No Bazooka As ECB Backtracks: Draghi Won't Pursue Yield Caps, To Sterilize Bond Buys In SMP Continuation

Tyler Durden's picture

Previously, the ECB inverse Operation Twist, aka Operation "Tsiwt" was merely speculated. Today, it is now confirmed, as Draghi admits that the entire Bazooka will simply be a sterilised purchase of short-term bonds (although not entirely without the selling of lonf-term bonds - the market will do that for them).

In what can only be interpreted as a huge disappointment for the ECB and Draghi yielding to German demands, Bloomberg has leaked what likely will be the final plan of the ECB tomorrow, which contrary to previously rumors stating that the ECB will pursue yield caps, or even just buy bonds on an unsterilized basis, appears to be a huge dud:

  • ECB BOND PLAN SAID TO REFRAIN FROM SETTING PUBLIC YIELD CAPS
  • DRAGHI'S BOND PLAN SAID TO PLEDGE UNLIMITED, STERILIZED BUYING
  • ECB PLAN SAID TO FOCUS ON GOVT BONDS, MATURITIES UP TO 3 YEARS
  • ECB SAID TO CONSIDER SELLING BONDS IF CONDITIONS NOT MET
  • ECB PLAN SAID TO STRESS CONDITIONALITY OF ANY BOND PURCHASES
  • ECB BOND PLAN SAID TO HAVE BROAD COUNCIL SUPPORT - but not unanimous, as Germany again objects

The keyword above is highlighted: sterilized, which simply means for those who are unaware, such as all the algos taking the EURUSD higher, that the ECB's entire overhyped plan is nothing more than a continuation of the Securities Market Program, or the SMP, which has been dormant for over 25 weeks, and which was deactivated because it did not work! Because sterilized means no new money enters the system, something which for Europe is unacceptable considering Spain alone is now seeing $100 billion in outflows each month. 

It also means this is merely a flow-targeting program, and one which does nothing to actually stimulate inflation with new money creation.

And another question: how can bond buying be "unlimited" if the ECB is by definition limited by its €3 trillion balance sheet since the transaction will be sterilized and the size of the overall assets will not increase? Does this also imply that the ECB will terminate its 3 year €1 trillion LTRO program prematurely? And if not, the total capacity for sterilized bbond buying, when one removes the various liquidity providing MROs and existing SMP purchases, is, well, zero!

Bottom line: if this is indeed the final shape of the ECB "bazooka" tomorrow the market will be hugely disappointed. And yes, it will send the steepness of PIIGS bonds to records if only for a few weeks, but all short-term bond buying will achieve is selling in long-term bonds. In other words, expect to see the Spanish 2s10s in the quadruple digits the fulcrum country of the Eurozone project quielty implodes.

From BBG:

European Central Bank President Mario Draghi’s bond-buying proposal involves unlimited purchases of government debt that will be sterilized to assuage concerns about printing money, two central bank officials briefed on the plan said.

 

Under the blueprint, which may be called “Monetary Outright Transactions,” the ECB would refrain from setting a public cap on yields, according to the people, and a third official, who spoke on condition of anonymity. The plan will only focus on government bonds rather than a broader range of assets and will target short-dated maturities of up to about three years, two of the people said.

 

An ECB spokesman referred to an Aug. 20 statement in which the Frankfurt-based central bank said it was misleading to report on decisions that haven’t been taken yet.

 

Draghi told the European Parliament this week that the ECB needs to intervene in bond markets to wrest back control of interest rates in the fragmented euro-area economy and ensure the survival of the common currency. Policy makers will start deliberating on the plan later today and Draghi will announce whether it has been agreed to at a press conference tomorrow.

 

Bundesbank Opposition

 

The people said policy makers are likely to adopt the proposal, with Germany’s Bundesbank remaining the sole objector. At the same time, one said Draghi’s relationship with Bundesbank President Jens Weidmann remains relaxed, and the two men only disagree on whether risks inherent in the bond plan are likely to materialize.

 

To sterilize the bond purchases, the ECB will remove from the system elsewhere the same amount of money it spends, ensuring the program has a neutral impact on the money supply.

 

At the moment, the ECB mops up the impact of its mothballed bond-purchase program by offering banks weekly term deposits that currently return 0.01 percent.

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