The Full Explanation Of How The ECB Broke Europe's Bond Market

Tyler Durden's picture

It was almost three years ago to the day when Zero Hedge first explained the biggest problem facing Europe when it comes to unconventional monetary policy: the lack, not scarcity, but outright shortage of collateral.

Initially, our focus was on private-sector collateral, and if one had to summarize the key difference between the US and Europe in one chart, it would be this one, showing that while in the US the split between secured and unsecured funding was roughly even, in Europe, some 90% of corporate funding was on bank loan books, with only 10% in the form of (unsecured) corporate bonds (which also explains why in Europe NPLs, aka bad bank debt is by far the biggest problem facing the financial industry).


Subsequently, we also showed that the collateral shortage is not only in the private bond market, but in the public one as well, because there simply wouldn't be enough net supply in Europe to cover the ECB's ambitious demands.

Three years later, and following the first week of direct ECB monetization in the bond market, we have proof not only that our warnings were accurate, but that the worst case outcome for the ECB - a failure to achieve its stated goals is now only a matter of time. The reason? After just a few days of intervention, the ECB's grand monetization experiment has already managed to get derailed.

To avoid repeating ourselves yet again, here is JPM with the full explanation of how the ECB appears to have broken the already rickety European bond market.

First, there is the issue of collapsing market liquidity as manifested by the plunge in European bond market depth to near record lows. Quote JPM:

The price action over the past few weeks and the market impact that the ECB purchases (of €9.8bn in three days) had in the first week of its QE program are raising concerns about collateral shortage and about whether the ECB will be practically able to achieve its bond purchase target without impairing market liquidity and the price transmission mechanism (i.e. without violating what the ECB defined as market neutrality condition).


The first issue of collateral shortage can be seen in the collapse of GC repo rates to negative territory since the beginning of last week for terms of greater than 3 months. 1yr Germany has been trading at close to -30bp; i.e. one can currently fund purchases of Bunds via the term repo market and achieve positive carry by even buying Bunds with yields between -20bp to -30bp. We note that this expensiveness in term repos shows how unwilling Bund holders are to depart from their collateral for more than a few days or weeks.


The second issue of market liquidity distortions is exacerbated by two developments, in our view:


1) by the big increase over the past two weeks in the universe of euro government bonds between 2y and 30y remaining maturity trading with a yield below -20bp. Figure 1 shows that this universe spiked to €170bn at the beginning of this week driven by Bunds. This means that almost 4% of the €4.6tr universe of 2y-30y euro government bonds and more than 20% of the €800bn universe of 2y-30y German government bonds traded below -20bp earlier this week, effectively inducing the ECB to extend the duration of its purchases.



2) by the sharp decrease in Bund liquidity as our market depth metric; i.e. the ability to transact in size without impacting market prices too much, collapsed this week (Figure 2). We measure market depth by averaging the size of the three best bids and offers each day for key markets. Figure 2 shows two such measures, for 10-year cash Treasuries (market depth measured in $mn) and German Bund futures (market depth measured in number of contracts). While both UST and Bund market depth have been trending lower in recent months and while the former moved recently below the Oct 15th low, what was striking this week was the divergence between a modest increase in UST market depth vs. an abrupt decline in Bund market depth. We note this development effectively challenges the market neutrality condition of the ECB from the first week of purchases already!



* * *

And then there is the just as critical issue of collateral scarcity.

But before we get into this point, we urge readers to refamiliarize themselves with the critical topic of shadow banking collateral volecity by rereading "What Shadow Banking Can Tell Us About The Fed's "Exit-Path" Dead End", since this is i) all that matters in a world in which every asset move is based on leverage of derivatives and in which the underlying collateral is so scarce, what matters is how efficiently its (re-)rehypothecated asset manifestation is re-used and ii) since virtually nobody actually understands this critical concept.

To be sure, our 2013 article was looking at the Fed's "exit" pathway, one which will soon be all the more critical if indeed Yellen is hoping to not only hike rates soon but to actively unwind the trillions in excess reserves. This is what Peter Stella wrote a year and a half ago on this topic:

Many major central banks are thinking strategically about exit pathways – how best to return to normal central banking. The main point of this column is to point to a key issue – the role of collateral – that has been under appreciated by many economists who are not in daily contact with financial markets.
When economies strengthen and central banks begin to drain reserves from the system, they will inevitably alter the composition of private sector asset portfolios.

  • If good collateral is swapped for reserves, banks and nonbanks can use the collateral to fund create credition via what are known as collateral chains.
  • If only term deposits are swapped for reserves, or if interest rates are raised only through IOR, the opportunity to lengthen collateral chains will be missed.

In today’s financial world, these chains are critical sources of money and credit creation – the days of textbook money-multipliers are long gone.


When it comes to reducing excess reserves, the ‘how’ matters as much as the ‘when’ and ‘how much’. Understanding this point requires mastery of the brave new world of shadow banks and re-hypothecation – a world that either did not exist or was truly in the shadows when most of us were taught about money and credit creation.

Stella's article also touched on something even more critical and even more misunderstood, namely why in a world in which rehypothecation, and shadow banking dominates, QE is in fact deflationary:

There is a great irony in the journalistic history of monetary policy. What many are calling central bank “money creation” “helicopter money” or “rolling the printing presses” may – in combination with tighter leverage ratios – lead to a tightening of bank credit and deflationary pressures. And all this is occurring while the spectre of uncontrolled credit expansion and monetary debasement are being decried countless times by those who have not recognized that yesteryear’s monetary paradigm is defunct.

... those such as the Fed and the ECB, who will keep piling on failed monetarist theories, in the process deflation the system even more (and pushing trillions and trillions of excess reserves into the equity markets, resulting in hyperinflation in risk prices and deflation everywhere else), until finally one day the central banks have no choice but to unleash hyperinflation. How? Well, rereading Ben Bernanke's seminal November 2002 "Deflation: Making Sure "It" Doesn't Happen Here" speech explains it all:

 Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money.

Said "helicopter drop" is coming, as is the hyperinflation it will engender via the inevitable collapse of fiat, but not quite yet: first the ECB, and then the PBOC, will jump through hoops and go through the motions to once again confirm they never grasped just how "yesteryear's monetary paradigm" became defunct, and inject that many more trillions of de novo created money into risky assets, meanwhile exporting deflation to anyone who isn't easing (thus explaining the 25 or so rate cuts in just the past two and a half months).

Indicatively, this is how we summarized this paradox nearly two years ago:

The paradox is that for the Fed to finally start "fixing" the economy, instead of the brokerage accounts of a few billionaires, it has to finally stop QE, because as long as it is running, the only "inflationary" sink hole will be global risk markets, and the only thing levitating are all asset prices enveloped in this bubble.

The Fed may have eased off the throttle, but it was merely replaced with even more easing by the BOJ and now, by the ECB. In a fungible, globally interconnected world, it means that in 2015 central banks will inject more liquidity than ever before.

* * *

Which brings us back to the topic of collateral shortage in Europe. And while the above section dealt with collateral shortage in the context of a monetary policy "exit", what JPM has done is flipped it around and shown just how profound are the limitations as the ECB tries to "enter" the same labyrinth of paradoxes that the Fed can supposedly exit in "15 minutes" (spoiler alert: it can't, and never will).

Back to JPM:

This week's speech by the ECB's Executive Board Member Benoît Coeuré tried to address both of the above issues. In particular the speech reinvigorated the debate about collateral shortage in the Euro area. Similar to his Oct 2012 speech, Coeuré made a distinction between collateral shortage and collateral scarcity "Scarcity is a fact and not a problem per se. Allocating scarce resources through prices is the way our economies work. The problem would be a shortage of collateral and/or an impaired price mechanism." At the time, in October 2012, the issue of collateral shortage arose because of the €2.5tr that was put forward as collateral by Euro area banks to be used in ECB's repo operations. We had argued at the time that those fears of collateral shortage were not justified as the ECB had in fact improved collateral availability. Via LTROs the ECB had created more than €1tr of reserves (i.e. cash) against low quality (e.g. peripheral and bank debt) or non marketable collateral (e.g. credit claims). Central bank reserves are equivalent to cash and represent highly-liquid high-quality collateral. In other words, the ECB had created at the time on net €1tr of additional high-quality (i.e. cash) collateral improving collateral availability.


However the situation is very different currently. It is true that in principle QE by itself does not affect the overall supply of collateral as government bonds are replaced with reserves; i.e. one form of high quality collateral is replaced by another form of high quality collateral. The only thing that is changing is the relative pricing of collateral. So in principle, the ECB's QE is merely creating scarcity by making one form of collateral (euro government bonds) more expensive relative to cash.

That's not all: the fungible reserves, because they can no longer be used by banks for downstream rehypothecation purposes, are instead used to invest in risky assets such as stocks. Unsure what this means? Then take one look at the mindblowing move in the Dax (or EuroStoxx) in the past 2 months since the announcement of Q€.

That's nothing more than frontrunning the ECB's reserves being fully allocated to risk assets instead of lying dormant in the form of European Government bonds.

Which then brings up the Stella point noted above regarding collateral rehypothecation front and center, because as JPM notes, "this assessment is complicated by reduced usage and efficiency of cash collateral in recent years. In particular, usage of government bond collateral has increased at the expense of cash collateral by both banks and investors. We note that buy-side investors are becoming more averse to usage of cash collateral for three reasons: 1) to avoid raising cash to meet margin calls by having to sell or repo assets from their portfolio thus increasing transaction costs; 2) to avoid the operational cost of processing interest payments back to the counterparty; and 3) to avoid becoming technically overweight cash which dampens returns, especially in the current zero or negative interest rate environment."

Banks are responding positively to reduced appetite for cash collateral by the buy side as this also helps banks to increase the efficiency of their own collateral management processes via re-hypothecation of security collateral and via consolidating and optimizing collateral across OTC derivatives, securities lending and repos to meet more onerous regulatory requirements. Re-hypothecation or re-use rate of security collateral has decreased post the Lehman crisis, but at around x2 currently it makes bond collateral more efficient than cash collateral."

Unsure what this means? Then refresh the following chart from 2013:

JPM's take:

In all, different to 2012 when the ECB was replacing low quality collateral with higher quality collateral, the ECB is currently replacing high efficiency government bond collateral with lower efficiency cash collateral. In a way an argument can be made against Coeuré’s speech that the ECB not only creates scarcity of one form of collateral vs. another but that it also creates shortage of collateral by replacing high efficiency collateral with low efficiency collateral.

That would be 100% correct, and one can now merely add Coeure to the ranks of those who don't understand that "yesteryear’s monetary paradigm is defunct."

* * *

Finally, it is not just the topic of swapping one asset with a higher collateral velocity for another with a far lower, if not zero, velocity, but also the issue of effective supply. As JPM notes, "another important aspect in Coeuré’s speech regarding market liquidity was the notion of "effective supply". What matters more for market liquidity and depth is indeed not the overall stock or supply of euro government bonds, but the size of the effective supply as some asset holders may not be willing to sell. And it is effective supply that would determine whether the Eurosystem be able to meet its quantitative targets. While it is inherently difficult to calculate effective supply we believe we can make some reasonable assumptions to proxy it."

But before JPM's analysis of effective supply in Europe (or lack thereof), it takes one more swipe at just how clueless the Goldman-advised ECB has become:

... we disagree with Coeuré’s view that, similar to their Japanese counterparts, "euro area banks will be more willing to sell euro government bonds to the ECB as they will receive central bank reserves, which in the current low interest rate environment can be viewed by banks as close substitutes for government bonds, and which count towards fulfilling e.g. the required liquidity ratios". The problem with this argument, in our view, is that the ratio of government bonds + reserves to assets for commercial banks remains low for European banks vs. those in the US or Japan. Euro area and UK banks, in particular, have a ratio of government bonds + reserves to assets of 7% vs. 30% for their US and Japanese counterparts. If Euro area banks sell no bonds at all to the ECB and at the same time the ECB injects €1.1tr into the Euro area banking system, the ratio of government bonds + reserves to assets would rise to 11%. This will still be well below the 30% for their US and Japanese counterparts. In addition, as we argued above, government bonds are worth more to banks from a collateral point of view given rehypothecation. And this is perhaps one of the reasons that banks are currently willing to hold euro government bonds with yields that are below -20bp. In all, we continue to believe that banks in the Euro area could end up selling bonds to the ECB, but to a much smaller extent than their Japanese counterparts given their much higher need for liquid assets.

Especially since the bulk of European bank "assets" are in the form of tens of trillions of "secured loans" which are turning "non-performing" at an alarming pace. 

Which brings us to a most critical issue, and one which will be discussed in the coming months, potentially leading to the next European funding crisis - the ECB's stealthy attempts to incentivize the selling of government bonds by quietly moving them from "risk-free" to suggesting they do in fact have an implicit risk. The reason why the ECB is doing this is clear: it know very well that absnet a structural impetus to sell their bonds, European banks simply won't do that, as JPM correctly assumes. As a result, the ECB, and specifically ESRB, will likely soon "shock" the world when it reveals once again that far from having a zero-risk weighting, government bonds are in fact risky, and the logical thing for banks will be to sell them!

In addition, we find rather concerning the statement that "irrespective of the desirable review of the current regulatory framework of sovereign exposures, it is in the best interest of banks to reduce their exposure to their respective government, which should increase their willingness to sell." Clearly, euro area banks and investors are not factoring in a change in the risk weighting regime for government bonds in the foreseeable future. Coeuré’s speech coupled with the publication this week of an ESRB (European Systemic Risk Board) report arguing for increased risk weightings for sovereign bonds is concerning in our mind. Domestic banks have been stable holders of sovereign debt during the euro debt crisis and inducing a change of ownership to perhaps less stable holders, could risk making euro sovereign bond markets more vulnerable to future crisis.

And in a market in which the herd moves as one, and in which there is no liquidity (such as the European government bond market), all the ECB needs now is a controlled demolition whereby European banks, which ever since the infamous "whatever it takes" comment in July of 2012 suddenly decide to sell all their bond holdings. Even with the ECB as a backstop buyer, this essentially guarantees bond market chaos in the coming months.

* * *

Going back to the issue of calculating effective supply JPM references a recent report, "Who will sell to the ECB?" in which it argued that the Euro area looks more like Japan in terms of net bond withdrawal, "so various bond investors will need to sell bonds to the ECB eventually as was the case in Japan."

We also argued that the most likely candidate sellers to the ECB are non-euro area investors but with limited contribution from reserve managers, domestic retail investors as they shift away from bonds towards equities and domestic non-bank financial institutions. By looking at the holdings of euro government bonds by these sectors, i.e. investments funds, non-euro area banks/pension funds/insurance companies and others (excl. reserve managers), we calculate that the effective supply of euro government bonds is roughly 30% of overall supply (of €4.6tr stock of 2y-30y euro government bonds) which is not much higher than the 17% share the ECB intends to buy by September 2016. I.e. on our calculations effective supply could be as low as 30% of overall supply.

Here the ECB's last ditch backstop will also prove shortsighted and lacking:

The ECB has the provision that "in case the envisaged amounts to be purchased in a jurisdiction cannot be attained, national central banks will conduct substitute purchases in bonds issued by international organisations and multilateral development banks located in the euro area. These purchases will be subsumed under the 12% allocation to international organisations and multilateral development banks, which will be purchased by some national central banks". While this provision gives some flexibility to the ECB, we note it risks transmitting liquidity impairment from one jurisdiction to another. Raising the issue limit to above 25% for certain bonds or cutting the depo rate to more negative territory are possible options by the ECB as mentioned by our fixed colleagues, G. Salford section in this week’s GFIMS. But again this only shifts the market liquidity problem from one bond segment to another and risks making the ECB chasing its own tail, in our view.

And here, dear readers, is JPM's conclusion - phrased as politely as possible - why the ECB will fail in its QE endeavor, something we have been warning about for the past three years: "In all, we note the above analysis challenges the ability of the Eurosystem to meet its quantitative target without distorting market liquidity and price discovery."

What happens then, just before the wheels of the entire "modern" financial system fall off as the credibility of the "western central bank model" is lost once and for all, is that said model will desperately look toward China, and pray to Beijing to allow the PBOC to join the global monetization intervention in one last ditch effort to preserve the current financial system, before the infamous money paradropping helicopters are finally put into play.

That too will fail, but it will buy the status quo a few more precious months to prepare for what comes after the systemic reset which even JPM, indirectly, warns is fast approaching.

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GMadScientist's picture

First time in my life I've ever seen a homeless man with a sign that says, "Will perform for points."

Gravity, meet zero bound.

bwh1214's picture

They've been broken for a while, the question is what we do with that information:

AlaricBalth's picture

Why should European banks and insurance companies sell bonds to the ECB. Of course they would realize large capital gains, but then they would have to reinvest that money at a yield of 0.5 percent or less set against liabilities at 3.50-3.75%. The numbers just don't work.

Good luck with that Mario.

Manthong's picture

Collateral? Collateral?

We don’t need no stinking collateral!

GMadScientist's picture

Poor job creators. So confused as to what to do with all that loot.

Dubaibanker's picture

You mean sky is going to fall?


Uber Vandal's picture

After reading the comments on here the last few months, there is way too much complacency, in regards to the markets; and worse are those who have lamented that they regret they did not join in on spoils, or are second guessing everything they did so far.

THAT unto itself is more frightening than any article that I have read on this site.

Dubaibanker's picture

Just about 98% of people in this world do not invest in the stock markets. probably 99% after the 2008 correction. China is having tough time pushing people to get out of deposits or real estate and get into the stock markets. Same is the case in India where not only almost 99% are poor but the rest are happy with 9% pa in a deposit. That leaves Africa, where almost no one has the resources to invest. 

Coming to the 50m on food stamps or the 4m who lost their homes in the US, I guess they are not inclined to invest too.

Point I am making is that worldwide, except for Federal Reserve itself buying US Treasury bonds and now ECB buying IMF or insolvent bank bonds, no one is really investing in anything.

Please say loudly FEDERAL RESERVE.

Then say loudly US TREASURY

Sound the same or not?

It does!

There is a huge cluster fuck going on in the financial markets. Let them implode. But the implosion will not affect anyone, least of all the people who have access to internet but dont have any $$$. Or the ones who dont have a job. Or the ones who dont have any money. Or the ones who are on the streets. Or the one who own their homes outright. Or the ones who are so poor working 3 jobs that they dont know what a stock market is all about. Or the ones who have 2-3 kids and earn 100k $ pa in the US.

QE is rigged, ECB is rigged, markets are rigged.

QE is done to help the billionaires carry on...with their musical chairs...until they too lose out due to oil prices or shipping or banking or whatever it takes for them to fall down the ladder.

There is no THE END happening. It is not complacency. It is logical commonsense.

Middle class and poor are being raped literally everywhere and falling behind. What took a whole generation to save has gone backwards in barely 5 years, with no hope on top. Suicides, murders and robberies are really happening worldwide as people lose their mind.

Most people only want a 9 to 5 job and nothing else. Since most are in urban setting now, they cannot move back to farming with their college degrees and sky high aspirations so they are stuck in this chasm between going back to farming/manufacturing from the service oriented urban jobs that they or their parents held for so many decades (bankers, accountants, incorporation agents, lawyers, brokers, car salespeople, even waiters.....).

Look at Spain, it is a great example of a turn around, even better than Iceland. Many Spanish left for other Spanish speaking nations in Latam or wherever else when the going was bad. Immigrants too. Then in 2013 onwards, billions moved in from global investors. New property was stopped since 2008-09 collapse. Still over capacity but has stabilized and risen since last year. Tourism has become second highest on the planet after US, beating France for the first time (due to terrorism) and climbing to No 2 spot. GDP, exports, real estate values, tourism numbers, banks, car production, unemployment too peaked in 2013 and is declining and all are rising since 2013. It is not yet normal but the numbers are the best in the world and growing and not fake because people are tired and are actually working hard. Much kudos to the Govt who sold Govt buildings, raised cash and managed things well. Also, they have a unique language advantage unlike any other country in the insolvent Eurozone due to which they have access to Latam nations and Philippines etc. This kept the trade engaged, banks to remain stable like Santander and La Caixa. Bankia was a disaster but where has a bank not been a disaster. Overall, Spain is a wonderful turnaround story and a good place to invest looking 2-3-4 years down the road.

The faster the youngsters worldwide realise that they wont have a job, wont get a promotion, wont have growth, the sooner the revolutions will begin.

Until then, let us just chill.

Once we have blood on the streets, there will be some normalcy but that day is couple of years down the road. Not yet....

So far, it is advantage Govt, whatever any one says. They have prevented large scale bank collapses, major unemployment though gradual unemployment continues. They have allowed people to adjust to reality and find whatever new jobs etc. They might find a way around all this 'noise' too.

One more thing, the poor have a way of surviving on this terrible planet and do not induge in the accumulation of wealth but only accumulation of peace and happiness. They meet their basic needs and die peacefully instead of prolonging their lives with antibiotics which anyways have caused so much havoc that many are going back to natural therapies!

williambanzai7's picture

This can only mean one thing: more stock buy backs...

Dubaibanker's picture

Most certainly yes, Banzai! Love your work, btw.

Plus QE. Plus some real sales. Plus some Chinese support. Plus some cash on balance sheet. Plus some insulation from eac other. Plus no capex. Plus sales of overseas operations. Plus readjustment of expectations. Plus change of skill sets ala when car/railway engine was invented and ala when IT came on the horizon....and Voila!

Ghordius's picture

price discovery? where?

logicalman's picture

I think 'Price Discovery' was mentioned in a few obituary columns quite a few years ago!


GMadScientist's picture

"pray to Beijing to allow the PBOC to join the global monetization intervention"

Sure thing, about that reserve currency...

tocointhephrase's picture

Itza Mario. Too many shrooms mofo

Paul Krugman's picture

As usual Zerohedge is failing to understand the intellectual superiority of the central banks. The central banks have stumbled across the most enlightening principal in the history of money. Through QE we can all become wealthy and have boundless prosperity. All that it requires is for you to participate in the stock market. 


As always,


I am the light.

tocointhephrase's picture

"I am the light" Yeah, that light is an oncoming train! Ps paper ain't money! 

They will look back in history and laugh at how stupid people were for exchanging goods and services for paper and plastic. 



Hohum's picture

Dr. Krugman,

It's "principle," not "principal."  The light should be able to spell.

CHX's picture

FIRST! Yes, I took heart and downvoted you first. Yeepieeee, what do I win ?

pcrs's picture

Who wants to own negative interest bonds in a tanking currency?

Not all at once: queue up in five lines, don't worry there is enough for all of you. Beware of this ghost of deflation .... you will be happy whit these negative interest rate bonds in a tanking curreny when prices start dropping ...


HardlyZero's picture

Yes.  The truth hurts...and the market is waking up from its 6 year doldrums.

Friday and Sunday gettin' real again.  Throw the dice 2 out of 7 days, see where Monday opens.

If the European bond market collapses ... wow !

elvy's picture
elvy (not verified) Mar 15, 2015 3:28 PM

An EU FinMin wrote this:


"...Now I know that, in this fine country of two brilliant Marios, to utter these words as QE (i.e. quantitative easing) is being unleashed, borders on the blasphemous. QE is all around us and a great deal of optimism hangs on it. At the risk of sounding like a party pooper (as my daughter often calls me!), let me say that I find it hard to imagine how the broadening on the monetary base in our fragmented, and fragmenting, monetary union will transform itself into a substantial increase in private investment in productive activity.

QE has indeed proven quite bad at this transformation even in solid, homogenous economies like Japan, the US, Britain. It is bound to prove worse in a fragmented Eurozone where asset purchases by the ECB are not even proportional to output gaps or aimed at the national economies experiencing the most powerful deflationary forces. I very much fear that the decoupling of the monetary base from the money supply that is always QE’s Achilles Heel will, in the case of the ECB’s QE efforts, prove far worse than it did in the experience of Japan, the United States or Britain.

The German case illustrates this well. In 2015, Germany’s total bund issuance will come up to only €140bn, courtesy of the Federal Government’s attempt to deleverage. However, the ECB is committed to buying €160bn worth of bunds in the same year. At the same time, German banks must increase their regulator-imposed liquidity reserves by around €20bn. And they are only allowed to use highly liquid paper, i.e. bunds. This translates into an aggregate structural demand for bunds of at least €180bn for 2015, well ahead of supply.

Under such circumstances, German financial institutions have no incentive to sell bunds as they need them, and their relatively high yields, to satisfy regulatory requirements. Predictably, bund prices across the maturity spectrum will quickly head up towards the ECB’s stated maximum, yield spreads across the Eurozone will collapse independently of any investment-led recovery in countries like Spain and Italy, and share valuations will be inflated to levels that have proved unsustainable in the past. The notion that this type of asset price inflation will help mobilise idle savings and convert them into productive investments, especially in the crisis countries, flies in the face both of empirical evidence from countries where QE was vigorously pursued previously and it flies in the face of basic macroeconomics..."

So... some sort of hope exists? Guess who the FinMin is to get the answer!


GMadScientist's picture

So you're saying Yanis should've known better?

elvy's picture

He's the one criticising and proposing something different so... no?


This was written in Aug 2011, after the second Greek bailout.


'I never advocated a default. Which means that, like you, I recognise that in the very short run we will depend on the ‘kindness of strangers’, as T. Williams might have said. But this is not the same as to put our signatures on the dotted line of a massive loan (of tens of billions) that will, supposedly, see us through to 2014. A NO vote last week would not result in a default. The 5th instalment would be paid, the only difference is that our EU partners would be in conference all day and all night till they came up with a proper, rational solution. Now, they feel they bought time and are on way to their holidays – just as they lulled themselves in May 2010 to the false sense of  security that the crisis had been dealt with by means of the massive loan to Greece and the setting up of the EFSF. We gave them, with our YES, more rope to hang themselves (and us, of course). In short, I do not have a problem with loans in general. My position of voting against Memorandum Mk1 and Mk2 was that, unlike the dominant paradigm according to which these massive loans bought time, they deepened the crisis and gave the EU time to mess things up. If I am right, a decent solution could be found in weeks (with bridging loans averting default in the meantime). Our slavish behaviour allowed the EU to inflict permanent damage upon itself. '


Compare with current Syriza tactics. Summer should be eventful, one way or the other.

GMadScientist's picture

The really funny part is that Tennessee Williams was using polite southern discourse for whoring, which is curiously appropriate for this little sell-out.

weburke's picture

the greeks are going to the brics arent they? everything is to push us to the imf sdr, so that we will welcome it. 

logicalman's picture

I think it's always a good idea to know what the job entails before applying for it.

If he knew, why would he have applied?

Like volunteering to be a flight attendant on the Hindenberg.

If he didn't know, he's not up to the job.

Greece is fucked - to be followed in short order by the likes of Spain and Italy


mt paul's picture

the pump don't work

cause vandals stole the handle


that lack of velocity

is a bytch..

In.Sip.ient's picture



Is Draghi actually Italian???


If he were, he'd know that Italians are all

about hard assets.  They'll give him all the paper

he wants, but anything substantial gets spirited

away ...real quick.


And while the rest of Europe may not be as

on the ball as the Italians, I'm pretty sure

they aren't very far behind.



q99x2's picture

I remember that article. What took them so long? They better get Bernanke back in his helicopter and start sending the Q99X2 more cash. I want more.

GMadScientist's picture

May want to get a helmet though; in the second phase, they drop wheelbarrows.

THE DORK OF CORK's picture

The Ecb board member is talking utter bollox.

Banks do not allocate scarce resources,  they create scarcity through their monopoly of credit.


There is currently more vehicles in little old  Ireland (2 million +) then there was in the entire flipping wermacht.

Back in the 1920s there was one car for every village and the pubs were busier!!!!!! 

THE DORK OF CORK's picture

There is simply no bottom.up demand signal.

The consumer war economy of Europe is eating all of the industrial surplus.

Car production / consumption has merely replaced tank production leaving little to no buying power leading to rationing of basic demand.

GMadScientist's picture

"But we can't be out of credit cards, honey."

max2205's picture

Dax up like 1930 dmarks...

ghostzapper's picture

Excellent article.

I reiterate a previous position: long Beijing/Shanghai helicopter pilot training schools.

Dragon HAwk's picture

Ammo is Money... Everything else is Just Prayer...


q99x2's picture

It is possible that the message of this article is part of the reason that the FEDs are promising free college and allowing the debts to be repudiated and giving huge amounts of benefits to illegal aliens as well as paying SSI, SSDI and offering free medical. I'm so loaded up on this stuff already with two health insurances and what not that it is getting a bit rediculous.

JenkinsLane's picture

Why doesn't the ECB just ask Eurozone banks to securitize their corporate loans? That way the ECB could direct their

firepower at the corporate level rather than the sovereign, a lot of the problems associated with sovereign purchases

would no longer be relevant, the Eurozone banking system could be steathily recapped, Eurozone banks could

dump their NPLs with NCBs and the ECB (assuming par purchases of sub-par assets), IBs could make a killing

from the securitizations and Eurozone banks, cleared of their NPLs, would then be in a position to again make loans

to the private sector, which, in turn, could lead to a meaningful pick up in economic activity in the Eurozone. 



GMadScientist's picture

I'm pretty sure securitized doesn't even cut it for some of the insurers and the like...the humor is that they consider government debt to be safe in the first fucking place.

Sorry, but there's not enough catsand in the world to cover this turd.

Ghordius's picture

"Why doesn't the ECB just ask Eurozone banks to securitize their corporate loans? "

excellent question. the reason is politics. european small and medium enterprises don't want the collateralization of their loans

in the US and UK, financialization if fare more advanced. everything "reasonable" get's packaged and sold further. any analyst looking at a bank balance sheet knows that corporate loans are the worst part of it, and all quality has already been packaged/securitized and sold away

in the eurozone, we still have the old world of banking: plenty of enterprises that simply have bank loans from a bank that is with them since ever, and knows it's customers. I know, quaint

hence less marketable collateral for the purposes of investment and central banking