ECB "Models" €1 Trillion QE

Tyler Durden's picture

Update: in direct flashback from the summer of 2011 when the ECB leaked news only to retract it within minutes, this just happened:


For those who have forgotten, here is the ECB playbook: leak "false" rumor, gauge market reaction, then promptly deny said rumor knowing quite well how the market will respond when the real news hits. Rinse repeat.

* * *

When in desperate need to crush your currency (being bought hand over fist by the Chinese), so urgently need to boost German exports, since you are unable to actually do QE as per your charter, what do you do if you are Mario Draghi? Well, you leak, leak, leak that you are contemplating QE, and then you leak some more. Such as today. From Bloomberg:

  • ECB has modeled bond purchases to show impact on inflation, FAZ says.
  • ECB bond purchase model show varying results, FAZ says
  • ECB tests show inflation could be boosted by a range from 0.2 percentage points to 0.8 percentage points: FAZ
  • ECB officials leaning more toward credit-easing policies: FAZ
  • ECB wants to work this month with BOE on ABS proposal: FAZ

Like US inflation soared on the $1 trillion QEternity? Can't wait. In other news, expect zero reaction from gold on this latest news that another $1.4 trillion in fiat is about to flood the market. If only inbetween Mario Draghi's jaw bones.

Finally, where did the ECB "get" all of these bright and original ideas? Why Goldman Sachs of course, which released the following overnight:



The ECB left all policy rates unchanged at the end of its policy meeting yesterday. At the press conference, however, President Draghi left the door open to additional conventional and unconventional measures, should the medium-term outlook for inflation deteriorate further. Specifically, Mr. Draghi placed the emphasis on this passage of the prepared statement: “the Governing Council is unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation”. (See European Views: ECB opens the door to QE, April 3).


As we had argued, risky assets and in particular credit products responded well to the announcement, resulting in a further easing of Euro area financial conditions. We continue to like spread products and recommend a long German DAX position. However, we now also recommend selling duration by being short June Bund futures (RXM4) for a target of 137.50 (roughly 2% on the generic yield). We initiated the recommendation at 142.91, with a stop on a close above 145.50 (See Global Market Views: Hedging Long EUR Credit with Short Bunds, April 3).


Today the focus shifts to the US Employment Report for March, which will be important in assessing the underlying strength of the jobs market as we come out of the exceptionally cold winter months. Our US Economics team forecast a 200K print in nonfarm payrolls, and a decline in the unemployment rate to 6.6%. These estimates are broadly in line with consensus expectations (See US Daily: March Payrolls Preview, April 3). A stronger set of data, in our view, would be the catalyst for a further sell-off of the US Treasury market. As we wrote in the March Fixed Income Monthly, we think that maturities spanning 2016-18 look particularly vulnerable.


As discussions on whether or not the ECB could potentially implement QE will take centre-stage in coming weeks, in today’s Daily we summarize our previous research on the institutional characteristics of the Euro area ABS market.


The European Securitization Market: Facts and Figures


The total size of the European securitization market was EUR1.5trn at the end of 2013, about one-quarter of the size of its US counterpart. Securitizations were expanding at a rapid pace before the global financial crisis, with yearly issuance peaking at EUR711bn in 2008. Since then, securitization issuance in Europe has fallen sharply, to EUR180bn in 2013. For reference, total securitization issuance has also declined significantly in the US but since 2009 it has stabilized at a yearly average of EUR1.3trn.


There are significant differences in the size of the securitization market in European countries, and in the type of collateral backing securitization transactions. The UK remains the largest market in Europe, with a total stock outstanding of EUR444bn at the end of Q3 2013, followed by the Netherlands (EUR281bn), Italy (EUR185bn) and Spain (EUR178bn). In 2008, the UK was also the most active market, accounting for about 38% of total European issuance, but since then it has declined materially. In 2013, issuance was highest in the Netherlands (39% of total issuance), followed by Italy (19%), the UK and Germany (14%).


In terms of assets securitized, in 2008 RMBS were by far the largest asset, underlying about 80% of total securitization transactions. RMBS transactions accounted for about 44% of issuance in the first three quarters of 2013, while ABS origination was EUR34bn in Q1-Q3 2013 (about 28% of total origination). The majority of issuance continues to be retained by originators, even though a lower fraction was retained in 2013 than in 2012. Owing to more conservative practices, the European securitization market has performed relatively well; since mid-2007 default rates of European structured finance securities has been 1.1% compared with 15% for US ones (see Helmut Kraemer-Eis, George Passaris, and Alessandro Tappi, SME Loan Securitisation 2.0, Market Assessment and Policy Options, EIF working paper 2013/19).


Securitization of SME Loans in a Nutshell


The securitization of SME loans in Europe began to develop at the beginning of 2000, and its share of the total securitization market increased from about 2% to roughly 8%, reaching an outstanding amount of EUR130bn. About two-thirds of the amount of SME securitizations is concentrated in Italy, Spain, Belgium and the Netherlands. Issuance peaked in 2011 at EUR60bn and declined to about EUR19bn in 2013.


In terms of performance, default rates on SME securitizations have remained low for vintages originated in 2000-2004, when originators were conservative in structuring transactions, and securitized diversified and transparent portfolios of SME loans. This approach was relaxed before the GFC and default rates for later vintages have increased. But, on average, in the stock of outstanding securitized SME loans, the default rate is about 5.5% and it peaks after 50 months.


At the current juncture, credit to non-financial corporations (NFCs) remains constrained. Loans to NFCs were down 3%yoy in February in the Euro area. From the peak reached in January 2009, loans to NFCs are down 10% (or EUR530bn). The decline marks sharp cross-country differences, with lending to NFCs down 1% in Germany relative to a year ago, but down 14% in Spain over the same time horizon.


Large discrepancies exist also in the interest rate charged by Euro area banks to non-financial corporations in the various member states. For example, in Germany, the average interest rate charged on new loans with maturity between 1 and 5 years is 2.7%, while in Italy and in Spain the interest rate for a loan with similar characteristics is 4.84% and 4.22%, respectively. The spread on loans to corporates in Germany and in the periphery is still about twice as large as the current spread between German and Italian or Spanish government bonds. Hence, the supply of credit to corporates remains constrained, particularly in the periphery, both in terms of volumes and in terms of prices.


Helping the Securitization Market Revive Would Mitigate the 'Credit Crunch'


Helping the securitization market revive could help mitigate the 'credit crunch' (see: The Case for ECB Credit Easing, February 2014). Securitizations would have the advantage of (i) providing banks with the means to raise cash directly from investors to fund lending; (ii) freeing up banks’ capital, thus increasing their balance-sheet capacity and supporting further lending; (iii) offering investors well diversified portfolios of credit exposure, and scaling the provision of funds to small companies; and (iv) helping develop a more market-based financial system.


Banks do not find it profitable, both due to the credit risk embedded in lending to SMEs and to the capital charges imposed by regulation, to extend credit and securitize loans. Hence, some form of public intervention seems necessary. The ECB could announce a QE program directed at buying senior tranches of ABS or it could guarantee mezzanine tranches, for example.


Even though this program would be much more limited in size than a QE program of government bond purchases because of the limited size of the ABS market (according to ECB data, there is EUR716bn of eligible ECB collateral in the form of ABS, of which about EUR300bn has already been posted), it would still have the merit of making SME loans more attractive from the perspective of private investors and of sending a strong signal that the ECB is ready to prevent deflation by stimulating credit and the economy.

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madbraz's picture

They need to do it to remove periphery government bonds from their banks at attractive prices (before they crash and impair once again the banks).



agent default's picture

So what happens when the ECB gets impaired? 

cifo's picture


Practice your acronyms (or shorts, for that matter) ....

NotApplicable's picture

Here it comes!

As I keep saying, they have NO CHOICE but to go double or nothing (despite "market calming" rhetoric otherwise).

They're gonna add a few more zeros to everything...

...except our salaries.


doctor10's picture

at the end of the day both Draghi and Merkel know this waits around the corner

Dr. Engali's picture

He must of tweeted that because Twitter just had a quick turn around.

fonzannoon's picture

I see what you have been doing btw and I don't like it one bit. I too read what sun tzu said about sandwich bets and you have been following the rules to a tee. We only have a few days to go and you have been purposefully ignoring the fact that you are responsible for one of the most miraculous comebacks in history. My only chance now is if you start trash talking and spike the ball on the 5 yard line and do a touchdown dance. 

Dr. Engali's picture

Not going to happen my friend. I learned that lesson long ago. I was hoping this move down would have started a bit later. A massive short covering rally wouldn't surprise me in the least.

fonzannoon's picture

Hey so correct me if I am wrong, but I checked the other day and it looks like the bogey is $45.10 on the close of whatever day the 6th month mark is. That sound right to you? Also I heard you like Reubens....and cookies...

Dr. Engali's picture

Yep that sounds right. Although sadly I gave up chocolate for lent in solidarity with my daughter, so should luck be on my side  the wife gets the cookie ;(

fonzannoon's picture

There's always oatmeal (yes yes lets keep talking about your clear victory).

FuzzyDunlop21's picture

Fonz, you are my favorite commentor here

fonzannoon's picture

Thanks dude, if not for the camraderie on here I would have gone nuts a long time ago,

cifo's picture

You are not the only one (going nuts, waiting for the fcuking end) ....

Kaiser Sousa's picture

Pakistan has refused to sell gold worth $2.7 billion, citing national security reasons, as the International Monetary Fund (IMF) pushes Islamabad to convert the precious metal into cash to build foreign currency reserves, revealed the global lender’s report on Friday.

The report, prepared by IMF’s staff led by its Washington-based Mission Chief to Islamabad Jeffrey Franks, also spills the beans on the ‘$1.5 billion gift’ to Pakistan by ‘Saudi Arabia’ – the name Prime Minister Nawaz Sharif’s government has so far refused to officially share with parliament.

According to the report, the State Bank of Pakistan (SBP) holds over 2 million troy ounces of monetary gold, having $2.7 billion value at market rate. It is not counted in gross international reserves as it is not deemed to be liquid by the SBP, says the IMF.

The IMF and Pakistan authorities discussed what steps would be needed to make gold more liquid, the report adds. “However, the (Pakistani) authorities stressed that they have no plans to sell gold and preferred existing arrangements for gold holdings for national security reasons.”

Two-bits's picture

Sounds like a call for USAID.  


Pakistan has gold you say?

National Security you say?

Nuclear weapons you say?

Doesn't like America you say?


Time for a new social media program to help sway opinion.



magpie's picture

In this case the gold is truly a barbarous relic - a hostage and a pawn - Saudi Arabia threatened by Iran/Israel/USA/Russia - gold dissappears, nukes appear at Riyadh's disposal...

HRamos_3's picture

Add this to Tobin Tax and you'll get...

zjxn06's picture


I guess that wouldn't be so bad. /sarc

Dolus's picture

FAZ, says...You can't make this shit up. 

DavidC's picture

Mmmm, since the employment figures, the Dow has been up nearly 50 points, then down 80 then up 60 and now seems to be somewhere in the middle.

Confused? I am.


elwind45's picture

Not deemed to be liquid? Because it isn't in a trust agreement or its already being counted as LOST? Them SDR's may actually be worth something someday? Or how do you account for SDR when all members are printing in the basket? Gold perhaps NATO for sure

syntaxterror's picture

Why not just 'model' $100 trillion?

Spitzer's picture

This is just jaw boning to the keynesians.

Europe understands that it does not need to devalue the currency to become compaetative. Wages have fallen in the south enough nominally. It has the same undercutting effect while keeping the currency strong.


King Euro

LawsofPhysics's picture

As long as the supply lines hold...

(pretty fucking clear that Russia wants a new "deal")

same as it ever was...


NotApplicable's picture

In due time.

Or should I say, one zero at a time.

elwind45's picture

Test show adding food and energy proper to CPI gains that elusive inflation requirement and makes this an academics exercise or a way to kick can until that annual holiday on CAPRI?

falak pema's picture

That should make Renzi and Montebourg happy!

QE-ECB means Euro zone joins the easy money pump of trying to get the ECB to bypass the Mutti dictat of no easy money printing. 

Deflation in Eurozone is the ogre as the IMF says.

But how do you kick start a two headed economy which is daggers drawn behind the crumbling Euro facade; Euro at 1.40 or Euro at Par to Greenback???

Take your pickkkk!

When the party hottens up! 

Amish Hacker's picture

Remember a few years back when the IMF announced repeatedly that it was going to sell its gold "to help the poor countries?" Talk, talk.

kurzdump's picture

1. Tell those broken banks to buy shitloads of worthless bonds when everyone else gets rid of it

2. Print trillions

3. Buy those worthless bonds paying crazy prices

4. Broken banks fixed.


Luckhasit's picture

Good gravy Batman! It's like watching a train wreck, however we're watching it in slow motion like in the Matrix. 

You know what's going to happen, that's inevitable, no running from that.  But I'll be damned at how long they can play this out.

SheepDog-One's picture

Any politician or other magical wizard alchemists in the Kings Court who even suggests Q/E or debasement of currency for the short headrush it would provide an elite wealthy few should be immediately apprehended and executed. Such extreme consequences appear to be the only way to keep these maniacs in check.

LawsofPhysics's picture

History is very clear on one point.  This happens, but only once the supply lines break in earnest, and it is usually quickly ended by sending the sheep to die in a world war...


Quinvarius's picture

I am pretty sure their models show no inflation no matter what the QE.  They will call the business ending commodity price fixing they do "deflation", just like in the USA. 

NotApplicable's picture

What scares me the most is the inevitable inflation in farm land. Just last week locally there was an auction for prime river-bottom land, 40 Ac. with three machine sheds and irrigation went for $15k an acre to some out of state investment group.

Quinvarius's picture

As long as the Fed and Treasury pick commodity prices via futures interventions, farm land is a bubble.  You won't be allowed to make a profit.  You will get just enough subsidy to keep you a debt slave as they set the prices for your farm product.

In Rome, under excessive taxes and government theft, people just walked away from everything.  When people start to see the government is making their farmland nothing more than a burden, the prices will go into the toilet as they walk away too.  I invite you to look at the current state of gold miners.  Even as their product is flying off the shelves, they are not allowed to make a profit.  Rigged prices crush economies.

Clowns on Acid's picture

Of course the ECB wil print... how else are they able to Pay Russia for their Natgas and to pay for Ukraine's Natgas as well.

Once the Buba folds and allows even stealth money QE printing ... the jig is up and so is gold. What if Russia says that they would like to peg te price of NatGas to gold ?

walküre's picture

Bullish for Maserati, Ferrari, Bentley, Porsche, Mercedes S, BMW 7, Audi 6 which is approx. 2% of European car production. (don't worry, those numbers are sanitized after I've pulled 'em from where the sun don't shine just like .gov numbers so it doesn't matter, you all get the point)

Bullish for parking lot owners to accommodate excess VW, Fiat & Opel (all crap), Mercedes A, B, C, E (mostly crap) and BMW 3 and 5 (craptastic).

Buyers in China are on the retreat while US and Europe middle class can stick to window shopping. Lower class subjugated to riding subsidized public transportation.

QE Infinity until the alchemists and their pseudo (was there ever anything but?) Kings and Queens get burned at the stake.

NotApplicable's picture

I'm thinking it's Europe's turn to purchase Treasurys from China, et al.

Which will then be promptly rehypotheticated into bankster bonuses.

Then leveraged into overpriced cars and other fine, luxury goods.

walküre's picture

You got it. The global bankster circle jerk knows no limits as long as oil flows and cronies get theirs. Almost everyone else is a peasant and can suck it. Being asked to please applaud for the cronies when they wander among us. Some useful idiots in the mix with high salaried positions make good boot lickers of the elite. Naturally they will defend their status and the elite status quo. Until the peasants revolt and refuse to participate in the gig, the current pharaohs, emperors, plantation owners, kings and queens will have their good time with the masses. All depends on the overlord's level of expertise and sophistication. The peasants can only pray they get ruled by the most sophisticated overlord which is what the elite has trained them to do of course.