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"Size Matters" For ECB Which Runs Into Unexpected Monetization Problem
Mario Draghi’s PSPP is just barely off the ground and we’re already beginning to get answers to some of the tough questions the ECB faced regarding the program’s implementation. For instance, we wondered how the central bank intended to treat the losses it was bound to incur as a result of purchasing billions in EMU debt carrying a negative yield. The answer: try to avoid that paper for the time being.
Another issue raised here (and elsewhere) revolves around the ECB’s ability to source willing EGB sellers. EMU banks — which hold some 20% of PSPP-eligible paper — are the most likely participants according to Goldman:
Our view remains that the main sellers of EMU bonds to the ECB will be the commercial banks. These institutions, which in the major EMU countries own about one-fifth of the stock of government bonds outstanding, tent to care more about their intermediation margins rather than about beating a hurdle rate they have promised policy holders. Furthermore, they will face regulatory pressures to reduce the concentration of risk towards the sovereign in the country of residence. Over time, their allocation to government bonds should converge to the ECB’s portfolio composition – roughly corresponding to the GDP weights of EMU constituents.
Nevertheless, sourcing €1.1 trillion in purchasable assets isn’t easy, especially when sellers have limited options for where to park their proceeds (pay the ECB 20bps or reinvest at rock-bottom yields). Here’s Nomura via Bloomberg:
Because new bond supply “is not enough to fulfill the ECB’s targets, a substantial portion of the €1 trillion [the ECB] intends to buy over 2 years will need to come from a reduction in current investor holdings.
Overall we see €25-50 billion coming directly from euro-area investors seeking higher yields abroad while the lion’s share call it €125-150 billion will come from foreign sellers.
Of course, as Goldman notes, it’s “hard to tell” what price non-euro area holders will charge, meaning the ECB may well have to pay even more of a premium than they already plan to pay, putting their balance sheet in an even more precarious state.
This is compounded by the fact that thanks to central bank largesse, high quality collateral is becoming more scarce by the day:
How much depth has the market lost? A year ago, you could trade about $280 million of Treasuries without causing prices to move, according to JPMorgan Chase & Co. Now, it’s $80 million.
But as it turns out, Mario Draghi may have a solution to the supply issue: buy “small” amounts.
Via Bloomberg:
- Rates trader in London says Eurosystem is purchasing bonds in trades of EU25m-EU50m.
- Another trader in London says QE purchases of EU15m- EU25m are going through.
- NCBs are buying govt bonds in “small clips,” Sunrise Brokers strategist Gianluca Ziglio says in e-mailed comments, citing market contacts.
Needless to say, if the ECB is unable to meet its monthly asset purchase targets (which, at €15-50 million dribs and drabs, looks likely), expect chaos, as the market has spent the last several months front running PSPP and would be absolutely horrified if DOMO (Draghi-open-market-operations) has to be downsized. Not to worry though, says Soc Gen's European rates strategy chief Ciaran O’Hagan:
Via Bloomberg:
“...the amount bought may be small to start with, but this will be like a pressure cooker. They've just switched on the heat and we will need some time for the pressure to mount.”
* * *
For reference, below is a list of EMU sovereign bonds that were eligible for purchase just before Draghi unveiled the details of DOMO (note that Citi thought to create a list of 2- to 30-year EGBs yielding -0.20 and above a week before the details of the program were announced).
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"It ain't the money, it's the motion."
Mario, take two:
The solution is for the EU member countries to borrow even more money (sell sovereign bonds) in order to increase the welfare state so the ECB can purchase those newly issued bonds.
Money for nothing and the Greek chicks for free.
that is not a solution if they have a treaty that forbids to have budget deficits. and without them, you have less net issuances, hence... less to buy
a problem without solution. but since the real problem was how to shut up the QE! crowd, perhaps it was not a problem in the first place. we'll see if the ECB will achieve it's goal of getting back to the levels of... 2012
Do you consider the lack of "teeth" for budget promise breakers a problem?
For example Germany in France back 10 years or so ago. Broke the treaty and nothing happened.
The obvious solution is to buy the soverigns from a newly reformed and brought into line Greece!
..just thought of something.
Maybe part of the dollar's run and Euro's drop had something to do with the ECB needing to pay off the $ .5 Trillion in Euro Swaps the Fed did at the end of 2011 when LTRO1 was conjured up and "the market" was effectively destroyed.
I seem to recall it was a three year deal.
initially, it was a three year deal, from memory. it went up to one full trillion, and was reversed in one year. if you have a look at a ECB balance sheet graph you'll see that trillion "bump"
first up, then down. have then a look at the FED's balance sheet graph for the same time, and you'll see... nothing
You make it sound as if any of this was legit or logical. Don't be an idiot and mouthpiece for their scam. There's no logic to this other than, if it doesn't benefit the banksters if won't get done.
You my man cannot win. Don't care if you made money temporarily and can afford a new shiny S class for the moment. Better get the tank version with the bullet proof glass.
THIS SHIT SHOW IS GONNA BLOW UP!!! There will be civil unrests and revolutions across Europe within 5 years MAX.
Don't underestimate how long they can kick the can. Part of me thinks "its gotta by this year" but I also know I've felt like this before (aka July 2012)
When the shelves are bare, people will revolt. The EU is becoming more and more like the former USSR. At least considering their financial challenges.
When Germans start hoarding gold, Swiss Francs and US Dollars you know the gig is up. Euro's reputation is shot. The faith in that currency is gone. It doesn't feel like real money
This tells me the EU, starting with Germany, is broke. They can print all they want, but there is no velocity. The .001% are hoarding, the rest have less and less to spend.
I will give them credit, they did a good job covering this up for the last several years, but fully monetizing Germany's debt is the end of the line for the Western Axis countries. The US will be the last turd down the toilet drain, nothing more.
I think the 'pressure cooker' metaphor was disgusting, yet somehow apt. Crafty fellow.
Entitlement class is too bloated everywhere in an environment of shrinking demographics and wages.
Deflating 40 years of massive growth and unwinding all the related bubbles that popped up since... impossible without blood shed.
Gobal population has doubled from 3.5 billion to 7 billion in 40 years and is now expected to swell to 9 billion by 2050. That's a flattening of the population growth curve.
China has grown economically massively over last 30 years. Adding 50,000 miles of highways over that time for example. China consumed more resources than any other nation in the history of man in such a short span.
That growth and the consumption have peaked.
Good luck to all.
"You make it sound as if any of this was legit or logical."
walküre, I don't feel responsible for how it sounds. I'm trying to describe the thing the way I see it, trying to describe how it is, not how it ought to be
legit? it was legal. currency swaps are legal, and I don't see anybody clamouring for any laws forbidding them
there is an undercurrent in all this that you might be missing: the persistent rumour that this Big Trillion Swap was not reversed. and this is completely wrong
the way how I read the thing is that the FED had a huge interest in providing USDs to all those megabanks that were severely lacking it, and the ECB gave an "assist"
tsk, tsk. Explain Greece, today, if the Euro does not mean anything for Europeans
Alternatively, you could find a comparison for "political capital" in the American political discourse, just to find out what "political capital" means, as a concept, for Americans. This is not meant as sarcasm, I often find out here on ZH that we share a (Transatlantic) English vocabulary, but with each a different content definition of certain words
Political capital in the US = Promises to the Free Shit Army. The more promises you make, the more political capital you have invested (because you obviously care more than the other guy).
We fought our Revolutionary War already. Keep going with this Euro project and you'll be fighting yours someday soon, too.
Clearly you aren't "united" enough. Time for some good reeducation.
There isn't any need for reeducation now. By the time they open those camp gates, everyone will know what happened. They will be nothing but extermination camps. "You can check in, but you can never leave". Some will put up a fight, some will go willingly, rather than take a bullet in the street.
This is our future, if we're not nuked first.
PCR is right, collectively we're a bunch of dumb fucks.
Tunga is long pressure cookers.
DUMBO. Draghi's Unrealistic Monetary Bond Operations
Nicely done
Mario's roll of nickels.
Hey Mario, call The Bernack, he'll give you some pointers.
I hear there are some Austrian bonds going cheap for Mario
hohoho, "expect chaos if the ECB can't keep targets". oh, poor, poor front runners, I mean we can't have them suffer, can we? /S
bah, plenty of strange notions on how 20 different entities are going to behave with this ammo, of which 19 have a national agenda influenced by national political opinion
I expect different approaches. european national banks, historically, love to keep options open, for future flexible responses
Can't find banksters willing to part with the paper they're holding?
CONFISCATE THE PAPER!!!
Must keep the shit show going at all costs.
ROFML
This is such a fucking sham, I am laughing my ass off all the way to my mattress and gold vault.
These banksters must all live in a parallel universe.
qe in Europe will fail even faster than in USA or Japan...
take a look at the DAX - I say, mission accomplished
DAX was frontrunning on rumors of QE since 2014. Now that QE is starting (or not) we shall see...
"We frontran some folks"
cue "wise guys" laughing meme....
How can there be sovereign bonds when there are no soveregn nations?
I am sure if they were buying Greek bonds there would be plenty of sellers.
I'll show you my Big Bazooka, if you show me yours.
The bureaucrats in Brussels are in panic due to the upcoming elections in Spain. The main target of this credit expansion (called QE) is to calm people down. Marin Lepen is coming soon in France. The EUSSR is a total mess