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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 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.

Read more here


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Wed, 09/05/2012 - 08:19 | Link to Comment fonzannoon
fonzannoon's picture

how can something sterilized be unlimited? don't they need new money for it to be unlimited/

Wed, 09/05/2012 - 08:21 | Link to Comment GetZeeGold
GetZeeGold's picture



Don't worry about that......we've got new money coming out the wazzoo!


Wed, 09/05/2012 - 08:23 | Link to Comment LongSoupLine
LongSoupLine's picture

crap!  that shit is money?!

Wed, 09/05/2012 - 08:24 | Link to Comment GetZeeGold
GetZeeGold's picture



Believe it or not Amigo.


Wed, 09/05/2012 - 08:27 | Link to Comment LongSoupLine
LongSoupLine's picture

Damn it!!...I just flushed our entire national debt this morning after tacos last night.

Wed, 09/05/2012 - 08:29 | Link to Comment HelluvaEngineer
HelluvaEngineer's picture

No free moniez make giant squid angry...ANGRY!

Wed, 09/05/2012 - 08:32 | Link to Comment GetZeeGold
GetZeeGold's picture



That's not good new considering that 800 pound gorilla in the room doesn't look very happy either.


Wed, 09/05/2012 - 11:51 | Link to Comment MeetTozter
MeetTozter's picture

If Spain is losing, who is winning?  This is a zero sum game, no?

Wed, 09/05/2012 - 08:21 | Link to Comment Boilermaker
Boilermaker's picture


Wed, 09/05/2012 - 08:21 | Link to Comment GetZeeGold
GetZeeGold's picture



Did NOT see it coming!

Wed, 09/05/2012 - 08:22 | Link to Comment LongSoupLine
LongSoupLine's picture's hot potato toss-back to the Bernank.


Fire up them thar' Heely-copters!

Wed, 09/05/2012 - 08:37 | Link to Comment DormRoom
DormRoom's picture

Draghi may not want to inflame sentiment going into the  German Constitutional Court decision.  Bernanke is a lame duck until the Fiscal Cliff gets resolved.

Wed, 09/05/2012 - 08:24 | Link to Comment Dr. No
Dr. No's picture

Sterilized is a medical term for taking the punch out of pudding.

Wed, 09/05/2012 - 09:16 | Link to Comment TwoShortPlanks
TwoShortPlanks's picture

Draghi you dirty Dawg!

"To sterilize...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."

And if you jack up Gold prices continuously while monetizing it (ie. leasing it to your local Central Bank) you'll have all the ELSEWHERE you can handle...get it Bitchez? Gold as collateral, Dodd-Frank, Central Bank buying, Fed Gold audit, BIS Tier1 rumors...join those dots!

It's been decided then; the game ahead is none other than the monetization of Gold across all endless series of Gold monetization currency drops on Bonds while at the same time pulling down the spread between Bank Assets and Bank Reserves by increasing the amount of currency in circulation while having a "NEUTRAL IMPACT on the money supply"...Central Bank monetization of Gold Reserves offsetting Base Money can have a neutral impact, and you can keep the offset even with Base Money expansion by increases in the Gold price, Bitchez!

And Gold is as sterile as it comes, fuckers!

ALL-ABOARD, it's time for Tyler's Fukushima 3 Hands!!!!

Wed, 09/05/2012 - 08:27 | Link to Comment Gandalf6900
Gandalf6900's picture

Where is Bazooka Joe?

Wed, 09/05/2012 - 08:29 | Link to Comment TJ00
TJ00's picture

This is almost as much fun as watching the old Soviet Politburo, without the purges, ice axes, Gulags etc.

Wed, 09/05/2012 - 08:35 | Link to Comment Boilermaker
Boilermaker's picture

So, it's the Poitburo without all the fun.  Great.

Wed, 09/05/2012 - 08:31 | Link to Comment Bennyandthejets
Bennyandthejets's picture

I am not joking when I ask, what does sterilizing mean?  I don't understand how one can buy bonds with no new money created, unless one is taking money from another designated program to do so.  How does this work?  Thank you!

Wed, 09/05/2012 - 08:32 | Link to Comment GetZeeGold
GetZeeGold's picture



I am not joking


We believe you!

Wed, 09/05/2012 - 08:36 | Link to Comment Bennyandthejets
Bennyandthejets's picture

Does this come from moneys designated for unemployment?!  

Wed, 09/05/2012 - 08:39 | Link to Comment GetZeeGold
GetZeeGold's picture



Would you like it to?


Wed, 09/05/2012 - 08:43 | Link to Comment fonzannoon
fonzannoon's picture

Dude you are cracking me up this morning. I hope you are in charge of a lot of people somewhere.

Wed, 09/05/2012 - 09:31 | Link to Comment Bennyandthejets
Bennyandthejets's picture

Would you?

Wed, 09/05/2012 - 08:40 | Link to Comment Terp
Terp's picture

They dump other trash from their books to keep them at the already bloated 3 trillion.


I bet those greek bonds will sell like warm buns /s

Wed, 09/05/2012 - 08:55 | Link to Comment theorist
theorist's picture

There are a number of ways that sterilisation can work:

1.) ECB purchases the bonds of say Spain. In return it sells the same quantity of core country bonds/bills it may hav on its balance sheet. Remember that a Central Bank does own short dated goivernment paper in order to conduct monetary policy, ie. keepign rates where they have argeted them.

2.) Where the Central Bank is out of securities it will offer interest for a term on the money it has paid to the bank in order to keep it held with the ECB. Remember when a Central bank purchases a bond from a bank, all it does is credit the account that the bank has with the Central Bank. This money may then be lent out by the bank. By offering interest on deposits with the Cnetral Bank, it effectively ties up the bank's cash.

Hope this is clear.

Wed, 09/05/2012 - 09:46 | Link to Comment Bennyandthejets
Bennyandthejets's picture

Thank you!

1)  Makes sense.  CB figures either the market complies and does it's job for it, or it does the dirty work until they run out of short term securities to trade with.

2)  Does the bank have a choice?  If the ECB buys the bond from Bank A, can it force Bank A to keep its cash with the ECB for an indeterminate time?  

Wed, 09/05/2012 - 08:33 | Link to Comment buzzsaw99
buzzsaw99's picture

as per usual drahgi's huge oral orifice is writing checks hiz puny ass can't cash

Wed, 09/05/2012 - 08:34 | Link to Comment Boilermaker
Boilermaker's picture

Look at the defense of 1,400 SPX....

My god.  At least TRY to make it LOOK like legit market action.

Wow, that's pathetic.

Wed, 09/05/2012 - 08:35 | Link to Comment fonzannoon
fonzannoon's picture

when do futures begin to reflect this astounding news? I would have thought immediately...

Wed, 09/05/2012 - 08:38 | Link to Comment Boilermaker
Boilermaker's picture

As soon as Ben takes his thumb off the other side of the scale.

Wed, 09/05/2012 - 08:44 | Link to Comment fonzannoon
fonzannoon's picture

oh yeah I forgot..

Wed, 09/05/2012 - 08:51 | Link to Comment Boilermaker
Boilermaker's picture

In other words, never.

Wed, 09/05/2012 - 09:59 | Link to Comment Bennyandthejets
Bennyandthejets's picture

That's how traders used to make money, the disconnect between perception and reality.  

Wed, 09/05/2012 - 08:48 | Link to Comment falak pema
falak pema's picture

wait till the next great leap forward, this is a page out of Mao's guerilla warfare! 

Keep the markets guessing. 

Here is the MSM version of the next sleight of hand : 

Details Of ECB Bond Plan - Business Insider

Wed, 09/05/2012 - 08:37 | Link to Comment Boilermaker
Boilermaker's picture

CNBC BREAKING NEWSSecond-Quarter Productivity Rises Faster Than Expected, Up 2.2% (click for more)

Yea, that'll offset the epic bullshit going down.  Golly.

Wed, 09/05/2012 - 08:37 | Link to Comment tuttisaluti
tuttisaluti's picture

Draghi, not the Vuvuzela, the Bazooka we say!

Wed, 09/05/2012 - 08:38 | Link to Comment lizzy36
lizzy36's picture

So these ECB bond buys under SMP program still rank as senior to other buyers right?

So problem NOT solved ?

Wed, 09/05/2012 - 08:40 | Link to Comment GetZeeGold
GetZeeGold's picture



Well WTF.....we totally had it fixed yesterday!


OK.....who's screwing around here?


Wed, 09/05/2012 - 08:41 | Link to Comment gojam
gojam's picture

Still time for 5 counter and counter counter statements before we get the bottom line.

Sterilizing = EUthanasia

Wed, 09/05/2012 - 08:53 | Link to Comment TrustWho
TrustWho's picture

I disagree.

Sterilized means buy Spain, Greece, Italy.....bonds and SELL Germany, Finland, France (?),......bonds. Remember, Dragi wants to equalize yields across Europe.

Wed, 09/05/2012 - 08:41 | Link to Comment stika
stika's picture

what will they sell to offset the buying? Their dirty pants on ebay?

Wed, 09/05/2012 - 08:43 | Link to Comment negative rates
negative rates's picture

Read my lips: No new lows.

Wed, 09/05/2012 - 08:45 | Link to Comment AynRandFan
AynRandFan's picture

Words, just words.  Greece never runs out of liquidity and never has to pay back all of what it borrows.  Europe just strangles slowly.

Wed, 09/05/2012 - 08:47 | Link to Comment petolo
petolo's picture

Within 30 days we,ll all be on helicopter watch and cashing in our foodstamps.

Wed, 09/05/2012 - 08:47 | Link to Comment pig no 3
pig no 3's picture

in plain english........does that mean: Short or Long or......just get away ASAP

Wed, 09/05/2012 - 08:54 | Link to Comment AynRandFan
AynRandFan's picture

EUR/USD spiked up on the news -- hope is back.

Wed, 09/05/2012 - 08:55 | Link to Comment Boilermaker
Boilermaker's picture

If you're in the lucky 0.00001% that has the pre-scripted playbook, then PLAY BALL.

If not, go to the casino.  You'll get free drinks while you get robbed.  It'll still hurt but at least you'll be hammered.

Wed, 09/05/2012 - 08:53 | Link to Comment Boilermaker
Boilermaker's picture

ES actually being forced positive....

I hope the wheat harvest is bountiful and chocolate rations are increased also!!

Wed, 09/05/2012 - 08:57 | Link to Comment monopoly
monopoly's picture

This will accomplish absolutely nothing. Plan B in the works I am sure.

Wed, 09/05/2012 - 09:06 | Link to Comment ISEEIT
ISEEIT's picture

"unlimited yet sterilized" WTF?

Wed, 09/05/2012 - 09:08 | Link to Comment Trichy
Trichy's picture

Who is gonna Sterilize who,

Ze Germans Draghi

Or Draghi the PIIGS through Bunds?

Wed, 09/05/2012 - 09:07 | Link to Comment eigenvalue
eigenvalue's picture

I think this analysis is deeply flawed. The  €3 trillion balance sheet is NOT a problem.

Suppose the ECB buys 10 billion euros worth of SPGB. The 10 billion purchase will increase both the asset side (the ECB's holding of securities) and the liability side (MFI's reserves at the ECB) by the same amount. If the ECB issues debt certificates to sterilise the purchase, the 10 billion on the asset side will not change but the 10 billion on the liability side will change from MFI's reserves at the ECB to Debt certificates issued by the ECB. Net effect: the ECB's balance sheet increases by 10 billion in spite of the fact that the purchase is said to be sterilised. 

Wed, 09/05/2012 - 09:10 | Link to Comment SmoothCoolSmoke
SmoothCoolSmoke's picture

/ES futures don't seem all that excited about this.

Wed, 09/05/2012 - 09:13 | Link to Comment tok1
tok1's picture

They said ECB will not have seniority on any bonds purchased. So that will be posative.,

In the end they can still fund it.. The ECB buys the 1-3ys.. They then need to borrow the amount purchased..  (ie the 1 week term deposits to banks)  but prob like the Fed they can do back door 

monetary expansion as they just increase the amount of funds they supply to the banks via the refi rate (ie overnight lending rate to banks).  The ECB is expected  to  cut the refi rate tomorrow so this prob will give the banks some margin in this short term switch (ie borrow from ECB at Refi rate overnight) and lending to ECB at 1 week deposit rate... back door monetary expansion.

The FEd does the same now lending to US banks at the overnight rate and then selling bonds to them in the 3y sector as part of operation twist (which is really overnight FED lending  .. 3y fed selling and 7-10y FEd buying its big barbell.. but their trying to hide the overnight lending part to pretend their not expanding their balance sheet..

Wed, 09/05/2012 - 09:36 | Link to Comment vote_libertaria...
vote_libertarian_party's picture



I smell some GS-off balance sheet-derivatives games being set up.

Wed, 09/05/2012 - 11:54 | Link to Comment Dareconomics
Dareconomics's picture

The peripheral economies of the Eurozone continue to deteriorate despite all political and financial efforts so far. The new magic bullet is the Monetary Outright Transactions. This is basically the same as the Securities Market Plan from one year ago. The name has changed to appease the opposition; by including the word "monetary" the ECB can be said to be executing monetary policy rather than financing its failing countries.

The plan is structured like so. The ECB will purchase sovereign debt under three years in maturity and "sterilize" these purchases by withdrawing an equal amount of money from the financial system. The ECB claims that it will not have a preference on the bonds it purchases to make the program more palatable to foreign investors. Of course, there are strings attached for the aided countries. They will be required to formally request aid and agree to a "memorandum of understanding."

This plan is full of problems. First, the ECB is not permitted to finance countries. Even though these purchases will be executed under the guise of monetary policy, the PIIGS are out of money. Buying their bonds is financing their governments no matter which way you slice it. The reason for this rule is to prevent the European taxpayers from being responsible for other countries' debts. This is exactly the result of this program.

Second, it is doubtful that the ECB can buy bonds in unlimited quantities without increasing the money supply. Sterilization requires that the ECB withdraw a euro from the financial system for each euro it places there through its bond purchases. If the ECB does this, it risks shrinking the money supply.

With the turmoil in Europe, people are not investing in the Continent. The euros that the ECB exchanges for the bonds will find their way back to safer jurisdictions. Some of the money will flow to Germany, but some of the money is going to be used to buy dollars, francs and yen and leave the system. Italy and Spain have a combined €900bn in debt held by foreigners. Just think of the massive sums that could leave Europe after these foreign investors wisely exit the Eurozone. 

Third, using the ECB program as a stick to coerce the peripheral countries into reforming their economies is dangerous. The Eurozone is not the Warsaw Pact; it is a group of democratic countries with duly elected parliaments. It is up to these parliaments to create solutions to these problems. Dictating terms to the Greeks is not working and is creating resentment that will persist for decades, just like the scars from World War II.

Last, this program is not happening in a bubble. The Eurozone is in a recession and heading for a depression. The money to bail out these countries is simply not there. The core cannot afford a Spanish failure now with lackluster growth let alone with the economic shrinkage that is coming.

This program is no game changer. There will some initial exuberance, but ultimately the economic fundamental do not support the turnaround narrative in the future.

Wed, 09/05/2012 - 14:25 | Link to Comment RiskAverseAlertBlog
RiskAverseAlertBlog's picture

Who cares what they "say?" Treaty agreements forming the EMU "said" a lot of things that didn't amount to a hill of beans when the rubber met the road. The ECB will hyperinflate and Germany will swallow it as long as it chooses to remain in the EMU. Everyone may posture how ever they wish, but bottom line debt burdens must grow or the banking system collapses.

Thu, 09/06/2012 - 01:45 | Link to Comment agagshoes
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