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Someone Didn't Do The Math On The ECB's Corporate Bond Purchasing "Trial Balloon"
While we understand that following the biggest market rout in years, it was all up to the central bankers to do everything in their power to restore confidence in the market's upward trajectory in a time when there are only 2 POMOs left under the Fed's soon ending QE3 program, which explains not only last week's 2 QE4 hints by FOMC presidents but also yesterday's ECB "leak" via Reuters that the central bank is contemplating launching corporate bond buying as soon as December. A leak which sent the market soaring to its best day of 2014. And while we give the European central bankers an A for effort, we can't help but wonder if someone did a major mathematical error when calculating the "bazooka impact" of yesterday's leak.
The reason: the same one we have cautioned about ever since 2012; the same why as we also explained in August the ECB's ABS QE will be grossly sufficient: Europe simply does not have enough eligible, unencumbered collateral in the private sector which can be monetized by the central bank (the same issue that the Fed itself was forced to taper QE once its holdings of 10 Year equivalents hit 35% as we showed last year and the TBAC started warning about gross bond market illiquidity). This goes back to a different issue, namely that Europe historically has funded itself on a secured basis, where the loans are kept on bank balance sheets (and serve as deposit collateral) unlike the US, where the primary source of corporate debt is through unsecured borrowing directly from lenders. We have shown all this before:
Our summary from March 2012 was as follows:
What is immediately obvious here, is that unlike in the US, where these are less than 30% for corporates, in Europe, bank loans account for nearly a whopping 90% of total corporate funding! These are secured, LTV loans, made by banks, and not syndicated, which means they are kept on the banks' balance sheets. As a result the bulk of Europe's assets held by levered entities, are already encumbered through existing security arrangement in the debt market (recall that bond debt is for the most part unsecured, and is thus a junior piece to secured bank loans). It also explains why European banks have to scramble to find new assets which they can "pledge" to the ECB in exchange for some additional cash to plug this liquidity shortfall hole, or that.
And because we understand that few have actually done any math behind the ECB's leak, here it is:
According to Barclays, based on the iBoxx Euro Corporate Index, there is €495bn in par value of unsecured, senior non-financial debt outstanding from euro area issuers (Market Value €563bn).
In addition there is €271bn in par value of unsecured, senior financial debt from euro area issuers outstanding (Market Value €300bn). The rating and tenor breakdown of the outstanding universe of bonds is shown below.
According to Barclays the reason why nobody else appears to have done the math, is because the ECB itself screwed up the numbers:
We note that these numbers are significantly different from the numbers reported by the ECB. The central bank reports €1.4trn of marketable corporate bonds and €2.2trn of uncovered bank bonds as eligible collateral at its operations. However, this includes MTNs, CP and guaranteed bonds. Starting from the ECB’s collateral list, instead of a broad-based index, we estimate the stock of corporate bonds at €177bn of non-financials and €321bn of financial debt (excluding Landesbank). This is much smaller than the “headline” figure, but also materially different from our index-based estimate, on the non-financial side.
Barclays' conclusion on the stock of eligible monetizable corporate debt: "Overall, we estimate the upper-bounds of potential bonds that might be in “scope” for an ECB purchase programme at €560bn of non-financial and €320bn of financial bonds (taking the iBoxx and ECB derived estimates, respectively). This falls to €240bn and €220bn if BBB-rated bonds are excluded."
It doesn't get any better when one looks at recent trends in net issuance to determine which way the collateral will move in coming quarters and years:
net issuance from financials has been negative in the senior unsecured €-IG space for the past four years, while net issuance from non-financials has been positive. Ex. Subordinated transactions, the average monthly net flow over the past two years has been: +€5bn from non-financials; and -€10bn from non-financials
In chart format:
Ok, so there is roughly about €750 billion in eligible (non-fin and fin, even though the ECB will almost certainly just do the former) bonds that can be bought? Why is that a problem: can't the ECB just go out and buy them all in one massive BWIC in its holy quest to boost its balance sheet by €1 trillion (apparently the magic number that will get those record youth unemployed in Spain back in jobs).
Well no. Here is JPM with the missing link which has to do with market liquidity and how much the ECB would actually be able to buy without soaking up all bond market liquidity:
It is unlikely that the ECB would buy subordinated bonds as these are not even eligible as collateral in its refinancing operations. That leaves €750 billion of nonfinancial corporate bonds that the ECB may consider buying, around €500bn of which is issued by European corporates. Market turnover may currently be around 2.5% of outstanding (after correcting for double-counting in the turnover data) and the ECB may be able to purchase 10-20% of this turnover. In addition, the ECB could also go into the primary market, buying 10% of new deals (from a total gross issuance of almost €20 billion per month recently). Such considerations suggest that, as a rough guide, they could purchase around €50 billion over a one year period under current market conditions, and perhaps as high as €100 billion if purchases improve market conditions, raising turnover.
So... the entire mega ramp yesterday was over an ECB monetization leak that boils down to a whopping €50 billion ($60 per year) or a tiny $5 billion per month, which is $15 billion per quarter?
Keep in mind at its peak in 2013 the Fed monetized $85 billion per month, while the BOJ added another $75 billion or so in its QE. So as the Fed is about to completely pull out of the "flow injection" market (even as the BOJ still pushes on with its existing remit which as a result of soaring non-wage inflation will certainly not increase any time soon) it will be replaced by $10 billion or so in ABC/Covered bond purchases and another $5 billion per month in corporate bonds?
And this is the best Hail Mary pass that the central planners could come up with?
All of this is critical because as Citi explained over the weekend, in order to keep the market from crashing, central banks need to inject at least $200 billion per quarter:
For over a year now, central banks have quietly being reducing their support. As Figure 7 shows, much of this is down to the Fed, but the contraction in the ECB’s balance sheet has also been significant. Seen from this perspective, a negative reaction in markets was long overdue: very roughly, the charts suggest that zero stimulus would be consistent with 50bp widening in investment grade, or a little over a ten percent quarterly drop in equities. Put differently, it takes around $200bn per quarter just to keep markets from selling off.
In other words, the "mega-leak" from the ECB will hardly scratch the surface in terms of the required liquidity injections, and certainly will be insufficient if at some point in the coming year, the BOJ finds it too has run out of collateral and is forced to wind down its own QE.
So after actually doing the math we wonder: how long before the market realizes Draghi's latest bazooka was another water pistol, and how long until Reuters is forced to go with the nuclear leak - that the ECB is now considering monetizing ETFs and, gasp, stocks.
Because that, ladies and gentlemen, is the endgame here.
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"Someone didn't do the math". Yep, definitely a liberal....
But maybe they did do the math. Its called "Common Core". You know, where 1 + 1 = 3 if you put forth the effort to find the an answer, any answer.
[REDACTED]
Liberals can't do math, silly.
How does that red team/blue team hook feel hanging out of your mouth?
Which team was the more liberal one, again?
the rainbow hook
Listen Fly,
The American "TEA" party are defiantly full of Liberals.
"YOU" have to vote for the USSA Black-ISH party the Democrats. That way you can retire and get a check from USSA government.
Why do you come to this site? Faggot.
By liberal, you mean libertarian?
I don't know bout that.
I've got that hook in my mouth. And yet the pain of it is not enough to distract me from the fact that liberals can't do math. Blue states know that liberals can't do math. Red states know liberals can't do math. Libertarians know that liberals can't, or won't, do math. Red, blue, yellow - liberals can't do math. No hook necessary.
Don't get caught up in the Red Blue, Democrat Republican. They are both heads on the same corporate monster. Its a distraction.
Regan ran up the deficit more than any other recent president, and Bush cut taxes while fighting 2 wars of choice, after Clinton left him a surplus. Both Republicrats and Demopublicans can do math and spend money for the sake of corporations.
Dems and Repugs are one thing - but let's not pretend there is no difference between the Progressive Left and statism, and libertarianism and paleo conservatism.
I'll change my mind when there's a viable 3rd party. There won't be a viable Libertarian party until it expunges the ideologues - the anarchists and people who quote Ayn Rand all day.
But then, "playing politics" is deemed apostasy by many of ZH's hipper than thou self-declared guardians of libertarianism. Anarchy could work - people just need to basically all be much better than they seem to be - self-interested creatures that they are. Meanwhile, the 2 parties maintain absolute dominance because the Greens and Libertarians think 'compromise' and 'pragmatism' are four letter words - guaranteeing that no partisan voter who might be tired of their party would even consider voting elsewhere.
Which is why we can't have nice things.
I tried the paleo diet once. Love the meat...
Just a bunch of fake words describing friggin politicians who will do anything for anyone who pays
So, yer argument is that the Libertarians should become more like the Decepticrats and/or Republicons in order to get anywhere in the polls.
Here's a better idea, LEAVE the Decepticrats or Republicons and vote for some other party(s), or do ya just want to prove how insane you are (by the doing the same thing over and over)?
War is peace, ergo the Nobel Peace Prize winner who has expenaded Bush's wars to more countries and is arming Al Qaeda and ISIS
It only works on way around here in right wing world.
2 + 2 = 5
"In the end the Party would announce that two and two made five, and you would have to believe it. It was inevitable that they should make that claim sooner or later: the logic of their position demanded it. Not merely the validity of experience, but the very existence of external reality, was tacitly denied by their philosophy. The heresy of heresies was common sense. And what was terrifying was not that they would kill you for thinking otherwise, but that they might be right. For, after all, how do we know that two and two make four? Or that the force of gravity works? Or that the past is unchangeable? If both the past and the external world exist only in the mind, and if the mind itself is controllable — what then?"
"1984" by George Orwell
....but 1 + 1 does equal 3 for high values of 1. (Yes, I'm an economist).
Listen.
I realize that was an insult to the "Common Core". But in America it is the best way to educate a group of stupid idiots.
It is a known fact that African Americans have, as a group, much lower IQ's. When America decided to mix those black people in with the whites, the whites out scored them in everything but athletics and rapping/dance.
So whats an Oligarch to do? Mix them and let the whites suffer.
You are correct, but in Europe, it is politically not correct to state this. I live in South Africa, and I can corroborate your point of view. We have a joke here : what's the difference between a tourist and a racist? Answer : 2 weeks.
Perhaps the equation was written on an arm, and smudged?
Since when do facts make any difference when it comes to market performance? Facts were deemed "irritating" in 2008, and were systematically eradicated from investment decisions.
Draghi's got a big wad in his pocket. One big note on the outside, and singles underneath.
pods
Listen Pods.
I use to visit USSA strip club on special occasion with American friends when I worked in Research Triangle Park. At strip club I would tell stupid American girls that I was middle east oil sheik and pull out big wad of USSA confetti. The wad was (quantity)1 - $100, the rest underneath was single dollars.
The strip girl was soon on her knees. Haha! Stupid! So well conditioned.
She was on her knees looking for that small indian penis... She had to get out a magnifying glass...
O/T WSJ Headline: "Airline Passenger Taken to Newark Hospital Has Not Tested Positive for Ebola"
What exactly does this mean? Not tested, negative test result, result not back from lab?
Just semantics? Why not say "tested negative" or something that confirms a "negative for Ebola" test result.
One more peep out of you and it's off to Stalag 17.
...more like Stalag 13...you know, the one with Klink and Schultz
William,
Brilliant!
DavidC
MUPPET DETONATOR!!
LMFOA!!
if they don't print the money now, they'll print in later.
this is going to war, civil and international war. it will take years, possibly dcades .but the imperial wars of the west are coming home
The Germans are at the helm. The ECB can do nothing without their blessing. If the Germans pull out, the EU and EBC is toast
meh
The math probably went like this: You pass this and we'll give you this bag of money.
If I owned a small biz in aniother state, I'd pick an accountant to run it over an economist - every time.
So note that when corps borrow from banks - that means new currency is created via checkbook creation, or {I prefer} ledger creation. Not so when they borrow from some entity sitting on capital.
The new euros are mostly going to stay in europe - or go to Russia for gas or to China for cheap electronics, clothing, and Ebola vaccines.
Monetizing corporate debt? That's precisely what is mostly happening in Europe. The Eurozone is good and fucked.
Good time to talk about repudiation. Good time to talk about ending private central banking.
This market is the greatest Ponzi I have ever seen in my lifetime.
Everybody still gambling with these corrupt moneychangers and prostitutes which are all in one bed - deserves to be fucked and fleeced and enslaved.
I refuse being part of the game of this stinking shitplace of the global banksters mafia - while zillions suffer because they can not afford food and energy and a home anymore.
At some point one has to know what is right: talk the truth and do honest work - and what is wrong: being in the same dark pool with these evil sharks - similarily trying to steal money from some other fucker.
It is absolutely clear why Jesus threw out the money changers - because they are trying to steal money from whoever starts listening to them. Today - "money changers" where ever you look.
At some point one has to decide: to also be part of the evil life, blood and soul suckers and vampires - or to stand strong and tall and follow the way of truth and honesty and the way of the truely aristocratic ethnics and moral of the founding fathers - and build a new garden and a new house and a new life style.
Everything else is just a show anymore. Glittering and with 24 x 7 x 365 sweet sweet talk - while below the surface the human race is a miserably failed experiment and has never left stonage. Neither the "we can never ever get enough 0.01%" - nor the still lazy, dumb and ignorant 99.99%.
It is time to wake up. And to decide on whether to continue to be part of the criminals - or to choose a different way.
Great article. Thanks Tylers.
"(the same issue that the Fed itself was forced to taper QEonce its holdings of 10 Year equivalents hit 35% as we showed last year and the TBAC started warning about gross bond market illiquidity)"
Wasn't that when we got those great charts from Stone McCarthy? Nope that was 2012. Did Stone ever update those charts?
https://www.youtube.com/watch?v=QWMCWAqPnoQ
https://www.youtube.com/watch?v=rOhSYd3lpaY
Bottom-line is the debt is overwhelming. If the economy was healthy and balanced we would not be experiencing slow growth while massive amounts of money are being printed and poured into the system. The crux of our problem remains in the fact that both people and governments have lived beyond their means by taking on debt they cannot repay.
Over the last several decades we have created entitlement societies built on the back of the industrial revolution, technological advantages, capital accumulated from the colonial era, and the domination of global finances. Promises were made on the assumption that the advantages we enjoyed would continue in both Europe and the US. Ever greater prosperity and entitlements were to be sustained through debt financed consumption growth. In that eerie fantasy world, debt fueled consumption was to be the catalyst to bring about evermore growth. Debt does matter and the following article delves deeper into why kicking the can down the road will ultimately fail.
http://brucewilds.blogspot.com/2014/08/modern-monetary-theory-is-wrong-d...
So I get my clock cleaned on Tuesday (21 Oct) from the meltup and find it is Reuters news market manupulation?
Did the "reporter" buy calls through his buddy before he "leaked"?
I wish the SEC employees would start earning their money