SocGen Explains That Since The ECB's QE Will Fail, It Will Need To Be Increased To €3 Trillion, Include Stocks

Tyler Durden's picture

There are a bunch of things in the ECB post-mortem note just released by SocGen's Michel Martinez, reproduced below, but here are the punchlines.

First, on the impact of ECB QE on the economy: "we argue ECB QE could be five times less efficient than in the US. In December, press reports suggested that the ECB had run studies suggesting that a €1000bn QE programme would only boost price levels by 0.2-0.8 after two years, five to nine times less efficient than the studies for the US or the UK. The impact on GDP is not provided, but it would be reasonable to assume the same impact as on inflation on a cumulated basis."

In other words, it will be an outright failure as it "triest" to boost inflation expectations and the European economy in its current format. That, as a reminder, is its stated purpose.

So what does SocGen suggest? Simple: the same thing every Keynesian says when justifying why a piece of occult economic voodoo fails to work: it wasn't big enough. To wit:

"The potential amount of QE needed is €2-3 trillion! Hence for inflation to reach close to a 2.0% threshold medium term, the potential amount of asset purchases needed is €2-3tn, not a mere €1tn."

Or as Charles Dickens would put it:

And since there is nowhere near enough bond supply in Europe, the ECB will have to proceed with monetizing, drumroll, stocks.

Should the ECB target such an expansion of its balance sheet, it would have to ease some conditions on its bond purchases (liquidity rule, quality...) or contemplate other asset classes- equity stocks, Real Estate Investment Trust-(REIT), Exchange-traded fund (ETF)...- as the BoJ, previously.

Because what tens of millions of unemployed Europeans really need to help their lot in life, and to boost their confidence, is for the central bank to buy the stocks sold by the richest 0.001%.

* * *

Full note from SocGen:

Large QE with symbolic risk sharing

The ECB announcement today was well in line with our call that the sovereign QE programme could be large scale but not pari passu. The share of mutualisation is symbolic (1/11%). Yet, they point to higher volume than expected overall (€1140n in total) and reinforces the probability that the ECB would reach (or go over) its stated intention of 1trn increase in balance sheet.

A) The size of QE programme is €60bn per month, €1140bn in total

The main measure is an expandable asset purchase programme that includes European agencies and sovereign and complement the current programmes (Covered bond and ABS purchase programmes). Those new programmes will start in March 2015 and run until end September-16 or until the inflation outlook converges to 2.0% medium-term, which means that it could be bigger. The combined purchases will amount to €60bn per month. Apparently, the expanded programme will not include corporate bonds.

There was a large majority to today’s announcement while the Governing Council was unanimous on the idea that QE is a legal monetary policy tool.

Hence, the ECB will purchase €1140bn (60*19) from March 15 to September 2016. Today, the pace of covered bond and ABS purchases is close to €13bn per month, so additional purchases represent €47bn per month. The ECB stated that “purchases of securities of European institutions will be 12% of the additional asset purchases”. A quick rule of thumb suggests €230bn in ABS and covered bonds, €110bn in European agencies and €800bn of sovereign bonds.

The ECB also decided to cut the spread on the TLTRO rate, that would now be equal to the refinancing rate (0.05% instead of 0.15%)

B) Criteria to be specified in March

We know that the new programmes are running until September-2016 at least and that purchased bonds will be hold up to maturity. Obviously, purchases will be made on the secondary market for European issues and government bonds.

In terms of rating, it is likely that the conditions will be the same as for the ABSPP and CBPP3. First, the ECB will purchase investment grade bonds.

Secondly, for Greece and Cyprus (which are not investment grade), the condition would be that those countries “have an ongoing programme with the EU/IMF”. This would suggest that any failure to extend the current Greek programme that expires at the end of February would exclude Greece from any asset purchase programme.

Can the ECB buy at negative yield? Yes, said Draghi during the press conference

Which maturity? Details will have to be specified in March but Draghi suggested that maturities could be of 2-30 years.

Interestingly, Draghi said that it will have two limits on its purchases: 30% of the issuer outstanding and 25% of the issue. This latter limit will prevent the ECB of having a blocking minority in CACs, with the aim “to ensure that the ECB is pari passu”. As we argue below, this is not convincing, given the low degree of risk sharing.

C) Minimum symbolic risk sharing (8% risk sharing only on government bonds

As we expected, purchases of government bonds will be done according to capital key. The point is the degree of mutualisation is minimum(1/11). For most purchases, the National Central Banks (NCB) will purchase their national government bonds and bear the credit risk. The silver lining is that the less the credit risk is mutualised, the larger a QE program could become in volume terms.

The main piece of information in the ECB communiqué is here: “With regard to the sharing of hypothetical losses, the Governing Council decided that purchases of securities of European institutions (which will be 12% of the additional asset purchases, and which will be purchased by NCBs) will be subject to loss sharing. The rest of the NCBs’ additional asset purchases will not be subject to loss sharing. The ECB will hold 8% of the additional asset purchases. This implies that 20% of the additional asset purchases will be subject to a regime of risk sharing”.

So the ECB indicates that the degree of risk –sharing is 20%, which seems a good compromises. However, regarding government bonds, the decree of risk sharing seem symbolic(8/100-12=1/11). To put is simply, the ECB will purchase €70bn on a risk sharing basis while the NCB will purchase the remaining €730bn. Noteworthy, the ECB will likely give objectives to the NCBs (purchases according to the capital keys).

This approach is consistent with our long held view that the ECB QE could not be both large and pari passu. Legal and political hurdles remain large because of the two articles of the European Treaty: Article 123 on prohibition of monetary financing and Article 125 (no bailout clause or no mutualisation clause). The ECB might well be pari-passu ex ante as Draghi argues. Yet, in the case of a debt restructuring, either the CB would avoid the debt restructuring (remind that the Eurosystem avoided the Greek PSI in 2012) or the (bankrupt) national government would probably be obliged to recapitalize its NCB. In both cases, the bigger are the purchases, the larger is the expected loss given default of the private sector. Investors risk seeking such way of proceeding as a lack of confidence in the euro area. Hence the final outcome on sovereign bond spreads might be uncertain debt sustainability concerns increase in the future. The flow of purchases will be positive but lower liquidity and higher expected loss given default will play out negatively.

Will it work?

In a joint paper with rates strategists (What kind of ECB sovereign and what impact?, we argue ECB QE could be five times less efficient than in the US. In December, press reports suggested that the ECB had run studies suggesting that a €1000bn QE programme would only boost price levels by 0.2-0.8 after two years, five to nine times less efficient than the studies for the US or the UK. The impact on GDP is not provided, but it would be reasonable to assume the same impact as on inflation on a cumulated basis. These figures are consistent with our own estimates.

The potential amount of QE needed is €2-3 trillion! Hence for inflation to reach close to a 2.0% threshold medium term, the potential amount of asset purchases needed is €2-3tn, not a mere €1tn. Should the ECB target such an expansion of its balance sheet, it would have to ease some conditions on its bond purchases (liquidity rule, quality...) or contemplate other asset classes- equity stocks, Real Estate Investment Trust-(REIT), Exchange-traded fund (ETF)...- as the BoJ, previously.

So the onus will remain on delivery of better-designed fiscal policy and structural reform. But it is difficult to be hopeful on these fronts.

* * *

Of course, this means that the time to frontrun the expansion of ECB QE 1 has begun. The only problem is that for Draghi to act, stocks will have to crash first, and they can't crash if they are frontrunning the event the follows from their crash.

Good luck figuring that one out.

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Millivanilli's picture

And people believe that politicians matter.   

hedgeless_horseman's picture



SocGen Explains That Since The ECB's QE Will Fail, It Will Need To Be Increased To €3 Trillion, Include Stocks

A bank...calling for MOAR money printing?


Occident Mortal's picture

Why don't central banks monetize drumroll... mortgages?


As if we need telling, everyone is begging for ECB QE to fail.

Ghordius's picture

it's just a good reminder that megabankster can only one thing: ask for moar

two years to get the ECB balance sheet down one trillion, at roughly 40 billion per month

now two years to get it slightly higher, at roughly 60 billion a month... while the LTROs continue to be paid back

meaning that in theory in 2016 the ECB is roughly again at the same spot as in 2012. but since nobody really notices the LTROs being paid back... the psychological effect is that of printing

no wonder SocGen megabanksters ask for moar. they were cheated, compared to their counterparts over the pond

hedgeless_horseman's picture



Ghordius, you have changed your tune over the years.  No?

Ghordius's picture

I change my tune when the facts that support my tune change. And one of the facts (that generate so many downvotes) is the balance sheet of the ECB, still lower then in 2012

here is the interactive statistic of the FED of St. Louis

in July 2012, the ECB's balance sheet was at 3'000 billion. now it's at 2'150 billion. if this QE goes on, in 2016 it will be at... roughly 3'300 billion

that's, in the year 2016, 300 billion more then in July 2012 if you forget about further LTROs and TLTROS being paid back. just saying


if you wish for a comparison to the FED, here it is:

July 2012: 2'800 billion. now, 4'500 billion. that's double the current ECB level

eddiebe's picture

Ghordius, don't you think that the figures you quote are suspicious. Don't you think that they are marked to model, like everything else?

Jack Burton's picture

It's a good point that. Do these central bankes really mark to market, are they above board with statistics they issue, or do they issue figures that justify their past and future practices. Banks are no longer reliable reporters of their books, not in the least. Should we now accept that Central Bankers, have religion, and produce honest figures in these charts.

Frankly. I do not trust anyting that sits in the 1%'s hands. They lies are monumental. No matter what they are, inflation, employment, assets on the books, liabilites, etc. etc.

philosophers bone's picture

People cry "Audit the Fed" (or other central banks).  But it is not actually possible to get a normal Audit Report, ever. 

If they ever were required to be audited, the accounting bodies would simply implement (in advance) "Special" Generally Accepted Accounting Principles (GAAP) which apply only to Western Central Banks.  These rules will to allow them to "mark to model" and apply whatever valuations they choose to ensure they appear solvent.

Audit Report would then say that the financial statements present the Fed's financial condition in accordance with Special GAAP.

Sirius Wonderblast's picture

Because they can print, they're automatically solvent. It's just a question of at what cost to thee and me - like they could care less about us.

First There Is A Mountain's picture

Not all balance sheets are created equal..... 

Both are/were garbage but I suspect the quality of these future "assets" will be of markedly poorer quality. Let's back up the truck and purchase sovereign debt at already preposterous yield. Can you say interest rate risk?



JRobby's picture

Do you have any used Volvo's in inventory? Low mileage of course...............

disabledvet's picture

I know I sure haven't.


And for this I am truly sorry.

Especially for my readership.


"To understand these things you just have to get into the mind of a total idiot.  Indeed...BE THE IDIOT."

All I can say is...I'm sorry.

Renfield's picture

disabledvet, a good 60% of the time I cannot understand what you are saying.

Yet I often upvote you. You are not only a fixture of the Hedge, but one of its more surreal offbeat people. This place would lose too much colour if you were gone. You are a different voice, and with our best here you bear the red-arrow scars to prove it.

So, speaking as one of your idiot readership, I'll just say don't apologise, and don't ever change.

SumTing Wong's picture

Oh holy fucking shit. Are these dumb asses kidding? 

We keep kicking the can down the road, and eventually we'll kick it right into this bankster-constructed house of cards. Then the shit really hits the fan. (Feel free to add your hackneyed phrase here to help me describe.)

ukspreads's picture

The DAX is the new DOW - BTFATH

MillionDollarBogus_'s picture

"Will it work" is not an issue...

If massive new debt generates any GDP at all, that's all that matters...

If it generates 10 new jobs now, it has worked...



Alea Iactaest's picture

And thousands of jobs "saved". MDB thanks for keeping us on point.

Wait What's picture

that bar just keeps getting lower and lower for CBs, even as the sums required to get over it get higher and higher.

"throw a few billion more on that pile, i won't be able to springboard off it as it stands now"

Manthong's picture

Long German wheelbarrels.

Bananamerican's picture

There's only one problem in all this....
This is the EU attempting "massive QE" this time...
I say "Fail"

Sirius Wonderblast's picture

Attempting, and all while calling Germany's bluff. Let's see how that plays out. Merkel is part of the Euo elite, and will avoid fighting this if she can. Will the Kraut in the strasse put up with it?

ukspreads's picture

I got me a Troll - drop me a line sucker and introduce yourself

Perimetr's picture

How long can this insanity continue before people stop believing that their fiat currencies are worth ANYTHING?

Pretty paper with fancy ink, take it and go back to work, fool

Bangin7GramRocks's picture

I'll give it a shot. Here goes. I believe the gentleman is trying to say that Central Bank QE is much like a man who visits prostitutes. Eventually one will bust his nut in the wrong skeezer and get the AIDS. But until then, let's keep spraying the seed.

pods's picture

This is gold.  The EU says they will rip off $1 trillion in purchasing power from those who hold euros and a bank can only ask for more.

It used to be that a TRILLION was a big number.  Like, a million million.  

Now, not so much.  


Soul Glow's picture

Gold and silver are back at their i3 day highs.  Look for a breakout soon.

philosophers bone's picture

Breaking out huge against the CAD.  Wait til the "real" breakout.

zeropain's picture

Crackheads will be crackheads, until dead or spirituality.  That is what they do.

SDShack's picture

Yep, addicts s have to have ever increasing hits to keep satisfied.

Renfield's picture

<<It used to be that a TRILLION was a big number.  Like, a million million.>>

Pods, didn't you get the memo. There is no inflation!

KnuckleDragger-X's picture

Come on HH, there's no such thing as a bad idea if you just throw enough money at it and 3-4 trillion should do the job nicely....

JR's picture

The QE is a sign of significant failure of the economics. They have gone all the way down this road and there’s been no economic progress for the people, only profit gifts for the banks. And Draghi’s remedy, let’s go deeper.

It’s failing, big time. The Swiss have escaped. They saw the euro printing coming and knew it was going to get increasingly worse.

Draghi is proving the political folly of having a euro zone ; central planning rewards failure because it declines letting the inefficient fail.

Skateboarder's picture

JR, people at large still don't know what QE is, how it is implemented, and what the effects are. They don't care either, as long as the supply chain gears turn another day. "Blah blah blah needs blah blah blah bailout to survive, and there's no other option." That's the presented and perceived message. From the macro perspective of looking at countries and CBs, monetary and fiscal policies are of complete failure to the people and complete success to the banks and gubbamins. That, anyone with even a cursory understanding of CB and gub affairs knows. From the micro perspective of JoeAverage's worldview, things are stagnating along while the purchasing power, disposable income, and ability to save are eroded, along with incremental regulations on life's activities, for reasons beyond Joe's level of understanding and inquisitiveness.

It is imperative in today's world for a human to be able to see and understand both macro and micro perspectives.

Evolution is survival of the fittest. Competing entities may be physical or ideological. If humans aren't fitter than CBs and gubs, CBs and gubs win.

JR's picture

The central banks are gaining ground but it’s quicksand. It will not support their weight. And while the public doesn’t understand this development, it will understand the collapse of the banking system when it touches bottom.

And, so, you are correct, Skateboarder, and so am I. It’s not a cycle. Central planning is linear. It starts with the pretense of good intensions and picks up baggage with every decision as it heads for disaster.

IOW, you don’t get to the point where all of a sudden what the Central Planners have done begins to succeed and begins to restore the economy; it just gets worse and worse. And rather than face what their problems are, these men are gambling that the end won’t be reached while they’re still in office. Draqhi looks at what his policies are going to do for him quarterly….he’s not interested in cutting out part of the cancer. How much more foolish could he be than with all the problems the Central Planners have, he’s going to manufacture even more euros?

I maintain that this is not a recession; this is the end of central planning. The Fed's banker-designed economies have finally begun their final chapter.

“Crash and burn”…this is what it would look like, according to Austrian-born economist Friedrich Hayek, the economies sliding down the hill and the bankers running after them trying to lasso them. Too bad Hayek isn’t here to see it. 

Yen Cross's picture

   Fantastic post JR. "Common Core Economics"

Wait What's picture

"let's go deeper"

they will go deeper until the moment they become the Danish, the Swiss, or the Chinese (soon) and realize they have to capitulate.

it's a psychological phenomenon, one with a predictable outcome.

walküre's picture

Draghi is Italian and he's a Goldmanite to boot.

The Mafia is in the house AND running all the bookies.

Eurolira is here. That's all this Italian shyster knows to do. Germans called the Lira "chewing gum currency".

That's exactly what the Euro is turning into. Naturally Hollande the French poodle is onboard because his country has devalued at least 2x in recent history.

Germany needs to leave the Euro. Who gives a fuck if other Europeans cannot afford German exports. BMW and Mercedes are still the best cars and quality always costs more. German products are status symbols for many consumers. Besides, the Chinese will pick up the slack from European buyers.

At least they should try it and let the chips fall where they may. Germany is extremely productive and competitive. It could pull out and come out ahead like the Swissies.

Alea Iactaest's picture

The politicians don't matter. Draghi sure wasn't elected. How many Euros want this programme?

Kaiser Sousa's picture


i think not.

"As China takes it currency global, Zurich is set to become a center for yuan trading in Europe with Chinese and Swiss officials poised to sign a financial deal on Wednesday.

“A memorandum of understanding will be signed between the central banks of the two countries during Chinese Premier Li Keqiang’s visit to Switzerland. It is an important step in the internationalization of the RMB, especially in Europe,” a government official was quoted by Chinese news agency Xinhua.

Switzerland is basing its push for the offshore yuan business on the country’s close ties with China, one of the nation’s biggest trading partner. Switzerland is the first country among the world’s top 20 to have a free trade agreement with China.

The Chinese and Swiss central banks already signed a bilateral currency swap agreement worth 150 billion yuan (24 billion dollars), in July last year.

Under the deal to be signed on Wednesday, China will give Switzerland a quota of 50 billion yuan (about $8 billion), under its Qualified Foreign Institutional Investor (QFII) scheme to support the establishment of the Zurich offshore RMB market.

The first branch of a Chinese bank will be set up in the Swiss financial hub for future RMB clearance after it gets approval from regulators of both sides.

China has established offshore RMB markets in Hong Kong, London, among other places, in a drive for the internationalization of its currency.

The world’s second-largest economy started pushing for the great use of the yuan outside the mainland in 2010.

China is promoting the use of its currency as an alternative to the dollar in global trade and finance and more and more nations now want to capture the fast-growing market for offshore trade in yuan, also known as the renminbi."

Renfield's picture

Am I the only one expecting some real financial fireworks at the after Chinese New Year turns?

Anytime from 20th February, look out below.

spottirade's picture

well schmucks stand in long que's and empower them with a vote... never really got that!

gadzooks's picture

This is looking more and more like corrupt Goverments constantly ploying 

against private sector Self-Sustainability.

indygo55's picture

What do the Europeans say?: Moooo.

What do the Americans say?: Baaaa.

What do the Japanese say?: Duuuuuuh.


slaughterer's picture

ECBQE will fail, but not before a good solid 6 week rally to ES 2250

walküre's picture

ECBQE may never happen despite Draghi's dog and pony show today.

Nobody has written any cheques yet.

Good to see you're back.