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The ECB Changes Its Mind Which Bonds It Will Monetize, Then It Changes It Again

Tyler Durden's picture




 

To get a sense of just how chaotic, unprepared, confused and in a word, clueless the ECB is about just its "private QE", aka purchases of ABS, which should begin in the "next few days" (but certainly don't hold your breath) - let alone the monetization of public sovereign debt - here is Exhibit A. Because if you were confused about what is about to happen, don't worry: it appears the ECB hardly has any idea either, because it was just on October 7 when 40 ABS bonds were dropped from the ECB's "eligible for purchasing" list. And then, just a week later, the ECB changed its mind about changing it mind, and reinstated 19 of the ineligible bonds right back!

Citi's Himanshu Shrimali explains the stunning flip flop that only the ECB could have pulled off without losing all its credibility (perhaps because it no longer really has any):

As straight forward as the details of the ECB’s ABS purchase programme (ABSPP) released on 2 Oct 2014 seemed, many market participants were taken by surprise on 7 October when about 40 bonds became ineligible under the central bank’s collateral framework and 19 of them were again reinstated on 15 October. We understand that the bonds were initially removed from the list of eligible securities because of inadequate servicer continuity provisions — a requirement which came into force on 1 October 2013 but had a 1-year transitional period until 1 October 2014. We believe the reinstatements occurred because the ECB had earlier misinterpreted the adequacy of servicer continuity provisions in these bonds.

 

Some of these expelled bonds, which include Spanish and Portuguese RMBS, have lost 2–3 points in cash prices, according to our trading desk. A similar tiering is evident in the broader ABS market with ineligible bonds demanding 40–50bp spread pickup over eligible bonds.

Don't worry though, and just repeat: "the bonds fell and rose not because of ECB frontrunning, or lack thereof, but because of fundamentals." Keep repeating until it becomes the truth.

But back to the "official" narrative:

One of the pre-requisites for an ABS to be eligible for the ECB’s buying programme is eligibility under the collateral framework. The collateral criteria have been amended several times over the years, and although the central bank provides a link to check the eligibility of a bond, the experience with the recently removed bonds shows the difficulties investors face in identifying the bonds that can potentially become ineligible. We provide a simple summary of the collateral eligibility criteria in this note and identify bonds that are at relatively higher risk of becoming ineligible under the ECB’s collateral criteria.

 

Eurosystem Collateral Criteria

 

The collateral eligibility criteria consist of a general framework and a temporary framework. The temporary framework was introduced after the GFC to decrease the constraints in ECB collateral eligibility in an attempt to support bank lending and liquidity in the euro area. Under the general framework, the ECB accepts senior ABS securities having the second-best rating of single–A1 or above while the rating threshold under the temporary framework is relaxed to triple–B2 provided the  bonds meet certain other conditions. We provide a summary of the collateral eligibility criteria in Figure 1.

 

 

As can be seen, the bonds that are rated single–A or above are eligible if they comply with the loan-level data reporting requirement and are not subordinated to any other tranches in the structure. Triple–B rated bonds, however, need to satisfy a few more conditions such as the servicer continuity requirement3 and also some additional collateral conditions listed in the above table. As such, many bonds that are currently eligible under the general framework may become ineligible following a ratings downgrade to triple–B if they do not meet the additional requirements of the temporary framework. Conversely, many bonds that are currently rated triple–B and are not eligible under the temporary framework may become ECB eligible once they are upgraded.

Remember when bond investment decisions were made based on such trivial, Old Normal things as leverage or interest coverage ratios, or heaven forbid, a covenant analysis?  That's all long gone: it has now been replaced, at least in Europe, with the "servicing continuity provisions" - so if you want to front run Mario Draghi, better get to know there:

Servicing Continuity Provisions

The servicing continuity requirement is the most ambiguous condition in the eligibility criteria because of its subjective nature and also because of a range of wordings in deal documents for servicer substitution. The conditions on collateral, on the other hand, are more objective and we believe that most eligible bonds satisfy them so we do not go into further details on them.

The ECB requires certain provisions in deal documentation to ensure timely servicing of the loans backing an ABS:

  • Provisions for a back-up servicer, or
  • Provisions for a back-up servicer facilitator to find a back-up servicer within 60 days of a trigger event, and
  • Triggers for the appointment of back-up servicer

The bonds that were removed from the eligibility list recently had some servicing continuity provisions in place but they did not meet the requirements prescribed by the ECB. Issuers of retained deals can amend the servicing continuity provisions in the documentation to make them ECB–eligible or can even appoint a back-up servicer if they intend to sell their retained bonds to the ECB. Permanent TSB, for instance, appointed a back-up servicer for its retained Fastnet 6 RMBS transaction in March 2011. Amending the documentation for placed deals, however, will be more challenging because it would require note holder approval.  Moreover, the associated costs of amending the documentation or appointing a back-up servicer or facilitator may dissuade many investors from pursuing such amendments. As such, we think placed bonds with inadequate servicing continuity provisions are more likely to become ineligible than retained bonds.

And the section everyone has been waiting for: the "Bonds at Risk of Becoming ECB–Ineligible", in other words, if you have been loading up on these in hopes the ECB will take them off yours hands, now is the time to dump, before everyone else figures out just how confused the ECB is:

The bonds that are currently eligible but have inadequate servicer continuity provisions can become ineligible if their second-best rating falls to triple–B. While core country ABS are unlikely to get downgraded to triple–B in the near future because of their current high triple–A rating, some peripheral assets that are currently rated single–A may be downgraded if collateral performance worsens or even due to the recent changes in S&P sovereign ceiling methodology (see European Securitized Products Weekly). We identify such bonds that are on the fringe of ratings threshold of the general framework and assess whether their servicer continuity provisions comply with the ECB’s requirements.

 

We shortlist 39 placed eligible bonds having the second-best rating of single–A–minus and examine the servicer continuity provisions present in their offering circulars. There are also 60 retained bonds that are currently eligible and rated single–A–minus but we do not analyse their servicing continuity provisions because the issuer may amend them if required. Our study of the servicing provisions of the currently eligible triple–B rated bonds and some other bonds which recently became ineligible helps us in judging the adequacy of the provisions of the shortlisted bonds.

 

We provide a list of our shortlisted bonds in the below table along with our view on the adequacy of their servicing continuity provisions. We also provide a justification for our view and a relevant comparable bond (if available) that has similar servicing arrangements in Figure 2. As the table shows, most Portuguese deals do not have any servicing continuity provisions. In Spain, on the other hand, the fund manager or the gestora is generally responsible for appointing a new servicer if the existing servicer fails to fulfil its obligations. As such, the fund manager acts as the back-up servicer facilitator. In some deals, the fund manager also takes over the servicing responsibilities until it appoints a new servicer ensuring that there are no servicing disruptions but a few deals do not have such provisions. In the latter case, there is no guarantee that the fund manager will appoint the new servicer within 60 days of the occurrence of the trigger event and we think such deals do not satisfy ECB’s servicing continuity requirements.

The table:

Finally, the inverse question: if the ECB could eliminate some 40 bonds on a whim, without warning, and simply because it did not read the fine print only to re-read it later, will it take another call from Goldman or BlackRock to make sure that anything that isn't nailed down (and is owned by Goldman and BlackRock) is eligible for purchase by the ECB? Here is Citi's take:

More Bonds to be Reinstated?

 

Following the ECB’s reinstatement of recently removed 19 bonds on the eligibility list, one wonders if there are more bonds that are can potentially become eligible. We analyse the servicing continuity provisions of the 21 remaining bonds that were removed on 7 October and find that most of them contain a backup-servicer facilitator but their deal documentation do not contain any provision to ensure the appointment of a new servicer within 60 days of the trigger event. Hence, these bonds are very likely to remain ineligible unless a back-up servicer is appointed or the deal documentation is amended.

 

We, however, find one exception — RHIPO 9 deal. A2 and A3 tranches of RHIPO 9 RMBS are ineligible even though the deal contains a pre-appointed back-up servicer (Banco Cooperativo). A closer look at the offering circular reveals that Banco Cooperativo will act as the back-up servicer only in certain circumstances. Although we could did not find the exact circumstances when the bank will act as the back-up servicer, we think the most probable reason why RHIPO 9 bonds  were removed is because the back-up servicer arrangement in the deal is not unconditional.

The bottom line: "the ambiguous wordings of the servicer continuity provisions in many deals and the recent flip-flop actions of the ECB show that the decision to assess ABS eligibility is not straightforward. The already visible tiering between eligible and non-eligible bonds will develop further once the ECB commences its ABS purchase programme so a clear understanding of the eligibility criteria is critical in identifying mispricing."

Said otherwise, in the new normal, the only advantage comes to those who know, ahead of time, if central bank X will buy what they have to sell. Everything else is noise.

 

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Sun, 10/19/2014 - 17:10 | 5353166 TeamDepends
TeamDepends's picture

Cut!!!! (facepalms)

Sun, 10/19/2014 - 17:20 | 5353200 summerof71
summerof71's picture

10 year will be below 2% by year end. Thanks Janet, Ben, Ruth's Chris, and EPSON.

Sun, 10/19/2014 - 18:25 | 5353343 Leonardo Fibonacci2
Leonardo Fibonacci2's picture

Draghi should go to the gallows!

Sun, 10/19/2014 - 19:12 | 5353482 NoDebt
NoDebt's picture

These bonds over here?  They're really valuable.  Now please buy them from us.

 

Sun, 10/19/2014 - 19:59 | 5353538 philipat
philipat's picture

The ECB just wants to bailout its Banks like the Fed did. If the Fed can be buying sovereign debt that nobody else (With the execption of "Belgium") wants and buying MBS debt that the Banks need to offload to stay afloat, isn't it only fair that the ECB should be able to do the same?

/Sarc Off

It really has come to that............................but, fortunately, Germany sees things a little differently and ultimately "He who pays the piper calls the tune".

Mon, 10/20/2014 - 01:41 | 5354276 TeraByte
TeraByte's picture

Prego Amigo

It is consistent with an old tradition to offer a silk rope to fix yourself. Should this option fail, first there after other means will apply.

Sun, 10/19/2014 - 17:39 | 5353247 dead hobo
dead hobo's picture

The ECB is doing it all wrong. They need to hire Goldman to tell them how to move all junk debt they own off balance sheet like they did with Greece before they joined the EU. They could make it look like a gain, then remit the gains to Germany, and a new crew at the ECB would have to deal with the issues after the bill came due in a decade.

Sun, 10/19/2014 - 17:49 | 5353271 Spitzer
Spitzer's picture

The forces behind the ECB are Austrians. They have this closet Austrian stance in the public but don't kid yourself.

 

King Euro

 

 

Sun, 10/19/2014 - 19:30 | 5353522 Remington IV
Remington IV's picture

ECB .... like giving a machine gun to a monkey

Sun, 10/19/2014 - 17:10 | 5353175 FieldingMellish
FieldingMellish's picture

Schizo central bank #winning!

Sun, 10/19/2014 - 17:28 | 5353194 THE DORK OF CORK
THE DORK OF CORK's picture

Little bit of info.

 

Ireland  is not seen as a republic as observed by the EU authorities.

This recent language of the fiscal treaty makes this clear.

 

(De Gaulle resisted Irish entry into the EU because we were not a sov entity)

 

 

TREATY ON STABILITY, COORDINATION AND GOVERNANCE IN THE ECONOMIC AND MONETARY UNION BETWEEN THE KINGDOM OF BELGIUM, THE REPUBLIC OF BULGARIA, THE KINGDOM OF DENMARK, THE FEDERAL REPUBLIC OF GERMANY, THE REPUBLIC OF ESTONIA, IRELAND, THE HELLENIC REPUBLIC, THE KINGDOM OF SPAIN, THE FRENCH REPUBLIC, THE ITALIAN REPUBLIC, THE REPUBLIC OF CYPRUS, THE REPUBLIC OF LATVIA, THE REPUBLIC OF LITHUANIA, THE GRAND DUCHY OF LUXEMBOURG, HUNGARY, MALTA, THE KINGDOM OF THE NETHERLANDS, THE REPUBLIC OF AUSTRIA, THE REPUBLIC OF POLAND, THE PORTUGUESE REPUBLIC, ROMANIA, THE REPUBLIC OF SLOVENIA, THE SLOVAK REPUBLIC, THE REPUBLIC OF FINLAND AND THE KINGDOM OF SWEDEN T/SCG/en 1

 

THE KINGDOM OF BELGIUM, THE REPUBLIC OF BULGARIA, THE KINGDOM OF DENMARK, THE FEDERAL REPUBLIC OF GERMANY, THE REPUBLIC OF ESTONIA, IRELAND, THE HELLENIC REPUBLIC, THE KINGDOM OF SPAIN, THE FRENCH REPUBLIC, THE ITALIAN REPUBLIC, THE REPUBLIC OF CYPRUS, THE REPUBLIC OF LATVIA, THE REPUBLIC OF LITHUANIA, THE GRAND DUCHY OF LUXEMBOURG, HUNGARY, MALTA, THE KINGDOM OF THE NETHERLANDS, THE REPUBLIC OF AUSTRIA, THE REPUBLIC OF POLAND, THE PORTUGUESE REPUBLIC, ROMANIA, THE REPUBLIC OF SLOVENIA, THE SLOVAK REPUBLIC, THE REPUBLIC OF FINLAND AND THE KINGDOM OF SWEDEN.

http://www.european-council.europa.eu/media/639235/st00tscg26_en12.pdf             As can be seen from official documents Ireland is neither a Kingdom or Republic.........................they were however happier times....................http://www.thejournal.ie/casual-snaps-show-charles-de-gaulles-irish-holi...

Sun, 10/19/2014 - 18:32 | 5353370 cifo
cifo's picture

And so are Romania, Hungary and Malta.

What does that mean, more precisely?

Sun, 10/19/2014 - 18:59 | 5353421 Wolferl
Wolferl's picture

The official name of that state is "Irland" and not "Irish Republic" or anything else. That´s why the official name "Irland" of one of the parties of the treaty is quoted in the treaty. The official name of Germany is NOT "Germany" but "Federal Republic of Germany", that´s why you find the later in the treaty. That´s all.

 

(Read Art. 4 of the Irish constitution)

Sun, 10/19/2014 - 19:43 | 5353537 THE DORK OF CORK
THE DORK OF CORK's picture

OK Wolf

Why was there no Amendment to the Constitution after 1948....the guys below might profess that the Irish executive is not really independent..................ps you should listen to the language of the executive when the irish people clearly don't want a water rent - its a use of language as a  management excercise rather  then   as a  government.

Again I can't describe how strange the system was under our "bankruptcy "  in 2010 - THe  CB gov came on irish state radio one morning and effectively overruled the prime minister.

Soon after he was gone.

Mon, 10/20/2014 - 05:55 | 5354428 Wolferl
Wolferl's picture

@ Dork

 

I´m very well aware of the fact that language matters, i hold degrees in law and politics. But in this case you are interpretating way too much into language. There are official names of states registered at UNO and those names get used in international treaties. The official name of the state of Irland is ... Irland. Because the Irish constitution says so. Using this name in treaties doesn´t mean anything else than this particular state is envolved. Gosh, imagine the EU suddenly using "Republic of Irland" instead, you and other euroskeptics would say that "Brussels" now even wants to dictate the names of states over the national constitutions.

 

If the Irish or you in particular feel that "Republic" should be part of the official name of your state fine, go ahead, change or ament your constitution. But don´t blame the EU or others for something that is a pure internal Irish thing.

Mon, 10/20/2014 - 07:49 | 5354512 THE DORK OF CORK
THE DORK OF CORK's picture

Sure - you are correct Wolf.

It is a internal Irish matter.

Tue, 10/21/2014 - 05:14 | 5358399 Razor_Edge
Razor_Edge's picture

Spot on Wolf;

Bunreacht Na hEireann (Constitution of Ireland)

 

"The State

 Article 4

The name of the State is Eire, or in the English language, Ireland"

"It may be noted that the designation "Republic of Ireland" is not the name of the State, and could not be in view of the express words of Art. 4 confining this to "Eire" or "Ireland". The statutory basis for "Republic of Ireland" in official usage is s.2 of the Republic of Ireland Act, 1948, which reads:

It is hereby declared that the description of the State shall be the Republic of Ireland."

Kelly, JM -The Irish Constitution - Jurist Publishing Co. Ltd. University College DUblin 1980 @ page 18

 

"Although Ireland was in fact a Republic, there was no formal declaration to that effect inserted into the Constitution in 1937 (note Article 5). Hence, Ireland's international status remained outside of the Constitution and when she was declared a Republic in the Republic of Ireland Act, 1948, no constitutional amendment was needed(Document 1),"

Cases and Materials on The Irish Constitution - James O'Reilly and Mary Redmond

Incorporated Law Society of Ireland 1980

 



Sun, 10/19/2014 - 19:25 | 5353488 THE DORK OF CORK
THE DORK OF CORK's picture

@Cifo

Don't  know about those other states (I guess Malta has a close British affiliation )

But we were told in school we were a republic since 1948.

I  know for a fact that De Gaulle did not consider us independent from the UK and blocked our entry to the ECC in the 1960s.

There is a group that claim the irish government is a provisional government and I am afraid everything that has happened in Ireland points to a middle management type operation rather then a sovergin entity

https://www.youtube.com/watch?v=lQpWSYEZHUo&list=UUX9xWGFjK0HyV7hVA0XaoOQ

 

I can't tell you how strange the apparatus of power is under stress from some hiddden power.

 

Sun, 10/19/2014 - 17:21 | 5353201 ronron
ronron's picture

this is called go with the flo unless a better bribe comes along. i meant bride. flo is a nice girl.

Sun, 10/19/2014 - 17:25 | 5353219 kevinearick
kevinearick's picture

Archimedes Screw

Capitalism, socialism, communism, fascism, and all the other isms, are phases of humanism, chasing its own tail, in boom and bust. The consensus builders didn’t invent the internal combustion engine, but they did commandeer it. Energy is only finite relative to empire. Whether you connect the circuit from and to nature is a choice.

1700 years and a dark age later, Galileo repeated the obvious aloud, that civil law, allowing the status quo of feudalism to determine the course of science, is stupid, and like Archimedes and his predecessors, Galileo was expunged for enabling economic development away from Rome. Archimedes not only proved that the earth was round, but also that gravity, like empire, was arbitrary, no astronomy required.

America has grown old and stupid, like every other government in History, which the others were only too happy to follow, printing into a demographic bust, with a convenient scapegoat when stupid repeated. The cleanest dirty shirt in a global economy spinning into fascism isn’t much of a goal.

If you think, there is no capital, to hoard, control, or redistribute, without labor; there is only dead inventory. And recycling dead inventory, faster and faster, with growing inflation at the entry margin and deflation at the FILO bankruptcy core, in a positive feedback loop of supply-side monetary and fiscal policy, can only result in fascism.

The fire in a crowded theatre analogy doesn’t work because the isms all crowd the theatre and compete to print supply-side debt, with artificial emergencies, by starting the fire, and grow increasingly anxious as the increasingly preempted response capability nears the inevitable real emergency.

CEOs/CAOs aren’t waiting to be exposed as frauds, by a fraudulent system, as the scapegoat, by accident, and they are not magically recycled by accident. Nothing was accomplished in the S&L crisis, except to grow the stupidity. That’s why the ‘banksters’ aren’t being prosecuted, and why they are all printing again, to no avail.

The governor has an elevator right across the road that has cost millions and still doesn’t work, by design. Until CA can’t float a bond, which will not happen under global QE, there is no exit, but Acts of Stupidity. The first thing you want to learn when you go skiing is how to brake. That bubble is a double-sided mirror, and you want to know which side you are on.

The critters are still choking themselves with RE inflation and the resulting income inequality. Until they get tired of doing so, you have much better things to concern yourself with than corporate outcomes. Communism doesn’t work in CA/China any better than it did in the USSR, and if the critters could exit by throwing a scapegoat on the barbeque, they would not hesitate to do so.

Whether the herd skates clockwise or counter is arbitrary. Identifying the artificial complexity maintaining the status quo is useful, but worth no more than 10% of your time. The bankers are just better at creating artificial emergencies than the monkeys they employ for the purpose. Applying, adjusting and releasing the brake is all you really care about, in the empire, a damsel always in distress that wants you to solve its problem, feeding it, until the day you die.

Take a look at the distribution of run-time compliance code and you will see the problemsolution. The critters create an emergency and offer you a loan, against your children’s future, as the solution, and The City is running out of fools to feed it.

Every moron wants to be your boss, and thinks that the leverage of majority rule is going to make that happen. Because your ancestors entered a contract made to be broken does not oblige you to do the same. Let the sharks eat each other.

The empire is an island. Whether you complete the economic mobility circuit is a choice, always up to you. Morons telling morons how to do stupid always ends badly, and you don’t want your name associated with the product. The clothing makes the ape. There are times when you are going to play the ape or the monkey, in a chain of the same; just don’t make a habit of it.

That pendulum exists in more than one dimension. Choose an exit/entry. If the vote doesn't matter, and you are pressed to vote, you are already passing communism, on the way to fascism.

Mon, 10/20/2014 - 00:33 | 5354215 tc06rtw
tc06rtw's picture

Could you repeat that, please ?

Sun, 10/19/2014 - 17:29 | 5353227 NoWayJose
NoWayJose's picture

As if the 'holders' of those ABS were playing the fiddle instead...

Sun, 10/19/2014 - 17:35 | 5353239 pcrs
pcrs's picture

Which bank has a position in these bonds and needs to dump them?

Sun, 10/19/2014 - 17:37 | 5353241 Fuku Ben
Fuku Ben's picture

At some point maybe they'll need to shore up junk bonds and add them to the list

Wouldn't want to accidentally allow something to trigger a system collapse before the one world government is ready to take over

Sun, 10/19/2014 - 17:48 | 5353268 Atomizer
Atomizer's picture
Red Lorry Yellow Lorry - Heaven

http://m.youtube.com/watch?v=i1nA4_SR-YQ

ECB is dreaming of Perpetual Debt Heaven. Fucking brussel clowns. 

Sun, 10/19/2014 - 18:16 | 5353321 THE DORK OF CORK
THE DORK OF CORK's picture

But the answer to all this [“sort of hopeless feeling”] is that these growing evils (and they have almost reached that limit after which the State breaks down) are not inevitable and arenot necessary—save [i.e., except, unless] under an anonymous system” (Hilaire Belloc, The House of Commons and Monarchy, p. 181—my bold emphasis added; italics in the original).

Sun, 10/19/2014 - 18:25 | 5353341 ekm1
ekm1's picture

Let me repeat this again.

 

Do you want to understand ECB?

 

Fine.

Learn about Target2

Sun, 10/19/2014 - 18:27 | 5353353 FredFlintstone
FredFlintstone's picture

Target2 might explode my tiny brain. Cliff's notes? Target2 for Dummies?

Sun, 10/19/2014 - 18:37 | 5353384 ekm1
ekm1's picture

http://en.wikipedia.org/wiki/TARGET2

The place where europeans pay each other

Sun, 10/19/2014 - 18:43 | 5353401 Renfield
Renfield's picture

Nice when the comments section sends me to research.

Found the following link:

http://soberlook.com/2012/02/target2-imbalances-reference-guide.html

Here's a bit from it I found interesting:

<<In this example the Greek central bank has to reduce "base money" while Bundesbank increases "base money" - effectively "transferring" cash from the Greek banking system to the German banking system (to pay for the truck). Simultaneously Bundesbank now has a future claim on the ECB while the ECB has a claim on the Greek central bank (effectively to reverse the "cash transfer" in the future). With significant periphery trade deficits, these claims have grown quite large.

The concern around TARGET2 imbalances is that central banks owe a great deal of money to each other via the ECB and should a nation drop out of the Eurozone, these liabilities may not be met. The ECB may then have to take a large loss. A mechanism for a nation's exit from the euro area was never developed.

But one question that few have asked on this topic is what is the net impact on base money in Germany vs. the periphery...By the same process the collateral held at Bundesbank is decreasing, while the same at the periphery central banks is rising. The collateral therefore is concentrated in the German banking system (banks get it back when they repay their central bank loans) and is trapped at the periphery central banks (who take it in when lending to their banks) - exactly where it is not needed.

One concern is that base money would start growing rapidly in Germany when banks stop reducing their central bank borrowings. If trade deficits continue to widen, this becomes an equivalent of a QE in Germany and potentially a tightening in the periphery - exactly the opposite effect of what's required. If this were China, the central bank would simply issue a note and force German banks to buy it in order to soak up the excess liquidity. However, there doesn't seem to be a legal mechanism in the Eurozone to address this issue.>>

So, I'm a regular J6P who don't play a finance professional on the internet. Therefore, it looks to me as though under this system, a quick 'rebalancing' of asset values could cause accounts in various ECB zones to swing wildly, perhaps kick off hyperinflation in Germany. But that's what I get as a regular J6P who don't play finance.

Clueless, but hoping to see some discussion from those more informed. Also, I am not clear enough on Target 1, which looks to me kind of like your basic SWIFT system, not so much about valuing assets as simply facilitating transactions across borders. But I'll shut up now since it's obvious this is over my head, and hope that you or someone else can chime in with enlightening replies.

Sun, 10/19/2014 - 18:51 | 5353410 ekm1
ekm1's picture

Greek buys a truck

The german manufacturer gets paid in germany

 

Greek central bank owes money to german central bank.

 

Two options:

1) Greek economy produces something to export to germany

2) ECB buys greek bonds thus creating euros and pays german central banks thus german state (pensions etc) being paid with greek bonds, not with real output.

 

Germany just said 'nein' to that option 2 by opposing ECB QE.

Sun, 10/19/2014 - 19:06 | 5353453 Renfield
Renfield's picture

Thanks, ekm, won't take much more time here since I want to shut up and think about it for awhile. BUT, even your reply raises further questions in my mind.

If Germany refuses Option 2 but the ECB (Italy? France?) insists on it, does the EU have a third option? (I'm gonna assume No.) If not, would this stalemate effectively break up the EZ?

If Germany accepts Option 2 (and would it come down to 'accept it or break up the EZ'), how great is the risk to their currency, and how soon could we see 'de-euroization'?

If Option 1 means that only a little output gets valued at very high prices (b/c productivity of real assets is so low -- apart from bonds, etc.), then is that not the same as a big euro devaluation?

Don't want to waste your or anyone's time so I'm just commenting these as my initial thoughts. No need to answer if these are stupid or unclear questions. I'm sure I'm all wet on this topic. I will eagerly watch any further discussion on this topic, though. Meanwhile, I'll need to do some research so that I know WTH people are referring to with these comments, to approach them with a real understanding next time.

Sun, 10/19/2014 - 19:08 | 5353476 ekm1
ekm1's picture

I don't see germans working so hard to maintain italians and greek lifestyle

Sun, 10/19/2014 - 18:31 | 5353362 THE DORK OF CORK
THE DORK OF CORK's picture

In the UK the parliament  is the Oligarchy.

 

https://www.youtube.com/watch?v=e2VuElk5_Bg

 

 

At 6.00 - "In the UK the parliament is sovergin ,in Iceland it is the nation."

 

We are clearly dealing with the total  bankrupcy of the British / Dutch scarcity system.

Ireland is a sort of weird  hinterland to inflate (the uk looking for a yield) and deflate (the UK wanting real goods)

It is now having difficulty mobilizing the irish for its own ends and must now therefore replace the population via a another plantation as quickly as possible.

Sun, 10/19/2014 - 18:49 | 5353413 sbenard
sbenard's picture

Economic alchemy: junk becomes gold!

Sun, 10/19/2014 - 19:16 | 5353493 bentaxle
bentaxle's picture

Baffle the sheeple with bullshit, works every time!

Sun, 10/19/2014 - 19:22 | 5353503 smacker
smacker's picture

Draghi is in a mess.

As Jens Weidman said last week, the ECB has become politicised and by extension Draghi is desperate to find ways to please his masters. Enter ECB QE. It's just that he's not sure what EZ junk to buy. Too much to choose from.

Sun, 10/19/2014 - 19:55 | 5353579 Pumpkin
Pumpkin's picture

LoL!  And yet, people still buy it.  No wonder evil works so well.

Sun, 10/19/2014 - 19:59 | 5353600 fibonacci's claus
fibonacci&#039;s claus's picture

we need to start calling draghi "fraulien fraud"

that is pure and simple fraud

cooking the books

the books are cooking

Sun, 10/19/2014 - 20:11 | 5353630 Keltner Channel Surf
Keltner Channel Surf's picture

draghi  (“DRAA-ghee”) defn:

noun:  a rare mutant cricket whose males, unable to mate, still produce the loudest chirp in the genus.  (e.g., “A splendid find!” gushed the entomologist to his grad assistant.  “The stridulation of your Sterile Blue Draghi specimen should create quite a buzz at this year’s Bugapalooza conference.”)

verb:  a dogged attempt to influence behavior through repeated bluffing.  (“Your father’s just draghiing,” said the mother to her tearful teenager, “he could never ground you for life without my approval.”

Sun, 10/19/2014 - 20:27 | 5353677 THE DORK OF CORK
THE DORK OF CORK's picture

  . "For the defination of "The Aristocracy" in  a Aristocratic State is not a body recruited by birth or even wealth ,not a caste (although it may well be a caste) least of all a plutocracy , but essentially a oligarchy enjoying the peculiar respect from its fellow citizens.

 

Upon the failure of the aristocratic quality of the house of commons........upon the decline of that body into a clique no longer respected

Its moral authority disappeared  , and with that moral authority disappeared its power of government.  "

Belloc

This is the situation approching us within the Irish state - that is why the apparatus of goverment wishes to change tack in its management of Irish water which is becoming a lightening rod for the Irish people. 

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