ECB Independence Workaround - Lend To IMF And Turn A Blind Eye

Tyler Durden's picture

The political pressure on the ECB (and implicitly the Bundesbank's oh-so-stubbornly sensible and correct bankers) to just-print-baby-print is growing by the hour (or down-tick in BTPs and OATs). The cacophony of long-only strategists, Keynesian central bankers, and desperate (under speculative attack) politicians has perhaps reached a crescendo as it appears (from a Reuters article) that the ECB has found a workaround. By lending to the IMF, who are able to do pretty much whatever they want with regard to on-lending and primary issuance support, the ECB denizens can maintain their tough no nonsense anti-monetization stance while providing a leveragable IMF with more support for whatever leveraged buying they deem necessary (cough France Italy Spain cough). And all this as the IMF scrambles to replace its European Director - what could possibly go wrong?

Reuters: ECB could lend to IMF for euro-zone rescue

Euro zone and International Monetary Fund officials have discussed the idea of the European Central Bank lending to the IMF, to provide the fund with sufficient resources for bailing out even the biggest euro zone sovereigns, officials said.


"Some discussions on this have taken place... It could be one way of getting around the legal restrictions on the ECB," one official with knowledge of the talks said. A second official said ECB lending to the IMF was being explored.


The idea appears as the rising severity of the euro zone debt crisis, which now threatens to engulf Italy, or even France, makes policymakers desperate to get the ECB, with its limitless resources as a central bank, more involved in the rescue efforts to buy governments time for reforms.


Economists say only the ECB now can offer a credible guarantee to markets, as plans to leverage the firepower of the euro zone bailout fund EFSF to 1 trillion euros were unlikely to fully materialise or, even if they do, to be sufficient.


But EU law forbids the ECB to finance government borrowing. The bank has repeatedly said it would not become the lender of last resort to euro zone governments, which should first of all change policies that created large public debt and slow growth.


France has openly called for the ECB to get more involved by issuing the euro zone bailout fund -- the European Financial Stability Facility (EFSF) -- a banking licence that would allow it to refinance itself with the ECB liquidity operations.


Yet Germany fiercely opposes such an idea, fearing it would lead to financing government deficits, endanger the ECB's independence and in the end lead to higher inflation, which would make all euro zone citizens poorer.




Policymakers have discussed, therefore, how to get the ECB involved in crisis-fighting without endangering its independence. Lending money to the IMF, rather than any euro zone government, could achieve that, officials said.


"It is just an idea, at least for now," a euro zone official said.


Article 23 of the ECB statute says that "the ECB may conduct all types of banking transactions in relations with third countries and international organisations, including borrowing and lending operations".


The IMF could then use the ECB money to finance various rescue operations in the euro zone like bailouts, precautionary credit lines, on its own, or in cooperation with the EFSF.


"It is doable," a second euro zone official said. Two further euro zone officials said they had heard of the idea.


Money from the ECB to the IMF would also help alleviate criticism from non-euro zone IMF member countries that all of the fund's resources -- which come from all IMF members -- are being used up for the relatively rich euro zone.


To prevent a collapse of the euro zone debt market, the ECB has been buying government bonds on the secondary market, saying it was doing so to improve the transmission of its monetary policy, which highly volatile bond markets were distorting.


It has stressed however, that such purchases were limited in scope and were also temporary -- a half-hearted approach in the eyes of the market.


While it may be designed to keep the pressure on governments to implement reforms, euro zone policymakers privately say it is also the costliest possible way of dealing with the crisis.


"If the ECB told the market it would buy euro zone bonds for as long as it takes, or up to some big limit, who in the market would want to test that? But if they do it bit by bit, markets keep coming back," a third euro zone official said.

And Peter Tchir's, of TF Market Advisors, take on this debacle:

Why would the IMF borrow money from the ECB rather than just get money from its members?  Especially now that the BRIC nations have increased their quotas?

Well the obvious reason is that the BRIC nations have only talked about increasing their commitment, and haven't actually done so.

Maybe it has a lot to do with the fact that the member states have no money?  Maybe someone actually realized that with the US up against the debt ceiling we don't have cash to give the IMF.  I'm sure our guarantees don't count against our debt limit, so the IMF can borrow from the ECB rather than drawdown on our commitments.  That seems less positive.  Maybe they also realized that the Eurozone including the PIIGS are big contributors and they definitely have no money to give to the IMF, so again, borrowing is a better option.  The IMF borrowing from the ECB just seems bizarre.

The ECB would clearly just print money.  So much for prudence and caution.  Can the ECB actually lend to the IMF under its existing guidelines?  Maybe the World Bank (which is a bank) can borrow from the ECB under their charter, and then the World Bank could lend to the IMF, which could then use that money and some SDRs to create TLF's (temporary lending facilities) to NUA (nations under attack)?

The ECB may be considering using the IMF because the IMF can demand collateral or better terms on its loans than the ECB?  The IMF does try and become a senior lender.  If that is the case, than this can actually be really bad for existing debt holders.  Especially if it is coming as a realization that SMP's have been totally useless in sustaining the crisis and have done nothing but stuff the ECB's balance sheet full to the gills with weak assets and helped some quick traders make a nice profit.

Be very careful with this rumor.  As with so many other half baked "plans" (found on a discarded cocktail napkin after a 3 martini lunch) , the likelihood of this occurring seems low, and I highly doubt it will have the impact people want or hope.

In the meantime, new corporate bond issues and IPO's consider to struggle.  In spite of knee jerk reactions, the market seems very very cautious.

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GeneMarchbanks's picture

Seems France is dictating now. Poor Germans are opposing in words only. Either Germans sober up and realize they have the most to lose or they assure continental M.A.D.

SDRII's picture

IMF deputy just resigned yesterday appointed by DSK

IMF borrowing from ECB may have something to do with the ongoing power struggle for voting rights at the US controlled agency. The Chinese were quite vocal about this at the G20 and the US has been in an ongoing dispute with Europe over the reallocation of voting rights. BRIC pony up they want more votes. Ergo, borrowing from ECB alleviates the governance issues which are already at the fore. Lagarde took a Mainlander as her deputy


lizzy36's picture

Maybe the ECB can lend to someone else who can lend to the IMF who can lend to the EFSF who can lend to sovereigns.

In between the banks can take out their 2,3,4% in fees. The lawyers can set up the contracts. Look technocratism is already working.


DCon's picture

How about the ECB lend to Goldman at .0000001%.

then Goldman buy EFSF Bonds at 5%

EFSF charge PIIGS 5% plus the comission of .2%


Everyone wins, right?



willien1derland's picture

Hold on...I am having a moment...(sniff, holding back tears) - Will Give Lloyd & Team another opportunity to conduct God's work! (Handel's Messiah plays in the background as GS employees stand as Lloyd reads from the Book of Abacus & Timberwolf)

Bicycle Repairman's picture

This is workable.  Just replace "Goldman" with "Bicycle Repairman".

Manthong's picture

Wait.. then the PIIGS issue bonds with a 2212 maturity that are bought by Morgan Stanley who in turns puts them up as collateral to the Fed for buying part of their MBS book and insures the whole shebang with CDS's from Goldman.

Simple..  Bonus Time!

willien1derland's picture

Not to mention the 'opportunity costs' of re-using the austerity measures which have been passed in Greece to the broader EU population...I love the smell of corruption in the morning

sushi's picture

"Maybe the ECB can lend to someone else who can lend to the IMF who can lend to the EFSF who can lend to sovereigns."


Yeah, sovereigns like Greece. If they lent enough euros to Greece it could buy the rest of Europe and everyone could retire at age 47 on a fat pension. All problems solved.


lolmao500's picture

And bonus, once you accept one cent from the IMF, they control your economy.

Down with the IMF, down with the bankers, down with the puppets.

America needs to elect Ron Paul PRONTO so he can cut funding to the IMF so the globalist take over fails.

willien1derland's picture

I support this message...

--Mario "Super Mario" Monti

--Lucas "Using Da Force" Papademos

Who do the Bi-Lateral Commission & or Bilderbergs have in Spain, Portugal, & Ireland? (Just sayin')

WonderDawg's picture

I'm pretty sure we can't elect RP until next November.

hedgeless_horseman's picture



...a third euro zone official said.

Where would one look for empirical evidence that these folks (workaround wizards) know full well that what they are doing is not sustainable and will eventually destroy the current system?  The answer, I believe, is that you will not see any person's name associated with the plan.  The plan, itself, will be used as the noun in all descriptions.  Occasional mention of, "officials," and, "policymakers." Never the actual planners.  In Orwell's 1984, Big Brother is the plan.

What is a policymaker, anyway? Are policymakers elected, appointed, or hired?

Technocracy Fascism* in Action!


* "Fascists seek to rejuvenate their nation based on commitment to the national community as an organic entity, in which individuals are bound together in national identity by suprapersonal connections...."  Suprapersonal, bitchezzz!!!

ziggy59's picture

yet pms are going down....FED said he would handle inflation, hes doing so by manipulating the perception of it through gold

hedgeless_horseman's picture

Portfolio managers booking profits to cover margin calls.

WonderDawg's picture

I'm in the camp that thinks when this thing implodes, all asset classes will be sold off, including PMs. Keep some dry powder for when they go on sale for real.

AE911Truth's picture

Dear WD, in ref to: "when this thing implodes, all asset classes will be sold off, including PMs."

Yes, you will be able to pick up some paper gold real cheap.
Physical? I don't think so. Premiums for physical will more than offset the price dip.

Peter K's picture

If the ECB lends to the IMF, what would they get back as collateral? SDR's maybe? Hey, know what. We can kill two birds with one stone. And if we can get the World Bank to guarentee this entire boondoggle, the world may be saved:) 

Too good to be true:)

sabra1's picture

according to a well known source, (forgot name) the soon to be in hell oldidorks, once the euro and US dollar are caput, the IMF would print, and claim that SDR's are the new reserve currency. this would be a ruse to plummet PM's, then, to bring in a new, one world currency backed by gold!

The Big Ching-aso's picture



"Quick dammit bury the sausage the camera's on us again!!!!"


"Where else?"

"I can't your arm is already in there!"

"Alright my turn to bend over just do it so it looks normal"................





sabra1's picture

why, did they run out of rumors at "Rumors Are Us?"

DormRoom's picture

uhmm.. Isn't that called money laundering?  How can a Monetarist Central Bank ever consider something like that. f--king double think at work here.

scatterbrains's picture

JEF pinching off a little turd here it looks like

FinalCollapse's picture

We need the cartoon bears to explain it in German this time around. 

GMadScientist's picture

Sell the IMF Portugal and Italy's gold!


Dr. Gonzo's picture

Sounds like an illegal money laundering operation. Lets go for it!

SDRII's picture

Germans should launch the Dmarc and put a relentless bid on gold

Misean's picture

Screw the middle man. It should just lend to itself.

HD's picture

Monetary masturbation...

shortus cynicus's picture

LOL, fucking good description of current "monetary" system

oogs66's picture

they have jumped the shark - yet again!

willien1derland's picture

Monti needs to channel the Fonz!

willien1derland's picture

OMG - So the markets are rallying on the idea that the constraints democratically ratified by each EU nation in the Maastricht & Lisbon treaty will be contravened by the ECB in a technically illegal confiscation of taxpayer assets so the IMF can graft their vig & allocate it back to the ECB/EFSF/ESM?!

thecoloredsky's picture

So is there an actual playbook for all this madness or is the TPTB just winging it?

WonderDawg's picture

Winging it. If this was a viable solution, don't you think they would have come up with it before now?

DogSlime's picture

Sneaky buggers.  They might have gotten away with it too, if it weren't for them meddling kids.

Catullus's picture

This is a giant clusterfuck. Don't even pretend to understand it. Why don't the equity market fear the uncertainty of the whole thing? This is not just going to clear up in a month or so. Theyve discussing this for years and they've come up nothing. A few bond market interventions here and there. It's like expecting the hail Mary pass everytime they trade.

Jim in MN's picture








AKA the Near Periphery

dereksatkinson's picture

Gold is trading down because of opx.  Look at gold's action going into opx and every time you see irrational sell offs.

slewie the pi-rat's picture

the reuters article does sound like the cocktail-napkin idea p.tchir describes

they keep running stuff up the flagpole and seeing how many finiMinis salute

there could be a capitulation of the ECB here:  we can't finance this.  the reasons don't matter

of course, the chairsatan and the wicked witch of lagarde had this pencilled out last summer at the j.hole ponzi-nomics & bankstering book-cooking school

if the ECB or any other wwbankster can't do something legally, and the heat is on, they will have someone else do it, or create special "vehicle" fueled by wunnerful unicorn farts.  this is why those clerks and notaries are gonna go down in nevada:  for their bankster bosses.  mrs simpson's fifth grade will handle the RICO indictments due to layoffs and leadership turnover in the enforcement divisions of things

  • same shit
  • different day
baseball13's picture

An Open Letter to Jens Weidmann, President of Deutsche Bundesbank and ECB Executive:

Dear Dr. Weidmann,

     Although I have chosen to operate in a rural area of the central United States, as an investment manager for over 20 years it is with great interest that I have been following the developments in the Eurozone. Being a student of history and having grown up exposed to the increasingly interconnected nature of today’s global markets, I readily appreciate their exposure to political tempests. Your comments in the media regarding the nature of the current EU debt crisis comes as a breath of fresh air amidst the squalid cacophony of politicians who’s demands for monetary salvations comes not from the true needs of their peoples, but instead from their selfish desire for political immortality. The problems the EU faces are of their own creation. You rightly point out the Stability & Growth Pact proposed by the Germans in 1995 foresaw the dangers in a lack of commitment to strict financial requirements for EU entry. Today’s eurozone meltdown bears this out. One can only hope that the EC may re-endorse this policy when they finally address the current debt crisis and stop pretending they can indefinitely hold off the eventual collapse and default.

    In your recent interview with the Financial Times, a few of your quotes illustrates your commitment to solid fiscal fundamentals;

 “One of the severest forms of monetary policy being roped in for fiscal purposes is monetary financing, in colloquial terms also known as the financing of public debt via the money printing press,” Weidmann, who heads Germany’s Bundesbank, said in a speech in Berlin today.

 The prohibition of monetary financing in the euro area “is one of the most important achievements in central banking” and “specifically for Germany, it is also a key lesson from the experience of hyperinflation after World War I,” he said.

In reference to bond purchases, using Bundesbank currency and gold reserves to help finance purchases by a special fund - Such a course “undermines the incentives for sound public finances, creates appetite for ever more of that sweet poison and harms the credibility of the central bank in its quest for price stability,” Weidmann said.

“I am glad that also the German government echoed our resistance to the use of German currency or gold reserves in funding financial assistance to other” euro-area members, he said.


 These comments are welcomed by many fiscal conservative in the United States. I have enjoyed your November 8 presentation “Managing macroprudential and monetary policy – a challenge for central banks” posted on the Bundesbank website. If you will permit me a few comments;

 “An explicitly systemic view on financial markets is needed as an additional element in our policymaking building, namely macroprudential policy.”

Would not macroprudential supervision be defined by the pricing actions of the free global markets? Central bankers have been a dismal failure in their attempts at price stability. History has shown their short term artificial attempts at price manipulation have always eventually ended with greater imbalances, at the cost of the common man with assets flowing to those with the means to protect them from confiscation – resulting in further price instability (and wealth concentration).

You note, “…central banks ought to make a substantial contribution without, however, compromising their main objective – price stability – and their independence.” By artificially manipulating the level of prices, central banks are by definition, NOT independent. Unsound public finances and structural economic weaknesses result from the manipulative actions of men, not from the free action of the markets. The market attempts to allocate resources to their best use – as determined by the collective actions of individual’s expenditures. As long as central bankers operate under Keynesian economic assumptions, their actions are doomed to fail, with greater instability leading to social unrest. If central bankers truly wish to be independent and enable stable prices, then a system free from the calculated actions of a centralized organization – must be established. Perhaps the central bank manifesto should be changed to one that protects the sovereignty of the free markets?  On the monetary side, a hard asset-backed monetary system would be preeminently qualified by the proof of history. Gold and silver have been the sole currencies that have never failed. It has been only after these were replaced by the paper promises of man, that civilization has suffered severe economic gyrations.

On page 4 of your presentation you address monetary policy and its use during crises and bubbles. Which is preferable in addressing illness; developing the best medicines or preventing its occurrence? It appears that the focus has become on the prior, rather than the latter. Economic crisis, investment bubbles, financial panics, even plagues and diseases are the result of causative actions. Why not address these? Examine why financial imbalances ‘regularly’ build up over time. Central bank credibility is already dubious. Is not the definition of madness doing the same thing time and time again expecting different results?

I wholeheartedly agree with your premise, “monetary and macroprudential policy cannot be seen completely separately from each other due to potential spillovers.” Not to overly simplify things, but in respect to the value of your time, the monetary policy should be one of having a stable currency, backed by hard assets which guard against human manipulation. The companion macroprudential policy should be to protect the free actions of the markets to allow it to supervise and regulate the fiscal responsibility of market participants. (Why do we call it ‘moral hazard’ indeed!) Market transparency has often been mentioned in the Basel accords, but in action it has been far less evident.

The most profound example of excessive credit expansion in the US began with the disastrous US Community Reinvestment Act of 1977 which encouraged banks to make loans to otherwise non-credit worthy individuals. Although this act did not officially mandate substandard lending, it did pave the way for future legislation. The ability to charge high rates and fees to borrowers was not possible until the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) was adopted in 1980. It preempted state interest rate caps. The Alternative Mortgage Transaction Parity Act (AMTPA) in 1982 permitted the use of variable interest rates and balloon payments. These laws opened the door for the development of a subprime market, but subprime lending would not become a viable large-scale lending alternative until the Tax Reform Act of 1986 (TRA).The TRA increased the demand for mortgage debt because it prohibited the deduction of interest on consumer loans, yet allowed interest deductions on mortgages for a primary residence as well as one additional home. This made even high-cost mortgage debt cheaper than consumer debt for many homeowners. In the mid-1990’s the Clinton administration further modified the CRA to address criticisms that the regulations, and the agencies’ implementation of them through the examination process to date, were too process-oriented, burdensome, and not sufficiently focused on actual results. Note that by 1998, the young subprime mortgage market already had a downturn. In 1997, delinquent payments and defaulted loans were above projected levels and an accounting construct called “gains-on sales accounting” magnified the cost of the unanticipated losses. In hindsight, many lenders had underpriced subprime mortgages in the competitive and high-growth market of the early to mid-1990s. This was an attempt by the market to curtail this unworthy expansion of credit along with its companion MBS. The response by legislative action resulted with the 1999 passage of the Gramm-Leach-Bliley Act which repealed laws prohibiting banks from offering investment, commercial banking and insurance services. After 2000, the growth of sub-prime lending began its ascent to bubble status, bursting with global ramifications in 2008. 

The subprime mortgage market existed only because of government manipulation of the housing market. Easing of the barriers to entry allowed otherwise non-creditworthy individuals to obtain credit. Lenders would not have made doubtful loans had their risks not been mitigated. The willingness of government to purchase theses dubious mortgages through their GSE’s such as Fannie Mae and Ginnie Mae, further encouraged this behavior. It was only when the institutional bankers became involved through securitization that systemic risk was introduced. And if that were not enough, soon even these securities would be leveraged resulting in global systemic risk. If the market had been allowed to operate, mal-investment would have been curtailed by the early failures evident in 1998. Additionally it is important to note the easing of credit did not lead to a better standard of living for more people. Rather it funneled their wealth in both mortgage payments and foreclosures of real estate, to those who designed and managed the system.

The path that central bankers have embarked upon is central market control. If one can accept the Austrian concept  that the market is the summation of global individual consumption, then it is the height of hubris to imagine that any one organization can create an effective and equilibrious artificial monetary policy for the globe. A far more effective use of resources would be to utilize the fundamental controls already present in our civilization, namely the markets, as a culmination of individual consumption, to facilitate credit and distribute wealth, and physical assets, to give our currency a stable and non-debasable backing.. One need only look to the Federal Reserve of the United States to the disastrous affect of central economic planning. The value of the dollar has been decimated since the Fed’s creation in 1913. I urge you to rethink your Keynesian outlook and instead develop an appreciation for the Austrian school of Von Mises, Hayak and others, which can lead to lasting economic stability.


Most Respectfully,

A Concerned Investment Advisor