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The Ultimate "Easy Money Paradox": How The ECB's Previous Actions Are Assuring The Failure Of Its Current Actions
Experiments, by their very nature, tend to have unintended consequences and on the eve of Q€, it appears as though the ECB’s previous policy decisions may have caused the central bank to unwittingly paint itself into a corner. Having pledged to purchase some €1 trillion in assets over the next 18 or so months, Mario Draghi now faces the rather perplexing logistical challenge of finding enough bonds to buy. What’s obvious from the following tables is that convincing domestic banks, insurers, and pension funds to sell is particularly important but will, for reasons outlined below, likely prove well nigh impossible.



As discussed previously, the ECB’s predicament (i.e. the reason it’s looking for sellers) is the result of a supply shortage. Fixed income net issuance across the Eurozone has only averaged around €340 billion over the last four years, meaning supply can’t possibly keep up with the ECB’s demand. In fact, at the individual country level net supply less-Q€ will be negative for Germany, France, Italy, Belgium, Netherlands, Austria, Finland, Portugal, and Greece in 2015. Put simply: someone, somewhere has to be willing to sell in order for the bank to have any hope of executing its plan

The problem, as several sources told Reuters last week, is that there simply aren’t a lot of willing sellers. Ironically, the ECB’s own policy maneuvers are ultimately responsible for creating this situation. That is, the fallout from previous forays into ultra accommodative monetary policy is now hampering the implementation of quantitative easing - call it the ultimate easy money paradox.
For instance, last September, the ECB cut its deposit facility rate to -0.2% in an effort to fight low inflation and encourage banks to put capital to work. Of course, this effectively eliminated one option for where prospective sellers might choose to park their proceeds should they decide to unload their EGBs to the ECB. That is, if I’m a bank, I’m not going to be too thrilled about the prospect of selling an interest-bearing asset only to turn right around and pay 20 bps for the right to hand the cash I just received right back to the buyer. The ultimate irony here is that, as mentioned above, the deposit facility rate cut was meant to counter disinflation, as is Q€. So what we’re witnessing is one deflation-fighting policy stymying another.
Another problem for the ECB is that sellers of EGBs expose themselves to the very real possibility that proceeds will have to be reinvested at lower rates. For some EGB holders, like insurers, this prospect simply isn’t feasible from a regulatory perspective. Here’s Morgan Stanley:
The biggest holders, Eurozone banks and insurers, will be reluctant sellers, given it will mean reinvesting at lower yields. If the ECB responds by pushing yields lower in an attempt to incentivise sellers, this could have an opposite effect, as lower yields could actually deter banks and insurers from selling.
Regular harvesting of unrealised gains, undertaken in part to meet life policyholder obligations, is expected to continue and may be a source of limited supply [but] our base case is that insurers will not seek to take advantage of the ECB bid and sell bonds in size, given their overriding priority to ensure as strong as possible matching of assets and technical liabilities.
As for banks, selling to the ECB would likely have the effect of compressing NIM, exacerbating the negative effect QE already has on margins. Domestic banks are unlikely to volunteer for something that will squeeze them further when they’re already concerned about the effect ECB asset purchases will have on their bottom line. Just ask Deutsche Bank’s Anshu Jain who, less than 24 hours before Draghi’s January presser, had the following to say about Q€:
“...it means very low interest rates and a real destruction of net interest margins, which of course will be a huge challenge. So the best parts of our businesses, the deposit taking and the flow franchise businesses will all suffer."
To drive the point home, here’s Morgan Stanley on why domestic banks won’t sell:
Eurozone banks own ~one-fifth of Eurozone debt (more in the south than north).
We suspect banks will be reluctant to sell because this would reduce NIMs and loan demand is yet to recover. The ongoing deleveraging in Europe may diminish banks’ capacity to sell bonds as deposit growth may continue to outpace loans.
Again we see existing easy money policies restricting the effectiveness of new easy money policies, or more accurately, the central bank’s previous efforts to drive down rates are thwarting its current plans to … drive down rates. This may well be the ultimate Keynesian boondoggle.
At the end of the day, it appears as though the ECB may need to turn its gaze outward:
We think Global asset managers have the ability to sell tactically, and may look to do so, given rich euro valuations vs. other sovereign markets. Global fixed income asset managers benchmarked to market-weighted indices have a large benchmark exposure to euro sovereigns (31% of their index), but generally have discretion to diverge from these benchmarks. As a result, they have the ability to tactically reduce their euro sovereign exposure if they think EGBs are likely to underperform other global government bonds. Syndication data show non-domestic investors, primarily asset managers, were significant buyers of euro sovereign paper in 2014, much of which we think was reducing previous underweight positions. However, we think they could be significant sellers to the ECB, given the richness of euro sovs cross market.
To summarize, the ECB will have to turn to foreign holders (who, as a reminder, ran the other direction during the height of the Eurozone crisis at the first mention of a periphery government bond) and, in yet another irony of ironies, the central bank may find some sellers there precisely because CB policy has created unsustainably rich valuations in € credit.
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Buy on this.
Here's the final analysis.
The EBC is failing as evidenced by the fact that nobody is willing to interest interest bearing obligations for Euros.
Print too much?
the madness of our current era is this unchallenged consensus to expedite catching up to Japan's fiscal circumstance
How on earth that can be considered rational or desirable leaves me wondering what freaking species I am
I'll sell em a fucking bond. How much do they need to spend?
Am I understanding this problem correctly ?
I'm right in line behind ya' bro', just waitin' for the negative interest rate so I can get paid for issuing the debt.
They're not interested in chicken feed. Offer them a bond for say 10 billion euros. If they reject that, up the amount.
And... let me guess: NO ONE in the ECB saw this coming. They are shocked... SHOCKED!
SO.... not enough debt... what is a man to do about that...
Marry my wife?
Why goodness gracious me, they'll just have to start buyin' American Treasuries till they nobody'll sell them anymore, too!
Y'all better getchur bonds before they don't pay interest anymore, folks.
Retire.
So Eurozone banks and insurers can't be expected to shoot themselves in the foot, but global asset managers can and will?!
Well said. Line up right here for the financial suicide trade. All lip stick and glitter.
If you don't sell to Obama's european friends he'll Operation Choke Point you
it reminds me the old question: "what if it's war and nobody shows up to fight it?". in the same way, "what if it's QE and nobody sells to the CB?"
the markets wanted a promise of QE, and they got a promise of QE. meanwhile, repatriation* is still going on, the Squid is still asking it's clients to short the HUF and the PLN for reasons that have nothing to do with Hungary and Poland, Bloomberg is propagating the meme that the EUR is "technically unsound" and...
ZH's sources have long given up showing a small comparison of the balance sheets of the FED and the ECB
meanwhile the NCBs of the ECB have more flexibility in the management of their holdings of european sovereign debt, as they wanted
meh. when is the CB in the driver seat of the world's monetary complex going to raise rates? this is the real question, all the rest follows from that
(* note how small the non-european holdings of euro sovereign bonds are, and how much is in the same issuing country)
All one needs is an office in Belgium ... and buy USTreasuries ... you will be doing your part.
Based on what I know, having an office in Beijing would increase USTreasury purchasing efficiencies. Moscow too.
The banksters need to repay us.
Even my dad asked me this week, "When did the Chinese buy the west coast ports?"
All very logical. But, just print and stuff those bank ledgers. No need to buy anything. Trickle it out to the corps so they can buy back their shares. It's all good. btfd...per usual.
How their new thefts are covering up their old thefts--sort of.
The banksters need to repay us.
Guillotine and grift have something in common, and it isn't the "g."
the complexity of deception and corruption
is tangentially infinite. ok, so fucking
what?
.
Miles Davis - So What
https://www.youtube.com/watch?v=zqNTltOGh5c
Ministry - So What
https://www.youtube.com/watch?v=_TjzdbNwTCY
Scum sucking depravity debauched
anal fuck-fest
thrill olympics
savage scars
supply and sanctify
So what?
You said it!
sedatives supplied
econ laxatives
my eyes shit out lies
I only kill to know I'm alive
So what?
It's your problem to learn to live with, destroy us, or make us saints
We don't care, it's not our fault, that we were born too late
A screaming headache on the brow of the state
Killing time is appropriate
To make a mess
and fuck all the rest,
we say, we say
So what?
Now I know what is right
I'll kill them all if I like
I'm a time bomb inside
No one listens to reason,
It's too late and I'm ready to fight!
USA offers 50 year bond to build death star. Line up here.