Draghi's Looming "Anti-Integration" QE: It's The Structure (Not Size) That Matters

Tyler Durden's picture

Via Scotiabank's Guy Haselmann,

ECB QE – Design Matters More Than Size

The basis for this note is to comment on market expectations that are developing for next week’s ECB meeting.

Der Spiegel wrote a note Friday stating that Draghi presented a QE plan to the German Government. The details were written up in a Bloomberg note as follows:

ECB President Mario Draghi presented German Chancellor Angel Merkel and Finance Minister Wolfgang Schaeuble with his latest ideas on quantitative easing at a Jan. 14 meeting in Berlin, Spiegel magazine reported, without saying where it got the information.


At this stage, ECB plan envisages national central banks buying debt of their country to avoid risk transfer between member states


Plan envisages 20% to 25% percent limit on purchases of each country’s debt


Greece will be excluded from QE because its debt doesn’t fulfill necessary quality criteria


Dutch Governing Council member Klaas Knot supports putting national central banks in charge of QE implementation. Knot says “if each central bank was only buying debt of its own country, the danger of an unwanted redistribution of financial risk would be lower. Says “we have to avoid that decisions are taken through the back door of the ECB balance sheet that have to continue to be reserved for elected politicians in euro-area countries” By keeping the risk of government-bond purchases at the national level, the ECB would show that it is “exclusively concerned about monetary and not fiscal policy”.

Below is how I interpret, and would subsequently trade, such a plan:

Aggressive ECB QE is priced-in and is expected, principally because markets have historically come to realize that Draghi rarely disappoints. The above plan would seemingly qualify as ‘over-delivering’ because the total size may be as high as $1.4-$1.7 trillion, while expectations were recently lowered from $1 trillion to $500 billion. The $1.4-$1.7 trillion number is roughly obtained by taking the 20% and 25% limits and applying them to the various country debt levels and adding up the totals (see Bloomberg page WCDM).


Nonetheless, there are more important factors than merely looking at the total size of the QE program(s).

There is a low, yet non-zero, probability that Draghi cannot muster the votes to deliver a sizable plan and markets end up with something that disappoints, or is delayed without sufficient detail to appease markets. Should the disappointment be great enough, there is some non-zero probability where Draghi chooses to resign.

The risk/reward of such possibilities - despite the low-probabilities - is good, because of how perfectly priced markets are, and how one-sided are the expectations.

More importantly, the greatest probability in my opinion, and the only way I believe Draghi can retain enough votes, is for the Council to reject risk sharing (as suggested in the Der Spiegel article). This means QE will be implemented by the National Central Banks who would be responsible for the purchasing of their own debt.

I believe this structure is of critical importance, because unlike other ‘bail-out’ structures, such an action is anti-integration. It would be a step back-ward; a step away from being a union.

Movement towards, or away from, being a union is what has driven the binary aspects of EU sovereign debt spreads for many years. In other words, debt spreads are binary in that they will either converge (union) or diverge (anti-union). Therefore, I believe the structure of ECB QE will ultimately prove much more important than the size of the program.

I believe an excellent trade prior to the ECB meeting (early next week) is to buy US Treasuries in 10’s or 30’s and sell the EU 10 year sector (particularly in Spain, Italy, or even France). For those looking for a cleaner trade, I believe the US/Bund 10 year spread will drop to 80 basis points in the next few months.

Another risk for European markets stems from the Greece vote and discussions around their debt levels. Since they are basically shut out of capital markets and Finland has stated it is adamantly against debt relief, it presents an obstacle, real risks, and the potential for Grexit (the word that every hates).

On a separate but relevant note, the Swiss National Banks has exposed credibility issues of over-burdened central banks. The biggest bubble may not be in stocks or bonds, but rather in the credibility of hyper-active central banks. The SNB basically broke a promise to the market. Markets feel misled. There will be long lasting implications going forward for all central banks. Moreover, the second order spill-over effects from P&L losses and margin calls will be likely be evident in markets for many months.

In general, central bank’s (CBs) are over-promising on what they can likely ultimately deliver. For example, CB’s historically have been able to stop inflation by hiking, but it is unproven that disinflation can be arrested (or inflation created) by cutting rates or printing money; and the long-run negative unintended consequences of attempting extraordinary measures to do so have yet to take hold.

The bottom line is that I believe one of the best trades of the year is shaping up to be the EU periphery divergence trade.

In the meantime (and supporting my bullish US Treasuries view), foreigners (especially Europeans) will prefer buying US Treasuries over European debt until they perceive the upside/downside to the EURO as being balanced. It is unlikely this balance will materialize with an exchange rate, say, above parity. Therefore, a Treasury long against the periphery could turn out to be an outstanding trade.

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pods's picture

With thew Swissies abandoning the peg, does this mean that they might, for real this time, unleash the Holy Hand Grenade of Antioch?


Haus-Targaryen's picture

Absent something somewhere going boom -- 

The EU Federalists will use the coming EU financial crisis (the same from from 2012 that has been kicked down the road while exaserbating the problems) to push for a "USE" similar to the American system.  

Something unexpected needs to break to prevent this that is sufficiently large.   

El Vaquero's picture


I believe this structure is of critical importance, because unlike other ‘bail-out’ structures, such an action is anti-integration. It would be a step back-ward; a step away from being a union.

Multiculturalism!  It's what's for dinner, BITCHEZ!


Fucking hell, let the Greeks be Greek and let the Germans be German. 

Greenskeeper_Carl's picture

agreed. I kinda hope they do QE, just get it over with. The people of europe will be better off once the euro and EU are gone, and this will probably speed up the process. I did just buy me some euros though....shiny ones. ill pass on the USTs

NihilistZero's picture

If they QE on a sovereign (and I use that term very loosely) by sovereign basis doesn't that hold the ship together a little longer?  I'm all for the EU destroying itself so the citizens of the various nations of Europe can be unshackled, but how does this speed up that process?  Doesn't no QE really force the hands of the nations closest to leaving?

Greenskeeper_Carl's picture

It could go that way, i suppose. I was thinking along the lines of nations who weren't included in the QE leaving sooner. If the weaker nations like greece aren't getting their free shit, they might up and leave sooner. It could also cause a further divergence of the weaker nations from the stronger ones. Once one country leaves, it will start a chain reaction. You very well could be right, but i think the citizens of the weaker nations not included in bond monetization will push more of the anti-EU/euro parties into power which will speed this up.

NihilistZero's picture

If the weaker nations like greece aren't getting their free shit, they might up and leave sooner. ...I think the citizens of the weaker nations not included in bond monetization will push more of the anti-EU/euro parties into power which will speed this up.

Seems to me that the "weaker" nations are being held in the EU by their Oligarchs who still benefit from the Union.  Soverign QE within the EU doesn't preclude the individual countries from propping up the power brokers in the weaker ones.  We know the whole thing is a circle jerk and that Germany (specifically Deutsche Bank AG) needs Greece to pay the interest on the debt they foolishly loaned them. 

Your thesis is based on popular democracy being a real thing in those weaker countries, it's not.  If it was the EU would have been kicked out of Greece years ago.

Greenskeeper_Carl's picture

i agree with you for the most part, and yes this whole thing is a circle jerk. I dont think anything is happening anytime soon. the greeks will get their bailout becuase all those big european banks are holding billions in greek debt. the greek bailout is really just another bank bailout, since if greece defaults it would wipe out all those balance sheets, ruining the illusion of solvency. However, when enough people get angry enough, greece, or one of the other ones, are going to demand to leave the euro. Ive never been a big believer in popular democracy, since i don't like being forced to do whatever the braindead masses say I should do(usually it involves giving up your rights, liberty, freedom, and money), but if it doesn't happen through the electoral process, it WILL happen with pitchforks eventually.

NihilistZero's picture

...if it doesn't happen through the electoral process, it WILL happen with pitchforks eventually.

For they young Greeks sake I hope you are right.  The financial occupation of Greece, where the EU is forcing the country that begot democracy to destroy its own people, must cease.

Ghordius's picture

LOL, what a funny collection of threads, here, full of fervent wishes for a certain collection of worldviews to be correct against evidence

NihilistZero, for example, would be quite unhappy to see his nihilist point of view disturbed by a Greece democratic decision

the funniest thing currently on ZH is this complete projection on all things that have to do with the EU and the ECB. they must be a classic top-down-oppressing-with-leadership hierarchical thing

any other narrative simply can't be. the empire must have an emperor, or something like imperial interests. must. because it can't be that europe is different, or structured differently

fact is that the EU is still a club of sovereign nations and a common trading and regulatory zone

fact is that the ECB is still a club of national banks and a common monetary zone

all this "integration" stuff is just jumbled with other culture wars that are ravaging the minds of many posters and readers

yes, it looks like the ECB members will do some some "solo pieces". and so, the whole jazz band must be breaking up. because... because... something has to break

(the equivalent of a Star Wars whiskey bar discussion on how the Trade Alliance must be breaking up because Emperor Palpatine is so evil)

Dollarmedes's picture

"...such an action is anti-integration."

I'm confused by this statement. If national central banks can be compelled into policies by a supra-national organization, then just how much "independence" do they have? I would see this as evidence of the opposite.

TheFourthStooge-ing's picture

"We need to unravel everything just a little to keep it together."
-- that one European guy

Ghordius's picture

no, stooge, his question is valid. the point is that the ECB is an alliance of national banks. sharing some features, but with members completely free to do individual acts

it's the narrative that is wrong. only because the NY-FED dominates the others and the dollarzone is one unitary state, the assumpion is that the voluntary association of the ECB must be something similar

for size, and the related positive effects, the national banks confederated in the ECB use the EUR, common liquidity pools and the ECB's balance sheet

for structured, local responses... they are still fully functional national banks, like the SNB. with their own balance sheets, which were not used up to now

and this has little to do with "unraveling" and a lot with how european nations have structured their policy setters, laws and treaties

interestingly, this will lead to a great wave of shock in the markets. the cultural shock of complete misunderstanding after a long spell of projection of own issues and structures


(a CB that has the power of issuing the global reserve currency faces a completely different situation from all the CBs that don't. taking that CB as a template for CB behaviour is... foolish)

Looney's picture

The EU should follow Nuland’s advice and go fuck itself.  ;-)


El Vaquero's picture

After presenting herself as a cookie monster, the EU has a hard time taking her message seriously. 

El Vaquero's picture

Seriously, who the fuck plays at international intrigue and politics by baking fucking pastries?  It's fucking embarrassing that I come from the same country as that woman.

Looney's picture

... After presenting herself as a cookie monster...

Then, the ECB should replace Draghi with Nuland.

She would be handing out meth-laced cookies to reporters during the ECB press conferences ;-)


Bossman1967's picture

Thats what Janet says I need size

Carpenter1's picture

This has been priced in for years. The rumour has been bought, and bought, and bought some more.

Dumbfucks think the market will lift off from all time highs to the moon, while the smart money will do what it always does, sell the news.

So fucking obvious, unless you're one of the Pavlov's dogs salivating for QE.

LawsofPhysics's picture

Wait for the PBoC to abandon the peg, that's the nuclear option IMO.

farmboy's picture

Haha what about the Saudi Real to the US $

Millivanilli's picture

Printing money- so easy a child could do it.   

Bloppy's picture

Wait, the ECB is finally going to do something?


Hawaiian congresswoman slams Obama over mishandling of Islamic extremism:


basho's picture

...and the circle jerk continues.

get it over draghi go home join the local retired mafioso, enjoy yourself

IT is next to go belly up and leave the EU anyway.

stocktivity's picture

"Nonetheless, there are more important factors than merely looking at the total size of the QE program(s)"


Earth to Guy - no there isn't

LawsofPhysics's picture

Earth to everyone, you stupid motherfuckers, zero interest rates is fucking "QE" (well, for the oligarchs who can access billions at those rates anyway).


Soul Glow's picture

Easy lending for JPM is for the health of the state.  Obama said so.

LawsofPhysics's picture

LOL!  Can't wait to see how D.C. responds when the PBoC finally "unpegs".

El Vaquero's picture

Just hope that their response isn't declaring DEFCON 1.

chubbar's picture

So the Greek "NATIONAL" central bank is not allowed to buy greek debt? I guess titles don't matter any longer because a Central Bank that takes orders from an entity outside it's borders is certainly not "National". The fucking greek bank should buy the debt at the same rate as the other national banks, fuck em. Let's get this party started!

Aaronson.Jones.Rutherford's picture

Can't buy debt, but can print EUR. We did it here in Ireland to the tune of €50bln


Ewtman's picture

The Dow and the S&P should continue their downward slide next week as global deflation pressures bring the fight to the U.S.





S&P 500


Truther's picture

ECB bitches will never learn. Fuck the EU alltogether.

GMadScientist's picture

You really can't determine Draghi's intentions without the drag-queen interpretive dance that accompanies the statements.

Soul Glow's picture

Monetizing debt is never a solution.

LawsofPhysics's picture

Monetizing debt that was fraudulent to begin with is fucking criminal, period.

Socializing the "losses" of a relative few who benefited from the fraud in the first place.

Somthing about consitutions and trees of liberty etc.

Seems humanity isn't so smart after all.

El Vaquero's picture


Seems humanity isn't so smart after all.




Now, lemme get back to grazing.

hairball48's picture


"At this stage, ECB plan envisages national central banks buying debt of their country to avoid risk transfer between member states"

So for ignorant rednecks like me...

The "law" notwithstanding...How is that different than the ECB buying the various countries debt outright-no "middle man" local CB needed?

The  sovereign debt winds up  monetized in both cases, right? or not?

i_call_you_my_base's picture

I think the implication is that if it's not consolidated at the ECB an individual country and CB could be pushed out and left on its own.

El Vaquero's picture

The real difference:  Which not-so-sovereign CB goes BOOM! first.


But, yeah, this is kind of like claiming that QE is not monetizing the debt.  Throw in some straw purchasers (the primary dealers in the case of the US) and you can claim that you're not purchasing from the treasury, therefore, you're not monetizing the debt!  See how that works? 


(This is serious business.  Therefore, they have to lie.)

Sudden Debt's picture

Not fully. The ECB creates the money let’s say 1 trillion easy

the euro loses 10% 

which the states are already speculating on with future tax money...

and the ECB will require it to be repaid.

there’s only a 0.25% rate on it but on a trillion created out of thin air it’s still good enough.

and the puppetshow can continue for another year and markets will rise again.

And if everything keeps up and the dollar doesn’t devalue, europe will get it’s inflation.

so they think... because we’re way oversupplied on everything and unemployment is skyhigh

kowalli's picture

bonds and treasures at record lows already and they will go even lower at faster speed.

Each next QE give less and less and destroy economy more and more

NoWayJose's picture

The difference between the ECB buying and national central banks buying is that this is the only plan Germany would OK. It keeps any defaults from weak countries from being covered by Germany. The problem is that each country is on its own - and the QE buying is NOT spreading the risk to Germany's AAA rating. But the big question is whether the ECB is equal or senior to existing government debt.

itstippy's picture

Well said.

It would allow weak countries to continue deficit spending a while longer, servicing existing debt and paying for social programs, without establishing "fiscal unity" among EU members.

The prior Greek restructuring and buy-ins made it clear that sovereign debt held by the ECB is NOT subject to haircuts.

rpc's picture

It is only done that way to keep calm the german voter, but it remains a sham. Since this "localized" QE money can and will be wired (at least partially) to Germany via the Target2 system with no collateral needed, the same problem - from a german point of view - will persist, and in the end, it will be a german liability, in case of a default somewhere.

RaceToTheBottom's picture

Trading Wanker planning.  Nothing here but that.

Jano's picture

does not matter if EU goes down as pyramid, or as a domino.