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Draghi's Looming "Anti-Integration" QE: It's The Structure (Not Size) That Matters
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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With thew Swissies abandoning the peg, does this mean that they might, for real this time, unleash the Holy Hand Grenade of Antioch?
pods
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.
Size matters.
Multiculturalism! It's what's for dinner, BITCHEZ!
Fucking hell, let the Greeks be Greek and let the Germans be German.
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
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?
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.
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.
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.
...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.
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)
"...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.
"We need to unravel everything just a little to keep it together."
-- that one European guy
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)
The EU should follow Nuland’s advice and go fuck itself. ;-)
Looney
After presenting herself as a cookie monster, the EU has a hard time taking her message seriously.
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.
... 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 ;-)
Looney
Thats what Janet says I need size
5, no 3 sir!
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.
Wait for the PBoC to abandon the peg, that's the nuclear option IMO.
Haha what about the Saudi Real to the US $
Printing money- so easy a child could do it.
Wait, the ECB is finally going to do something?
Hawaiian congresswoman slams Obama over mishandling of Islamic extremism:
http://tinyurl.com/pn5l4k4
...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.
"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
Earth to everyone, you stupid motherfuckers, zero interest rates is fucking "QE" (well, for the oligarchs who can access billions at those rates anyway).
Easy lending for JPM is for the health of the state. Obama said so.
LOL! Can't wait to see how D.C. responds when the PBoC finally "unpegs".
Just hope that their response isn't declaring DEFCON 1.
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!
Can't buy debt, but can print EUR. We did it here in Ireland to the tune of €50bln
http://www.businessinsider.com/ecb-allows-ireland-to-counterfeit-51-bill...
The Dow and the S&P should continue their downward slide next week as global deflation pressures bring the fight to the U.S.
DOW
http://www.globaldeflationnews.com/dow-jones-industrial-averageelliott-w...
S&P 500
http://www.globaldeflationnews.com/sp-500-indexelliott-wave-update-for-w...
ECB bitches will never learn. Fuck the EU alltogether.
You really can't determine Draghi's intentions without the drag-queen interpretive dance that accompanies the statements.
Monetizing debt is never a solution.
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.
Bahhhhhhhh!
Now, lemme get back to grazing.
"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?
Yes, monetized.
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.
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.)
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
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
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.
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.
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.
Trading Wanker planning. Nothing here but that.
does not matter if EU goes down as pyramid, or as a domino.
Wh it that Europe produces that Russia does not?
I would argue very little.
Google search the collapse in europe's refinery complex.
The refineries are still there of course...
reliable quality?
The next step is getting rid of the common currency.
uncommon debt does not jive with common currency.
this post sound stupid
ECB QE is priced-in and is expected, principally because markets have historically come to realize that Draghi rarely disappoints.
Another can kicking act of desperation
"Je suis Bernanke"
The key is here. How are the individual CB backstopped by the ECB. If not then it is game over for the Euro. The CB in the south will hit their limits very soon and need to issue more debt.
Shock and Awe!, Read'em and Weep, 3 Trillion not dollars but Euros. S&P 500 up 100 bones in one session.
European decision makers...
https://marknesop.wordpress.com/2015/01/15/once-he-was-the-king-of-spain-now-he-vacuums-the-turf-at-skydome/#more-3246
I seriously expect these idiots to blow the thing sky high.What is my best options in that case, apart from gold?
gold
I went to all cash, plus my stack of phyzz. You cannot short the market because they will likely bounce it up ahead of the ECB, spike it on first words from the ECB-- then drop the hammer and crush the markets on disappointment in the QE details and on the looming Grexit vote. Gold could run a little higher, but then could go up or down based on the QE details. If the QE details are large and loose and have no Grexit plans, it will help gold -- but will Germany 'let' it?
more gold and farmland
Bankenstorm
The Oligarchs will have WAR before they allow for dissolution of the forward moving goal of world wide political unity and economic integration.
If the EZ collapses war will be on the horizon.
Your premise is interesting. But it will not be so. The EU will move toward integration and unity, not away from it.
Sovereign nations will not be allowed to take the "step backward" from unification AT ALL by buying their own debt.
If the Oligarchs cannot achieve said unity by political and economic means they will achieve unification by war.
The goal of world wide integration in a one world political and economic unity has been ongoing for decades, arguably since the creation of the United States Federal Reserve.
Key milestones on the map of the rise of Central Bank control world wide I have enumerated here (as others) before.
Whatever he chooses. Gold goes up and up and up. That's a good thing to look forward to.
They should just take 50% of whatever anyone has in their bank accounts tomorrow.
That is the ultimate end game and result of central bank insanity, just cut to the chase.
I wonder how oil will react because there have already been 2 mayor spikes in 1 week and I expect the same next week!
Logic would say Brent higher (weaker Euro) and WTI lower (stronger dollar). But logic and technicals are worthless now. I think what they announce will disappoint, such that stocks and oil and gold go down.
Well, American QE’s did magic for the markets so I kind of expect the same.
It's going to $200, your prediction.
For no apparent reason other than the belief that oil needs to be at least $100.
Every other commodity has tanked, shouldn't those go through the roof too?
It looks like they are giving up the Euro in stages or at least they are frightened enough of a potential bust up that they want to fragment responsibility for the debt.
Added phyzz, sold paper gold and oil stocks (on the rips) last week. After 3 years of 'whatever it takes' I think we see QE from Draghi - but the details will disappoint big-time. Germany is going to block the 'wish list' that the markets want. This could go either way, but I think it will drop stocks and gold (mostly because gold is already up $90).
Rearranging the deckchairs on the Titanic in an orderly fashion.
The EU has already hit the iceberg -- the 'pumps' are keeping it from sinking -- for now -- but the fate is sealed.
the EUro is the front of the ship, the stern is the Yen and the body is the Reserve.
2 T and low risk sharing; with an exemption for Greece.
So all the countries can build their own slushfund/bad bank, except Greece.
Around 75% of Greek public debt — or around €270 billion out of a total of €317 billion — is held by the official sector — the EFSF eurozone rescue fund, the European Central Bank as well as the IMF, according to IMF figures.
Of the €270 billion, defaulting on the €24 billion owed to the IMF is considered the ultimate taboo, even by Syriza.
The ECB and national central banks are owed €54 billion.
FROM: Contagion Catch 22; Finland Opposes Greece Bailout Deal; No Scope for Solutions http://globaleconomicanalysis.blogspot.nl/2015/01/contagion-catch-22-fin...
German bank exposure to Greece around $28 billion http://www.reuters.com/article/2015/01/06/us-eurozone-greece-banking-exp...