMT, the ECB would have no choice but to disclose more details about the real terms of the OMT to assure smooth passage of the OMT, and not to jeopardize the tenuous balance in Europe where things are once again going bump in the night with bond yields suddenly blowing wider on fears the Japanese bond carry trade is set to unwind. And if the validity and credibility of the OMT is also suddenly questioned, then Europe will go right back to imploding right before our eyes all over again.

The first such notable detail comes courtesy of the FAZ this morning, which reports that "in fear of the judgment of the Federal Constitutional Court, the European Central Bank (ECB) has revealed for the first time the boundaries of their controversial bond buying program... ECB President Mario Draghi announced last year, if necessary, that unlimited government bonds of distressed euro countries would be monetized to save the euro. Meanwhile, however, the central bank has limited this program to a maximum volume of €524 billion and also communicated this to the court." This is the maximum allowable purchases of Spanish, Italian, Irish and Portuguese bonds.

Why is the ECB revealing that the open-ended program in fact has a very set end now? "Apparently, to make the program legally less vulnerable the ECB has now said that it has commissioned legal opinions boundaries. Central bankers described the process as "containment."

Further details revealed that only short-end bonds with a maturity between 1 and 3 years would be permissible, which is as had been previously disclosed.

Naturally, the ECB in keeping with the facade of one set of truth for legal authorities, and another set of lies for the not so free market, immediately came out with its refutation.

First it was Joerg Asmussen, whose idea the OMT was in the first place, who told German Bild in an interview that the ECB is not being "accused" in next week's hearing, and that it provides a "good chance to clarify program details." Great - maybe it will also mean finally getting that legal term sheet which has been in the works for a year, and without which the OMT effectively does not exist!

Then Joerg suddenly gets very sensitive, saying the ECB last year was "only European institution fully capable of acting" when euro zone was "at danger of falling apart" and that the ECB had to get the message across that market participants "should not mess with the ECB" as it would defend the euro. Markets “got the message” without the ECB needing to buy bonds.

In other words, the ECB lied (just like everyone else seems to these days). And by the way Joerg, this is also known as crying wolf - soon the very same bond threat will reemerge, and this time nobody will believe you. Meaning that the ECB will have no choice but to do what it has threatened to do. The only problem is once the ECB does embark on open-ended unsterilized monetization, then the legal impossibilities of doing that in a fiscal disunion, where every nation has its own set of bankruptcy laws, without a common banking resolution law, and without joint Eurobonds, this is impossible. And the ECB knows it very well. This is doubly so now that the IMF's reputation has been thoroughly destroyed. How long until the markets questions the credibility of those two other Troika members: the European Commission (already a joke) and the ECB itself?

And sure enough, just to hopefully avoid this out of control spiral, the ECB was quick to deny everything.

Moments ago, via Reuters, a spokesman for the bank said that "there is no limit to the European Central Bank's (ECB) bond-buying program,"  denying the FAZ report.

"The report is incorrect," an ECB spokesman told Reuters.


"As indicated on various occasions, there are no ex-ante limits on the amount of Outright Monetary Transactions. Their size would be adequate to meet their objectives."


Germany's top court will consider whether the OMT infringes the constitution's insistence on sovereign parliamentary control over budget matters.


No ruling is expected until after national elections in September, and legal experts say the court may for the first time defer to European judges in the euro zone crisis.

We'll find out in two days who is lying. In the meantime, Europe better hope and pray that the recent unwind in the Japan carry trade, which has been the primary driver for the unprecedented surge in peripheral bonds does not accelerate, and force not only the marginal holders of peripheral bonds, but everyone else to start dumping. In that case not even the threat of unlimited purchases will be enough.

Especially when one considers the chart we put up in April of last year showing that the funding needs of the periphery keep growing and growing and growing, and that sooner or later, neither guarantees, nor threats, nor actual purchases will have any impact at all.

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Mongo's picture

It's all Ponzi to me

i-dog's picture


"maximum volume of €524 billion"

... until more is needed....

It's called "an opening gambit".

Middle_Finger_Market's picture

Testing the markets waters...but I thought the whole thing was already centrally planned. 

Buckaroo Banzai's picture

Boundless informant, meet Boundless Bond Purchase!

aint no fortunate son's picture

"We'll find out in two days who is lying."

Ooh, ooh, I already know - ALL of them!

DeadFred's picture

Unlimited when the market wants to hear unlinited. Limited when the courts want to see limits. Back to unlimited when the market rebels. It's cool when you can say whatever you want and GET AWAY WITH IT.

TheFourthStooge-ing's picture

A limit set in stone, just like the US debt ceiling.

This is sure to bolster confidence and strengthen the global recovery.

derek_vineyard's picture

I've been out of stocks shortly after the dow crossed 10,000 in 1999.  I had a screen name on america online-- 10kby2k and it was made in folly because 10,000 would have been such an unforeseeable level in 1995 or so.  I missed much of the nazdaq's run to 5000 and felt jealousy as many partied around me.  I stuck to my gut and bought cd's and commodities. When the Dow came back below 10,000 in 2008 I was vilified (though my long term commodity positions were drawn down, but those cd's became very valuable with the thought of deflation and have FDIC backing). Now here we are again.....another 5 year run from 8000 to 15000. I missed all of it.  But as those cd's matured I could not reinvest at near 0%.  Long duration cd's yields dropped to 2 to 3%.  I purchased as much physical silver as i felt comfortable hiding (not that much). I was forced to re-evaluate all asset classes.  Ben had put me in a corner.  Knowing that the real estate markets in Nevada, Arizona and Florida had crashed.... as an inflation hedge and a value play I to bought prime, newer, desired commercial property. Doing extensive pavement the tennants before purchase, etc I became the proud owner of some sweet parcels.....that at the time had a replacement cost near double of the purchase price.  Ben actually forced me to become a landlord and expend a lot more energy to get a profitable positive real rate of return.  Getting these units at 1/2 of construction cost was the inflation angle inherent in these properties. My entire life has now changed. I realize my paper positions in oil/corn/cattle have risk because they are paper.  And i only feel comfortable storing XXX amount of physical commodities. All this elation in the markets feels like 1997/8 /9 ....a year or so before the nasdaq crashed. I've prepared the best I can and will be affected by the next 'crash', but hope to avoid the brunt of it and weather through with my holdings. If Armageddon comes, I'm fucked, too. But, the Jim Rogers style I have employed feels comfortable to me. (only wish i could take large amounts of physical possession comfortably). I  don't think real rates will EVER be positive again....the national debt would then implode.  My advice: find what you are comfortable with and follow your gut (no emotion allowed) and NO debt.  Good fortune to everyone and I really understand how frustrating a parabolic market rally affects the psyche. Again, these are trying times for an enlightened thinker.

Rustysilver's picture


Great post. I feel the same.

buzlightening's picture

derek.  Good for you and seeing the whole of it coming to another crash or wash, rinse, & repeat cycle.  I could care less about the paper chasing market participants. All debt based fiat paper ponzi money. Just when the whole terd herd is corralled the the banksters pull the plug and flush.  Nothing to be gained in holding wealth in paper assets.  Monetary stores of value you have complete control over.  Sure they're limited.  Food & water; guns & ammo; along with barter gold & silver.  Stay mobile as the friggin dead head feds in bed with banksters don't want some of the citizens wealth any longer the goon platoon wants it all. Hell I'll die and never allow these rat bastards one morsel to move the beast forward in world domination.  Never would have known over 1/2 a decade ago ammo would have been my best investment.  Likely food will be the big winner as all fiat currencies gone debt wild turn to ashes.  Always silver & gold to take wealth with you where ever you may need to start over.  Way the whole of it's coming apart; individual freedoms melting away as an iceberg stuffed into an erupting valcano, shouldn't be long now before we know the vicious real agenda heaped upon us by our pretended non representing gov goon platoon. 

fonzannoon's picture

Derek real rates will go positive, substantially so, eventually. That will be the real tanks on the streets moment, when everyone living off the government will come to the unfortunate conclusion that they just got thrown out the window in a last bit attempt to save a dying currecny.

joego1's picture

Buy a Boy Scout Handbook it's at least as good as many survival manuals. "Do your best" and "enjoy every sandwich" as Warren Zevon wisely said on the way to the happy hunting grounds.

WTFUD's picture

or alternatively kidnap 3 of the little fuckers and get them to do the work for you!
Only kiddin' right! right?

spine001's picture

Capital vs retur on capital: As capital grows due to QE return on capital must shrink in real terms (goods and services), no choice when fiat is involved, therefore the only refuge is your ability, while possible, to allocate your capital to producing goods and services that people will want, whatever you think they are based on your vision of the world's future. Housing will relegate you to around 20 percent of the income of the average family you rent housing to, times the number of houses you are renting, this is based on a net income from rent  of 8,000 usd typical for the type of property a 40,000 usd a year family provides to the renter, assuming reasonable maintenance and 80% occupancy rate. Asking for a larger percentage will not be stable... So with 5 houses you'd be making 40,000 per year.... no debt of course..

Derek how do your numbers compare to this back of napkin analysis...

Middle_Finger_Market's picture

Limit to printing paper, the only limit is the ultimate demise of FIAT. Due imminently. 

viator's picture

Jeeze, the strictures of democracy are so damned inconvient.

logicalman's picture

On a happier note....

French President Francois Hollande declares that the eurozone debt crisis, which has gripped the region for the past four years, is over. - BBC News.

Don't we all feel better now?

Frastric's picture

The eurozone debt crisis will be over until France topples everything...

You've got to love the balls these people have saying such bare-faced lies...

Or more likely they are frightened out of their minds and will say anything to save their skins!

logicalman's picture

I would favour the last option.

XRAYD's picture

Oui Francois - THAT crisis is over. A Bigger REAL one is just round the corner for you.

daz's picture

(Reuters) - There is no limit to the European Central Bank's (ECB) bond-buying program, a spokesman for the bank said on Sunday, denying a German newspaper report published in the run-up to a court hearing on the scheme.

Nussi34's picture

Draghi is toast! Go Bundesbank sink the Italian dove!

fonzannoon's picture

Here are my questions.

What is Bernanke's "scheduling conflict" for the Jackson hole meeting? What is so important that he can't make it?

Has any reporter, anywhere, actually asked him this?

Do they go ahead with the meeting? If so, who speaks?

Does Bernanke show up to any subsequent meeting after Jackson hole? If not, then what?

What happens if interest rates continue to rise over the summer and Bernanke's absence leads to proof that the bond market is beginning to overwhelm fed policy?

What happens if several areas of the credit market have begun to suffer extreme losses and many areas of the real estate market begin to suffer declines due to rising rates which the fed assured everyone would not take place and there is no one in Jackson hole to address this?

What happens if Brent crude is $125 and WTI is $110 in August and Bernanke's absence leads to proof that inflation is occuring at higher levels than the fed has claimed?

What happens if markets begin, or actually already are beginning to price all these concerns in, as well as the stupid debt ceiling debate, ahead of the biggest meeting of the year, which the primary decision maker on monetary policy has decided to skip?




Everybodys All American's picture

I expect Bernanke's resignation and Janet Yellen to take over in the comings weeks. Which amounts to moar of the same. Did you see Christine Romer was asked if she would take the job? Geithner has been rumored. Larry Summers even. Can they find any other failed misfits? Unbelievable.

fonzannoon's picture

I expect his resignation as well. I expect it to be met with him being called a failure and exiting early because his polocies have failed. I expect it to escalate around the debt ceiling as Bernanke reminds everyone that QE was only intended to put a floor under things until law makers were able to fix the structural problems, which, they still have not.

It won't be smooth. A scumbag like Summers can come in, or Yellen. But Bernanke is leaving because he knows what is coming, he just wants enough distance to share the blame in hindsight.

Everybodys All American's picture

I'm watching the 10 year like a hawk right now. Anything that gets over 2.20% becomes very troubling for the print farce market.

kito's picture

the money talk is all about bond yields going up for the right reasons........economy improving....................more people running to certain the bernank is allowing this rise to test the waters............the bond movements do not happen without ben and his merry men...........................the cbs are still in control....................they will not allow bonds to rise to their detriment in the short will take some acute event.......something sudden and dramatic in world events for the bond market to reek havoc............................for now the Almighty Dow cranks higher and bonds stay in range.........move along now............

fonzannoon's picture

I am still convinced our yeilds are moving up as a byproduct of Japan. A part of me thinks Bernank may be trying to get yields up as a way of passing the torch to the next shmuck so they can have some room to ease but based on the way Bernak is handling his exit (running away) I don't think he gives much of a shit.

I also don't care what the reason is. As rates creep higher, high yield gets destroyed and real estate starts to implode again.

If by "in control" you mean Bernank, like Abe, will be forced to buy moar and moar, then yes they are in complete control.

kito's picture

 its just a coincedence that yields climbed after the tapering talk...................

fonzannoon's picture

which coincided perfectly with Japan's bond market going bonkers...................................

kito's picture

come on fonz, bernanke could buy 15 trillion worth of japanese bonds tomorrow and you wouldnt know many trillions did he lend to the foreign banks during the beginning of the end in 2008-2009? i stand by the fact that the big money has total faith in the bernank and there isnt even a crack of confidence going on right now.......all is going swimmingly according to ray dalios beautiful deleveraging....................

Everybodys All American's picture

It is all about Japan. The yen carry trade unwind is why the markets sold off. This also signals that a printing farce can go on for only so long before unintended consequences begin because we are all so interconnected. I think seeing the Japanese going all in on crazy printing puts a little doubt here in the US on controlling the interest rates and markets.

Chaffinch's picture

Tyler, are you sure there is a problem here?

According to the BBC website Hollande says the crisis in Europe is now over...

/ sarc off

newworldorder's picture

Like any leader in a bubble, Hollande is having his "let them eat cake" moment. In his circle of associates, all is well. He will dither untill the French kick him out of office.

Vegetius's picture

At this point, who cares? We have gone past the point of return and are now committed. It is a point that  the Eurotrash Elite refuse to see, they have bet the house on 22 black and the ball is spinning. The game is over the roulette wheel has come up 666 red and they lost it all, they are up shit creek without a paddle but at least they have all the other elites from the USA to China for company.


“In the end, more than freedom, they wanted security. They wanted a comfortable life, and they lost it all – security, comfort, and freedom. When the Athenians finally wanted not to give to society but for society to give to them, when the freedom they wished for most was freedom from responsibility, then Athens ceased to be free and was never free again.”

- Gibbon

EmmittFitzhume's picture

Protester just crashed the French Open finals. The unrest is growing!

Seasmoke's picture

Anyone get a knife in the back ?

Non Passaran's picture

That doesn't count. We need mayhem in Brussles and Frankfurt.

DawgAss's picture

FUCK Bernanke.......Oops, wrong continent!

Smegley Wanxalot's picture

This can't be true. Hollande said the credit crisis was over.

Urban Redneck's picture

So an ex ante limit is just like a Plan B, whether it exists depends on who you ask, and who they perceive the audience to be...

Schwindler, menteur, bugiardo, bandoleiro, mentiroso.

markar's picture

"maximum volume of €524 billion"

guess we'll finally get real price discovery on Spanish & Italian debt.


...unless of course they're lying again

trebuchet's picture

Someone going ot test that limit real soon..............

falak pema's picture

On nation states and Machiavellism since the Renaissance days : 

In western nation states, inspite of  tradition of open liberty that has been long institutionalised, three guiding principles of fundamental importance have influenced european geopolitics, (and by extension the subsequent US model) :

All government issued from elective and normative procedures use great ability and tactical skills (night votes in congres or parliaments) to negate the essence of laws protecting individual freedoms to their own elitist benefit as power cabal;

a) by parallel procedures that dilute offical laws making them ineffective (always),

b) by secret procedures (often),

c)  by illegal procedures (sometimes).

This is the very nature of Machiavellian governance based on ends justfying means, instilled by the profound belief that without absolute faith in God, in post renaissance revolution of "free will" affirmation, man had essentially become evil and was thus malleable by the Prince, who plays on this new paradigm where "reason of state" has replaced "divine faith" as people's lodestone, guiding principle.

The extent to which the illegal replaces the spirit of the law gives us an assessment of the degree of corruption of nation state. 

What we are seeing today in Pax Americana internal governance (NSA, Patriot act, financial scamming) as in the increasing use in surrogate Europe ( ECB/EU/IMF bureaucratic decision making), of these "parallel procedures" and "secret deals", now the official norm; when its not overt illegal actions like financial banksta rape and NSA video/digital tapes. 

There comes a point of inelasticity in all systems.

PS : as a corollary one has to wonder what is required to ensure that "malleable and evil" individual people, in whose name nation states exist and function, need to find a way of ensuring that their ideals, now not absolute truths but relative ones, find a defense mechanism againt the rule of unprincipled Prince or his oligarchy.

I personally feel against my better instincts that there is none except ...the natural law of entropy. We keep climbing that hill again and again. But what else can we do but try and try again.

Non Passaran's picture

Which is why it will be instructed to vote in the common interest (of the sociopathic politicians and banskters).

Can't wait for the euroshit to hit the fan.

cloudybrain's picture

dont worry Europe in the right recovery track , just like Recovery in US

JJ McApe's picture

spain and italy are a little bit bigger than greece and cyprus. :)

as you can see, things escalate slowly but surely, greece was the start, and now the bigger boys start to struggle. with youth unemployment rates over 40% spain and italy are in serious trouble.

and what the ecb is doing can only delay the ineviteble, u cannot print away an unemployed flashmob. this would need another world war.

however it's like the ecb is trying to prevent the ship from sinking while using a spoon to get the water out. lol

i am very concerned that the social stability is not guaranteed in the upcoming years. as you can see in greece people are living in the streets, in cars, while doing drugs. the new status quo.

falak pema's picture

the spaniards are working as artisans in Morocco at moroccan rates; and liking it. Carpenters, masons and architects.