No QE Coming From The ECB
On Monday we posted "Goldman Says European QE Will Come In 2015 At The Earliest, If At All" in which we showed for the latest time that Europe's grand delusion that 'QE is coming" (a rumor originated late last year by none other than a French bank) and all of which has already been fully priced into peripheral bonds and local stocks by now, is nothing but yet another massive bluff by the former Goldmanite and current ECB head who has taken lying about the future to a whole new level. Today Reuters confirms as much when it reports that while the ECB may ease modestly (a step which will achieve nothing to unclog the loan creation pathway to private companies), it will not undertake QE at this point.
Reuters, in an exclusive (apparently the ECB's favorite mouthpiece is not happy that the WSJ got the market moving scoop yesterday) reports first what the ECB will do:
Five people familiar with the measures being prepared detailed plans involving a potential rate cut, including the ECB's deposit rate going negative for the first time, along with the targeted measures SME measures. The package offers some stimulus for the euro zone economy but falls short of the large-scale effect the ECB could unleash with a major program of quantitative easing (QE) - money printing to buy assets. Such a QE plan is still some way off.
A June rate cut is "more or less a done deal", said one of the five sources who spoke to Reuters on condition of anonymity.
A second source echoed that sentiment, and added: "This will be the first major central bank to move to a negative deposit rate. That would move the exchange rate."
The first two sources spoke to Reuters of a cut of 10-20 basis points, probably in all three ECB rates. The main refinancing rate is currently at 0.25 percent.
Both sources expected the move to bring down the currency exchange rate but said the ECB had made no calculation of how much it was likely to fall by, and had no target for the euro.
But not just cutting rates:
Should it decide to cut rates, the ECB is looking at also deploying either a targeted long-term loan operation, or LTRO, or else announcing a purchasing program to buy asset-backed securities (ABS) comprised of bundled SME loans.
The targeted LTRO, which ECB staff have been working on for weeks, would come with conditions attached on achieving a measurable increase of banks' lending to SMEs. The operation could be even longer than 3-year LTROs the ECB deployed in late 2011 and early 2012 to head off a funding crunch.
As an alternative to the targeted LTRO, the ABS purchase plan would see the ECB buy bundled packages of SME loans. This could be announced in June with a view to coming into operation late this year, two sources said.
The idea behind this second option is to build the market in Europe for SME loans bundled as ABS, with a view to making it larger and more liquid to aid the flow of credit to the smaller firms that form the backbone of the euro zone economy.
While developing this purchase plan, the ECB is also lobbying banking regulators in Basel to loosen the capital requirements on banks holding high-grade ABS.
How an LTRO - the same LTRO which merely deepend Europe's deflation and totally collapse traditional lending will help boost lending we don't know. And we certainly don't know how an ABS plan will assist with lack of loan demand in Europe - an issue which has nothing to do with "capital requirements." It seems the ECB doesn't know either.
One of the five sources said the ABS purchase idea was on the table but, because it would take time to make it operational, the measure might not be announced in June.
But the reason why European stocks are not happy this morning, and why bonds are bid to levels not seen since 2013, is due to the "great unrotation" resulting from disappointment with what we have been warning would happen for months. Namely: No QE.
To deal with problems transmitting its policy to all parts of the euro zone, he said the bank could deploy an LTRO targeted at encouraging bank lending or an ABS purchase program.
Under a third scenario of a deterioration in the medium-term inflation outlook, Draghi said on April 24 the ECB could respond with a "broad-based asset purchase program" - potentially QE.
However, just a few days later - at a meeting with German lawmakers - Draghi played down the prospect of QE any time soon.
"He mentioned quantitative easing in this context but made clear that we're still some way off QE," a source who attended the meeting with German lawmakers said.
One of the sources who spoke to Reuters for this story also said QE was some way off but another said he could imagine further measures potentially being examined later this year.
"It's not QE yet," the source said of the package being prepared for June. "This is now, and autumn is later. You could think about some more things then if it is well prepared."
Of course, this makes perfect sense: after all why should Europe do QE when the effects of QE have been fully priced in (for those confused see Spanish and Italian bond yields). The question is what happens when all those entities that have loaded up on peripheral bonds in hopes of the greatest fool out there, the ECB, would buy the toxic biohazard from them, realize they have been punked again. And how long until the risk market selloff translates into a European triple dip recession. 3-6 months seems like a fair estimate.
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