The ECB's QEnundrum: Draghi May Run Out Of Bonds To Buy As Soon As November

Tyler Durden's picture

Yesterday we pointed out the many "Conundrums Of A Policy Maker" which focused on the waning ability of central banks and sovereign governments to continue to control asset prices as their traditional forms of stimulus are reaching the end of their useful life.  As proof of just how ineffective the marginal stimulus from Central Banks has become, the Financial Times points out this morning that the ECB will likely have bought every dollar of eligible debt available by the end of this year under its $1.6 trillion QE program.

As the FT points out, there is about $7.5 trillion of government and agency paper outstanding in the EU.  That said, the ECB is restricted to purchasing bonds with maturities ranging from 2-30 years and with a yield above the eurozone's deposit rate of -0.4%.  According to FT calculations, those restrictions eliminate roughly $1.5 trillion of eligible paper.  Moreover, the ECB is also restricted from purchasing more than 33% of any given issuance or of a single country's outstanding debt which reduces total supply of eligible paper further to just $2.0 trillion which is only slightly more than the $1.6 trillion approved for the QE program.

That said, other rules require the ECB to make purchases on a pro-rata basis in-line with the size of the economies of its member states.  Therefore, the ECB will likely run out of paper to buy in larger countries like Germany earlier than others.  Per the FT, many analysts are starting to speculate that the ECB will have bought every single available bond by the end of 2016.

The mechanics of the ECB’s quantitative easing project means banks and investors believe the central bank cannot keep on buying €80bn of bonds a month as planned — or extend quantitative easing — unless it relaxes rules about what it can buy.

 

With the eurozone’s recovery proving relatively lacklustre, the ECB has vowed to continue QE at least until March and many economists expect it will be forced to prolong the programme beyond that date.

 

But credit analysts at banks including Citi, HSBC, Bank of America Merrill Lynch, BNP Paribas and JPMorgan and investors such as Pimco all say the €1.6tn programme is fast approaching a wall, perhaps as early as this year. The trouble is that no one outside the ECB knows how close the wall is.

 

Citi believes the squeeze is so severe that the ECB will run out of German paper to buy in November, although BofA thinks the programme can run unaltered until the end of the year.

And, as we concluded yesterday, there's only one thing left to do when you've lowered interest rates to below 0% and purchased every piece of sovereign paper possible.

Helicopter Money

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pods's picture

Well he can threaten a bazooka for another couple of months, right?

Figure springtime is when we get the first few splatters on the fan.

pods

Quantum Bunk's picture

Running out of bonds to buy is a sign of strength. Wont have that problem in the USSA (United Seppo Socialist Republics)

PT's picture

Tell me moar about Forming My Own European Company and Issuing Bonds For ECB To Buy From Me. 
Do I need earnings?
How long can I do this before I need earnings?
Can I make lots of companies and issue bonds for ECB to buy from me?
Can I make pay-outs with even moar bonds?

And don't you anyone say I did not offer to help!

Wang Dang SP's picture

Thant's right, take one for the team.  I think I know a Solyndra bankruptcy attorney who can help you out in a year or two.

Bryan's picture

there's only one thing left to do when you've lowered interest rates to below 0% and purchased every piece of sovereign paper possible.

And what's that one thing?  Going fuller retarderer?

zvzzt's picture

I'm guessing the "basic income" route will follow. Also takes 'care' of the argument that current QE program does not get to main street. Give Joe 500-800 a month and most 'problems' have gone away. Also, companies will "profit" with higher demand and less shareholder interference (when going the stowck buying modus). 

My 2 cents, but basically, yes they can go fuller retarder :) Please don't underestimate the stupidity of the idiots (noting that the stupidity makes the idiots rather rich themselves, at least until the music stops...."what do you mean, there is no bid for my bonds....?"). 

Spungo's picture

I'm betting on basic income as well. Calls for it are growing louder, and the ECB is saying governments need more debt, so it's a match made in heaven.

NoDebt's picture

Had a lot of discussions offline with current and former ZH members over the last few months about exactly that.  We're in agreement that a "BIG" (Basic Income Guarantee) is out there on the horizon somewhere.  The problem is in implementing it.  If you just do the spending side of it that money is quickly absorbed in higher prices, most notably in rent/housing.  So then you have to revamp taxation in a huge way.  I won't try to explain all the details and arguments we've had but suffice it to say, taxation on land/property would have to look RADICALLY different than it does today.  

And that's when I said "Cool, now all we gotta do is whip up $100 billion to lobby DC into doing this because it's going to royally piss off the real estate industry- and they spend every bit as much money buying DC politicians as Wall St. does."

No easy answers on this one, guys.

 

Spungo's picture

Higher renting and housing indeed. Guess which sector I'm buying every 2 weeks :D

https://www.google.com/finance?q=TSE%3ABEI.UN&client=fss&ei=WpbRV5HiI4K6...
That's a REIT in Alberta. Unit price is completely disconnected from fundamentals. According to the Q2 report, occupancy is 97% in the cities hardest hit by oil prices, and rental prices are only down about 5-10% to maintain high occupancy. When oil recovers and governments start throwing money out of helicopters, that real estate will be worth a fortune. 

Father ¢hristmas's picture

Yeah, I've tried to explain this to the brothers because the libtards are trying to stir up negroes with this "basic income" talk.  And I think we all know how much dindus love free shit.

The only solution is major tax incentives and reducing government.  But .gov doesn't want to do that because they are fucking greedy, which inevitably leads to stupidity.

If world governments gave employers tax incentives to hire and up wages, they could slash gubmint spending by kicking people off the dole, then the cocksucking economy could grow.

At this point, government is a cancer.  The moar this cancer continues to grow in an effort of self-preservation, the moar it kills its host.

Spungo's picture

I'm a bit disturbed by how little people talk about taxes to pay for basic income. What do you think would be a reasonable basic income? $10,000 would be an absolute minimum, but let's go with $10,000 and be conservative. I won't tell you my income, but I can tell you my income is slightly higher than the national average. The amount I pay in federal taxes is not even close to $10,000. After all the deductions, it would be a little more than half that. If it takes 2 above-average employed people to pay the basic income for 1 person, how the fuck is this supposed to work? What about all of the other shit our taxes cover? Do we cancel all police and fire service to pay for this bullshit? Do we close all public schools? 

kiss of roses's picture

No no no silly rabbit. You don't "PAY" for it, you borrow it, forever. I know cause I are ineligant.

NoDebt's picture

"there's only one thing left to do when you've lowered interest rates to below 0% and purchased every piece of sovereign paper possible."

Yeah, buy all the other pieces of paper.  Hell, start buying Accounts Recievable straight off company balance sheets if you want.  There is no way I can be convinced there isn't enough debt to buy.  Debt is oozing out of every crack and crevice of the planet right now.  "Running out of debt to buy" strikes me as unlikely as hitting "peak oil".

Thebighouse's picture

He could buy US bonds cheap!

Down three handles today!

ejmoosa's picture

Double post...sorry.

ejmoosa's picture

If you have been buying your friends drinks at the party for days and days and years and years and now they don't want to party with you anymore you need to look in the mirror.

The problem is you.

wait. wait. What.'s picture

I don't think the inability to create some semi-fictional paper is going to hold them back.  somebody is not paying attn.

Captain Chlamydia's picture

He can buy my mortgage. 

white horse's picture

I am sure Greeks can issue more bonds for him to buy.

Mountainview's picture

With the Greeks he is already at the limit, but expect his countrymen, the Italians to help him.

Rainman's picture

"Rules are mostly made to be broken and are too often for the lazy to hide behind."

           ~ Douglas MacArthur

2ndamendment's picture

Never fear, Draghi still has plenty of Euro stawks he can buy..... 

Mountainview's picture

This isn't helicopter money anymore, this is a money avalanche.

Bemused Observer's picture

Hey Mario, I have some bonds. Let me know what you need. It's a limited offering, so get back to me ASAP...they're going fast.

PT's picture

Don't listen to him Mario.  Buy my bonds first.  I promise you that mine are better becoz they are total heaps of shit.  His bonds are probably backed by real companies or something but my bonds won't even exist until I talk to a lawyer or print some out or something.

monad's picture

Don't listen to him Mario. Buy my bonds first. I'll give you 40% face. My freighters are insured at Loyds, capiche?

PT's picture

Actually, let's be realistic here.  There's plenty of money to go round ...

Bemused Observer's picture

Hey guys! Back off, I saw him first!

He's MINE.

GoldenDonuts's picture

Well after they buy German bonds they can buy french bonds and spanish bonds, italian bonds, etc etc until they buy greek bonds then they can buy the stock market.  Once they have bought the entire stock market they can start buying commercial property, then private property.  Once they have bought all of that they can start buying the cars that people are driving and eventually they will have invented enough digital money to own everything on earth.  Then they will make claim to the moon and buy that from ???

PT's picture

They'll buy and own the whole world, then they'll pay everyone absolutely fuck-all to work in their factories.  Then they'll wonder why they have no income and lament the lousy "return" on their investment.

NDXTrader's picture

They will change the rules. They've done it every other time. Then we will get pictures of those German judges that wear funny hats, who will wag their finger and do absolutely nothing to stop them

Father ¢hristmas's picture

9/11 Never Forget: .gov is fucking greedy.  These assholes know exactly how to jump start the economy, but it would require a reduction in government, so no go.

They wanna institute helicopter munney so they can tax it, then hike taxes on everything else.

This is like your older brother who punches the shit outta you for your lunch munney telling your parents to give you moar lunch munney.  If the son of a whore loved you, he would stop punching you for your lunch munney.

To make it even moar comical, the asshole then has his friends draw up charts and shit showing how your school lunch cafeteria is experiencing an inexplicable drop off in earnings.

monad's picture

German real estate bubble. What does this word "eligible" mean, Angelo?

ExpertiseAsia's picture

QE only exacerbates th imbalances of the eurozone, expressed by ever diverging Target2 numbers. Expertise Asia has commented further on this here.