ECB Liquidity: Back-Door Bazooka Or Suspension Of Democracy, BARCAP Opines

Tyler Durden's picture

The market's reaction to Draghi's comments over the last week have been visceral in its schizophrenia. While his 'temporary' provisions, three-year LTROs specifically, provide a life-line of liquidity (a la TLGP - and how is that working out for the US banks having to roll now?), they hardly address the real underlying problem of the vicious circle between sovereign debt's now-risky nature and financial balance sheets bloated with zero-risk-weighted re-hypothecated peripheral bonds. The last week has seen a roller-coaster of Senior-Sub debt decompression and compression, liquidation-like drops in commodities, lower correlation across European sovereign debt, and significant dispersion in high- and low-beta equity and credit markets (notably as we have previously discussed, some of which will have been driven by index roll technicals). The issue comes down to whether this is the Bazooka (buy-buy-buy) or not enough (fade-the-rallies) and BARCAP's macro sales and European Banks' research team have, like the rest of the market, been exchanging views on this perspective. While their take on the liquidity explosion is that it doesn't solve the almost unsolvable solvency problem but it the deeper insight that perhaps it is not the actual mechanics of this liquidity bazooka but the perception that democracy itself has been suspended in favor of bank and sovereign survival that interests us more. Furthermore, they do an excellent job on breaking down the mythical carry trade potential of these LTROs and mutual sovereign financing benefits since near-term profit potential would be offset by additional sovereign risk -
meaning that funding markets could stay closed for longer

From BARCAP Macro Sales:

Our European Banks Team (Simon Samuels and Mike Harrison) are manifestly the best European banks strategists in the market. I can't speak highly enough of them. I therefore want to pass on a small essay they have written on the ECB providing infinite 3 year liquidity at 1% to anyone who wants it. However before I do that below - I have to disclose that in this instance I think they have completely missed the point. They analyse the ECBs recent decision to provide infinite funding to anyone who wants it for 3 years duration at only 1% cost. The term 'back door bazooka' has been termed because this could be seen as a way for the ECB to fund the hoovering up of all PIIGS debt but using the banks as an intermediary. Lets say I'm a European Bank - i borrow a lot at 1%, invest in Italian 10 years at 7% and earn a 'free' 6% carry trade profit. So banks can rebuild capital as this is easy profits. Sovereigns get funded. And all is well. This sounds super cool. And it is cool. But Samuels/Harrison argue it is not cool enough. Please do read their essay for yourself as they are market leading. But the point i think they make is that liquidity helps but ultimately we are dealing with a solvency issue here.....just because you are more liquid doesn't mean you won't go bust.

That is exactly right. Solvency is the key. Obviously. But they miss the big point. The big point - and the real bazooka surely - is that democracy has been suspended in Europe. Most obviously in Italy but the spread of 'technocratic' government is relentelss now on the contintent. In my view it is the removal of the democratic obstacle that is the true bazooka for solvency. Liquidity is needed to keep the patient alive for 3 years or so. But that's pointless if no surgery is done over that time to heal the patient. The surgery is now a go. The democratic experiment is over. Fiscal reform ignoring the will of the people (as the will of the people has bankrupted Europe) is on. I am amazed that this suspension of democracy has not got more attention. The powers that Monti now has would have made il Duce blush! But i think a lot of Europeans are inherently 'liberal' and that this recognition of the failure of the welfare state model and the need for the suspension of democracy is slightly awkward to discuss around the dinner table while smoking your Gitannes, wearing a beret, looking thoughtful and moaning about capitalism. But it is the reality.

That's my view. I think we do have a solvency bazooka. Am i saying therefore buy everything? Hardly. We remain in thrall to the politicians. But at least the politicians now have economics degrees rather than bandanas.......              Below i now follow on with Harrison/Samuels's excellent piece. This is an important debate...let me know if you want me to get them into your life..And so to their piece...... Enjoy!

[Chart Below shows Sovereigns outperforming Sub Financials today - again we suspect that market participants are not as enthralled with this bazooka as many believe they should be and in fact this is more technical index protection selling due to its significant cheapness (wideness to fair-value).]



From BARCAP European Banks Team:

Three year ECB funding: A back-door bazooka or fast-track to 'zombie-ville'?
There's been a lot of focus recently about the ECB's introduction of two 3 year LTROs, scheduled for 21 December and 29 February.  The bull case here rests on the idea that it will allow banks to do an attractive (and zero risk-weighted) sovereign debt carry-trade - thereby easing sovereign yields and simultaneously boosting banks' earnings (which will help with the EBA recaps). In extremis, bulls argue, pumping ECB liquidity into banks effectively creates a 'buyer of last resort' for sovereign debt - thereby ending the current crisis. We think that this view is wrong. Whilst we see the 3 year LTRO as a positive development for the sector in terms of warding off the threat of a funding-induced credit crunch in 2012, the 3 year LTRO is not the right tool for banks to fund a sovereign carry-trade with, and would likely make non-ECB funding access harder not easier.

In summary, what the ECB announced last week is as follows:

  • Two 3 year LTROs (long-term refinancing operations) - ie banks can borrow money from the ECB for 3 years rather than the current maximum of 13 months. But banks can pay the money back anytime after the first 12 months if they want.
  • The operations are done as "fixed rate, full allotment"...which basically means that the banks can get as much as they want provided they have sufficient collateral.
  • The amount that it will cost the bank is the "average rate of the main refinancing operations over the life of the respective operation"...which currently stands at 1% (so it'll act like a floating rate note)  Obviously, the banks have to post collateral if they want to borrow from the ECB, so the amount that they can borrow is limited by the amount of available collateral that a bank has  However, the ECB also relaxed the rules on what counts as valid collateral (eg they can now include a broader set of credit claims) and halved reserve requirements (freeing up to EUR100bn of collateral).


The sovereign carry trade potential of the 3 year LTRO is limited

At first glance, the 3 year LTRO looks like a very attractive tool to use in a carry trade.  Banks could borrow from the ECB at 1% to buy (say) Italian 10yr debt yielding 6%-7%, and pocket the difference (after adjusting for haircuts). Even better, since (for many banks) sovereign risk carries a zero percent risk weighting, this trade would carry an infinite return on equity. So banks would have the incentive to do as much of this as possible - creaming off profits (which help meet the EBA's EUR114bn capital shortfall) whilst simultaneously easing the most distressed sovereign bond yields.  The logical conclusion here would be that the ECB could engage in quasi-QE, using the Eurozone banks as a proxy 'buyer of last resort' for sovereign debt, standing ready to purchase as much sovereign debt on the secondary markets as is needed.  This would end the current crisis at a stroke - and would be entirely within the confines of current EU treaties.

Unfortunately, we don't think that it will be quite as easy as that. Here's why:

Banks might not want to use 3-year money to fund a sovereign carry trade: The earliest that banks can pay back the 3 year LTRO is after 12 months - which is probably longer than banks would want. If a bank uses the 3 year LTRO to do a carry trade in its trading book on (say) Italian debt and the trade goes against them, they'd have to sell the Italian bonds and buy bunds (or dollars or whatever) instead.  This could potentially lead to negative carry problems, or leave them crystallising a large loss if bund yields then rise from their current historic lows.  Alternatively, if the bank placed the trade in their banking book to avoid the volatility of marking-to-market, they'd still face the risk of posting extra collateral if there were further sovereign downgrades, and ultimately have an even bigger problem on their hands if the markets' worst fears on sovereign solvency are realised. So whilst it's plausible that such a trade might be attractive to some banks, there is no riskless free-lunch on offer here.

Access to non-ECB funding becomes harder not easier - so more banks could become 'addicted' to the ECB: At a time when the EU / EBA is asking banks to hold more capital because of sovereign risk, it would be strange to see banks increasing the exposure to the very asset class that everyone is most worried about. Moreover, if banks load up even more on SGIIP sovereign debt this will make it harder not easier for banks to issue term debt.  So funding markets will stay closed for longer.  This in turn would mean that more banks become more reliant on ECB funding.  We anticipate that neither the ECB nor bank managements would want to see this play out.

It's not exactly what the ECB had in mind: It's likely that the ECB wants banks to use the 3 year LTRO to help them manage the EUR600bn of senior unsecured debt that falls due in 2012 (much of it in the first quarter).  So whilst the ECB might go along with some degree of carry-trading, this is perhaps limited by European banks' need to roll over their term paper next year.

There's still stigma in using the ECB:  This latest move from the ECB (combined with recent actions from other central banks) clearly makes a stronger economic case for accessing ECB money.  This can reduce the stigma for banks using ECB funding - but is unlikely to eliminate it entirely.  Whilst some banks could conceivably turn a profit from taking ECB money, they would be justifiably concerned that that they could struggle to convince investors afterwards (especially in debt markets) that they only used the ECB for profit-making rather than because they needed the funding.

Do banks actually want to hold peripheral sovereign debt?: Up until the end of September, it made sense for banks to sell down their holdings of SGIIP sovereign debt because the EBA's capital shortfall calculation is based on sovereign bond holdings at the end of Q3.  This helps partly explain why, for instance, banks reduced their holdings of Italian sovereign debt by c10% between Q2 and Q3. Since then, banks have had no further incentive to sell down SGIIP sovereign paper from a regulatory / capital shortfall perspective.  Yet the continued gyrations in peripheral sovereign bond prices means that they remain tricky assets to hold. Would banks want to do a carry trade on volatile instruments?

Of course, even though banks might not want to use ECB liquidity to buy sovereign debt, moral suasion by politicians could effectively force them to do so.  This seemed to be hinted at last week in a statement by the French President, Nicolas Sarkozy, who stated the the ECB's increased liquidity provisions for lenders meant countries like Italy and Spain could look to their banks to buy their sovereign debt.  In effect, Sarkozy is advocating just the sort of 'backdoor bazooka' to solve the crisis that was alluded to above. Would this be good or bad for the sector? We suspect that the market reaction here would fall into three stages:

(i) A near-term positive for the sector as investors hope that the end of the crisis is in sight.

(ii) Medium-term uncertainty as banks become ever-more reliant on the ECB, and question marks surface as to whether or not the strategy will work (eg are yields coming down fast enough? Far enough? Are all the SGIIP sovereigns definitely solvent rather than merely illiquid?).

(iii) The longer-term equity story for European banks could be potentially compromised by political interference: if banks make super-normal profits via an ECB carry trade, it would not be unrealistic to think that political notions of "fairness" could start to be applied to banks' lending and pricing decisions.


Whilst the 3 year LTRO is helpful for managing the senior unsecured funding hump in 2012, balance sheet encumbrance increases even as the provision of credit to the wider economy eases

Even though we anticipate that banks' use of ECB 3 year monies for carry trade purposes will be limited, it is still an incremental positive for the sector, versus having no central bank backstop at all. As noted above, European banks have got circa EUR600bn of unsecured term debt maturing in 2012, with much of it falling due in the first quarter.  Given that unsecured funding markets are, effectively, closed for the time being, rolling over this money has appeared challenging for European banks.

As such, having the ECB as a potential replacement for the market funding is vital.  Of course, even before the 3 year LTRO was announced, banks could access ECB monies for maturities of up to 13 months - with most ECB funding taking place at 1m-3m maturities. The cost for this is the same 1% as for the 3 year LTRO.  So, in theory, banks could have replaced all of the maturing EUR600bn with this shorter-term ECB money anyway (provided that they had adequate collateral).   However, it would have been understandable if some banks had not wanted to fund too much of their balance sheet on such short maturities. It's clearly a reasonable assumption for banks to bet that they could always roll-over ECB funding on favourable (ie non-punitive) terms.  After all, over the last few years, the ECB has made very clear how far it'll go to protect systemic stability - why should that change? But at a time of heightened macro concern, a 'reasonable assumption' might not be good enough for more risk-averse institutions.  Faced with a choice of taking 1m-3m ECB money or shrinking, these banks would opt to shrink.

By offering a 3 year LTRO, the ECB has side-stepped these concerns.  The longer-term ECB money can now be used to replace maturing senior unsecured debt - if required.  Banks can use this to maintain credit provision to the real economy.  So the 3 year LTRO may help to reduce the risks of funding-driven de-leveraging - even if the deleveraging risks from the EBA's capital shortfall remain.

But it's not all good news here. Banks' access to ECB funding requires them to post collateral.  So we could have a situation where banks exchange (market-based) unsecured funding with (ECB-based) secured funding.  But if banks encumber more of their balance sheets via ECB repos, then this reduces the amount of assets that senior unsecured bond holders would have a claim over in insolvency.  This means that ECB funding subordinates the remaining senior unsecured investors.   This balance sheet encumbrance may, therefore, increase the cost of banks' non-ECB unsecured funding and make it difficult for banks to wean themselves away from the ECB and back on to senior unsecured. So 'excess' bank usage of the 3 year LTRO runs the risk of creating more banks who are 'addicted' to ECB money - ie the classic model of 'zombie' banks. Furthermore, it's arguable that the provision of emergency central bank funding to the sector is 'proof' that many wholesale funding business models in Europe do not work and re-inforces the need for structural change for large portions of the banking system.

Furthermore, the impact on lending margins is more than a little bit ambiguous.  In theory, banks borrowing from the ECB at 1% for 3 years is a pretty massive subsidy versus the theoretical cost of replacing this funding in the market. The key question here is whether banks pass this subsidy on to customers or whether the ECB funding offers banks an opportunity to boost their margins.  Ordinarily, competition would see the fall in funding costs passed straight through to customers. As argued above, political notions of 'fairness' might put pressure on banks to do exactly this rather than increase profits.

But this can create a problem.  Banks that do not access ECB funding (perhaps in a show of strength) would be put at a competitive disadvantage versus those banks that do.  If ECB-funded banks pass through the lower funding costs to customers, they will likely take market share from the 'stronger' banks and structurally depress RoEs for the non-ECB funded part of the market.  If ECB-funded banks don't pass through the lower funding costs they will make fatter margins, so they win again.  Taken in isolation, this would seem to be be a deeply perverse example of moral hazard.  However, banks considering whether to use the 3 year LTRO have to weigh up the potential near-term competitive advantages they can gain with the longer-term risks of potentially becoming 'addicted' to ECB funding. The answer here ultimately may be determined by how quickly debt markets in Europe can normalise: if the stigma of ECB funding dissipates and political interference is limited, then weaker banks who use more ECB money may be advantaged versus stronger banks who do not.

A more clear cut conclusion can perhaps be drawn about how the 3 year LTRO may help to mitigate credit quality concerns in peripheral Europe. High sovereign funding costs typically mean high bank wholesale funding costs.  But the banks pass this on to their customers (where they can), meaning that the interest rate on loans for the end-customer increases most in the economies least able to absorb the extra cost.  This creates a vicious circle where high sovereign funding costs ultimately reduce tax receipts - thereby worsening the sovereign debt dynamics. By severing the link between bank funding costs and sovereign bond yields (for maturities <3 years), the ECB can help prevent this vicious circle from becoming established.

It may improve the optics of near term funding / liquidity measures - whilst actually delaying the timing of the terming out

Technically speaking, by offering banks longer-term funding, the ECB has made it easier for banks (eg the French) to term out their funding.  This will likely flatter the LCR and NSFR ratios that banks report in advance of full compliance in a few years time.  Of course, this may be a bit of a fudge.  It's not clear whether using ECB money really counts as terming-out funding.  Surely the point of a bank terming out their funding is to make them more resilient to liquidity squeezes.  But ECB funding isn't subject to these vagaries to the same degree.  Could a bank claim in good faith that they have fixed their funding profile by pushing loads of their liabilities onto the ECB? We suspect that this may be a hard sell. If using 3 year ECB money actually delays the timing of banks 'properly' terming out their funding, this could potentially be a negative for attracting longer-term investors.

Overall, the 3 year LTRO is a (small) incremental positive for equity markets rather than a 'game changer'

If a major European sovereign defaults, then very clearly the whole sector will sell off.  If sovereign risk disappears, then the whole sector will likely rally. In the absence of a 'backdoor bazooka', we think that it's unlikely that the 3 year LTRO particularly changes the story here.  So any benefits to the sector from the LTRO potentially provides material upside as / when sovereign risk declines.

The longer LTRO does help banks mange their way through the 2012 senior unsecured funding hump, it lowers the incentives for banks to shrink and potentially reduces risk at the shorter end of the yield curve.  This is a clear positive for the sector - but we don't think that a funding-driven credit crunch in 2012 had been priced in anyway.  So the equity market response may be muted here - although net net, the risks of additional credit quality deterioration in Italy and Spain are reduced. We do not see the 3 year LTRO as offering European banks a 'no-brainer' carry trade, so we'd expect bank appetite for this purpose to be limited.  Indeed, if banks were to engage in a sovereign debt carry trade at this stage in the cycle, we think that the risks to the sector would be to the downside: near-term profit potential would be offset by additional sovereign risk - meaning that funding markets could stay closed for longer.  Whilst it's clearly difficult to say with certainty, our rates team suggests c EUR250bn of demand for the auction in December (see "The ECB: Non Standard Delivery", Laurent Fransolet). We anticipate that if substantially more than this was requested by the banks for carry trade purposes, non-ECB funding could potentially become even more dysfunctional.

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knight99's picture

 Twas right after nine

And all across the screens

Not a market was moving

Not even the grains


Things had just settled down

After yesterday’s rout

With visions of dollars

Floating about


Then on down the quote list

There arose such a sight

Had the S&P 500

Officially lost its fight


Down one percent yesterday

Not a heckuva lot

But down through its 50-day moving average

Without even a thought


Might this be a gift

I asked myself

An early sell signal

Wrapped by an elf


Yesterday commodities slid

Like a sleigh down a hill

But today at the bottom

They appear very still


Now over the last

Thirty-four days


Correlations have loosened

Gone separate ways


But more recently

As the markets dip

Commodities, currencies, stocks

Have become attached at the hip


Gold, silver, copper

Aussies and euros

All wrapped in one blanket

With frostbitten toes


The move is one-sided

Balanced by dollars

Shore up your capital

Button your collars


It smells of worry

Of investor concern

Like roasting your chestnuts

And then watching them burn


If stocks don’t recover

If they don’t climb out of the snow

Christmas this year

Could totally blow


With no wealth effect

Or stimulus to boot

We pray for Ben Bernanke

In a Santa Claus suit


On Raskin, On Fisher

On Plosser and Yellen

On Kocherlakota, On Duke

On Diamond and Evans


They may have disappointed

Earlier this week

But falling markets may beget action

From the FOMC


They better act fast

To stem all the fear

Because the financial naughty list

Is quite long this year


It is said the eurozone struggles

To rescue its members

Because they can’t agree

On coming together


But the problem is worse

Than a collective can fix

With Sovereigns selling CDSs on each other

And with insolvent banks in the mix


While “mass incidents”

In China Prevail

Its policymakers

Are chasing their tail


Officials seek growth and opportunity

Its people are demanding

But they’ll be lucky

If they avoid a hard landing


Emerging markets can see

That their growth is slowing

Without Europe and China

The tough has gotten going


Like unicorns and leprechauns

The ogre on the cliff

And like Greek austerity measures

Decoupling is a myth


And just when you thought

Things were looking scary

MF Global’s demise

Was just the canary


Consider all the

Off-balance sheet items

All the re-hypothecation and leverage

Among them


Tight-coupling be damned

And this may sound crude

But the global financial system

Is totally screwed


On the markets, this mess

Will take its toll

And many will be left

With a sock full of coal


The US economy

May avoid a pandemic

But chances are

This global financial mess is systemic


As politicians and voters

Fight to restore common sense

America may recover

Or it may go off the deep end


The Plunge Protection Team

May save markets, I know

But as of right now

Look out below



Black Swan Trading.


Josephine29's picture

The mechanics of this in action are explained well here.

What created this sudden enthusiasm for Spanish government bonds?


The examples I gave on the second of December have something else to support them now and it is due to a new initiative at the European Central Bank. It announced at its last policy meeting that it will hold two separate three-year long-term refinancing operations and the first of these is on Tuesday.


So as long as you have collateral (Spanish government bonds are collateral) you can have as much money/liquidity at an interest-rate of 1% as you want for three years. So the 2016 bonds which were issued yesterday at a yield of 4.02% suddenly look attractive do they not. You can finance them for 1% for the first three years of their life and make just under 3% a year (there will be a “haircut” applied by the ECB).


Also existing bonds look attractive and if we look at the yield on existing 3 year maturity Spanish bonds they have fallen from 5.1% on the day of the ECB announcement to 3.57% as I type this. Suddenly the improvement in the price of these bonds does not look as good as it did before did it? Yet again risk is being moved around but the underlying issue is unchanged and taxpayers find themselves potentially on the hook yet again should this pack of cards fall down.

GeneMarchbanks's picture

The focus on Eurozone peripheral sovereigns is way overhyped. I'm now convinced the big market moving event will come from else where.

There's a bank run in the periphery. We know that.

ECB will act as a life support over the medium term. We know that.

aleph0's picture



Looks like the EU is thinking about using PRIVATE ASSETS to bail out the banking system :

( In German unfortunately - use Google to translate )

FAZ: Very high Private Assets in the Eurozone

Germany Culture-Radio : “load balancing” instead of “Expropriation”

GoldReporter: Why you can already write off your assets


Ironically , Belgium has the highest Wealth pro Capita  ( FAZ Chart ).

Now how did they do that I wonder ?
Could that have something to do with the EU's HQ in Brussels ?The FAZ says there are 18 Trillion Euros of wealth  in Private EU Households.... and 6 Trillion would do nicely to bail out the EU Banks.


PS: This just in :


Shows all the kids emptying their piggy banks into the EU's black hole.

Seems to be from an ARD show ( ARD = #1 MSM TV Channel )


bank guy in Brussels's picture

Belgian wealth is very, very old and much of it held very quietly ... We were perhaps the richest region of Europe in the 1400s, when we were part of a old grand 'Duchy of Burgundy', a large oddly-shaped 'middle kingdom' between France and Germany and stretching much of the way from the north to Switzerland. Then we were the centre of the Holy Roman Empire at its height under Emperor Charles V, who was born and raised here in what is now Belgium.

People here are used to empires coming and going (not to mention currencies), and have ancestral memories of securing wealth while, for example, the armies of Napoléon came and went. There is also a lot of private gold and silver, held discreetly; we talk about it much less than Americans do. Belgians are ready for the ebb and flow of the EU as well.


equity_momo's picture

Someone just sit these idiots down and tell them to stop running. They cant out run this thing so they may aswell default and start over , will be less painful in the medium to long term.

"Listen and understand. That Terminator is out there. It cant be bargained with. It cant be reasoned with. It doesnt feel pity , or remorse , or fear. And it absolutely will not stop , ever , until you are dead"


Seasons greetings.



youLilQuantFuker's picture

The article says that they can outrun it using a place kicker with a bionic leg. Kick the can.

XRAYD's picture

The Muppets Henry (Sarkozy) and Liza (Merkel) in a rendering of - A Hole in the Bucket - sum up the Euro fix:


bank guy in Brussels's picture

This article has great points but misses digesting a great fact, about the revolutionary momentum building with the people in the European streets, who are about to BRING DOWN GOVERNMENTS.

It is not true that, as said above, « democracy has been suspended in Europe ». The authors' mistake is looking only at a temporary phase of institutional arrangements, and not the whole social - political dynamic in play.

People in the streets ARE democracy, not institutional structures, and much more than 'voting' which can be managed - manipulated - co-opted ...

People in the European streets are the ultimate power here, even still ... we are much better off than the Americans under their repression, with their tweedledum - tweedledee 'two parties' that lead to Bush and Obama having the same policies. - Ron Paul is certainly different in America, but I suspect it will take the direct power of God against the US oligarchs to let him through.

Just the other day we had nearly 1% of the Belgian population demonstrating in the streets of Brussels against economic austerity, and that was only to remind the new government who is boss. Italy and Greece are already in near-revolutionary condition. Iceland already had a successful populist revolution ...

In Europe we are still people of 1789, ready to storm the Bastille, and 2012 may be another revolutionary year for the history books, rather like 1848.

youLilQuantFuker's picture


If things get out of control they will call in American Armed Forces as usual. You bitchez will tuck tail and cower in your windmills. If you make it that far, I heard wooden clogs are a bitch to run in.

Sandmann's picture

Always takes 2-3 years for them to warm up though - 1917 Us finally got into the battle as Russia left.   1941 got into the battle after being invited to by A. H. and 6 months after the Russians changed sides to join the Allies

William Finn's picture


I just googled the "fighting spirit of the Belgians"


World War II

Period of the Phony War

As the German army invaded Poland on September 1, 1939, the Belgian government announced its neutrality on September 3. On November 7, 1939, the King of Belgium made a joint public appeal with the Queen of the Netherlands, calling on all belligerents to accept mediation to terminate the war.[21]


German invasion

Invasion of Belgium by Nazi Germany (see Battle of Belgium) started on May 10, 1940 under the operational plan Fall Gelb and formed part of the greater Battle of France together with invasions of the Netherlands and Luxembourg. The Belgians put up a short-lived resistance and it took 18 days only before the country was subdued. Diplomatic considerations had led them to make very limited preparations for invasion and the attack was immediately successful. On 17 May 1940 the capital city Brussels fell to the Germans. The Belgian king surrendered on May 28, contrary to the advice of the Belgian government, having decided the Allied cause was lost.[22] The King remained in Belgium during the war as a German prisoner while the government went into exile and continued military action in the Allied cause.


Allied liberation

Belgium was liberated late in 1944 by Allied forces, including British, Canadian, and American armies, including a small Belgian national contingent.


Sandmann's picture

The Belgian king surrendered on May 28     but kept it secret from the British and left their left flank exposed around Antwerp. Lord Gort had to disobey Churchill's orders and decided to fall back on Dunkirk with a huge rout as British Forces were sliced through by German armour leaving 338,000 to be lifted off the beaches at Dunkirk and another 220,000 were rescued from Brest, Cherbourg etc.


So thanks to Lord Gort Britain could save its Army from the betrayal of the Belgian King - although for every 7 soldiers rescued at Dunkirk 1 became a POW

falak pema's picture

The underlying thesis is that the global Oligarchy, represented by Hank Paulson and Tarp three years ago, now Draghi and ECB's comments on installing a liquidity pump and sovereign debt tsunami insolvency fire wall, is doing God's work in defence of western civilization; like FDR/Churchill in 1942. It is a little far fetched to say the least.

"We are in financial war! You guys should now rally round the flag and forget your individual rights!"

Ok, but who is the enemy? It is US! Wow, so the new POTUS is fighting against himself and Old Potus's broken legacy?

And justifying that due process, total transparency and accountability, remedial action etc. etc. etc. be suspended on both sides of the pond, making life hell for the Billion first world citizens; all to save the 0.1% who initiated, controlled and benefitted from the ponzi.

"Go back to your miserable sleep Sheeple. We'll give you a wake up call when the WAR is over and we have recovered our economic growth, and only THEN, you your citizen's rights!"

Now, that is post Pearl Harbour talk, about "a day in Infamy", but this Pearl Harbour  has been committed by the US/EU ruling classes against their own people. There are no fascist Axis powers threatening the world today!

Who are we kidding?? And when has an Oligarchy EVER given back power to the people???

One question to the people who understand in detail how this back door Bazooka works : This monetary creation is it considered "sterilized"? Or is it true new money creation. How does the ECB operate this back door Bazooka? I understand that the banks provide "junk" collateral; fine, but by pumping new money into the euro banks, unable to go get money from their US counterparts; doesn't the ECB QE like the FED??? Just asking...

Reptil's picture

"Who are we kidding?? And when has an Oligarchy EVER given back power to the people???"


PaperBear's picture

CFTC's Bart Chilton has just been on CNBC saying 'I want customers to have opt-out of how their money is used'.

I would say that unless customers do have an opt-out they will empty their account and put their money elsewhere like physical gold/silver

PaperBear's picture

Could this post be any longer <sarc> ?

waterdude's picture

Thing about a feedback loop is it's a loop.   Which is why journalists, analysts and others that live to create fearsome stories love them so much: they extrapolate either untold wealth or complete destruction.  If EU banks can obtain funding for a carry trade using sovereign bonds as collateral, sovereign spreads will contract and (ex-Greece) debt levels become more sustainable.  If EU banks couldn't fund previously because of unsustainable sovereign holdings, they'll find it easier to fund in future. 


Obvious the world's not that simple and there are plenty of structural issues that darken the outlook for future ROE for EU banks (regulatory, asset quality, lower leverage).  But it's interesting that when the zerohedge "we're all  doomed because banks can't fund" story gets turned on it's head and they can fund, Zerohedge disputes the logic of the feedback loop.


Atomizer's picture



Slip slidin' away
Slip slidin' away
You know the nearer your destination
The more you're slip slidin' away

Minoan's picture

New rumour.

France may be downgraded tonight. (in French)

guiriduro's picture

Forgive my limited understanding of sovereign financing, but isn't the sovereign debt risk profile in some kind of dynamic and mutual arrangement with the banks - i.e. if a sovereign is viewed as risky because it might have to bail out banks, and the bank is viewed as risky and possibly in need of a bailout because its holding "risky" sovereign debt, isn't there some kind of cycle there ?

Surely, if the ECB intervenes to provide a cashflow-challenged illiquid bank with some liquidity such that it can borrow to fund sovereign purchases, then both the sovereign and the bank improve (i.e. the risk deterioration relating to sovereign exposure at the bank improves, and the sovereign exposure to the bank likewise improves.)  All other things being equal, which of course, they aren't, but at least in the limited sense of sovereign->bank->sovereign exposure, am I right in thinking there has been an improvement ?


Tic tock's picture

I just love the idea that european leaders now have economic degrees. Mainly though, whethr the EU is capable of a structural change to the wholesale financing method - same with the US - I would've argued that it isn't until there is no option to print left, will the policymakers finish with enriching themselves over the trough:- this infinitely available cash is going to fund the profligacy of the ruling elites, it is to support inflated wages and overpriced contracts. Europe - and the US - is now too expensive - and it is  an exclusivity for which they are proud - presumably it delineates men from beast. The government finances are a product of a very sick body, and banks are at the heart of that body. One of these nations has to structurally alter the bond-financing model, to serve as the brain. This article is readable in that it does mention how banks also need policy rather than transfusion. ...mind, the sheer arrogance with which the blinkered have steered real money after 'banks are a business' losses, themselves with no attached accountability, should make one pause as whether their continued presence should be encouraged. 

Sandmann's picture

I just love the idea that european leaders now have economic degrees


Bit light on the specifics though - nothing beats a Lawyer in Politics. Romano Prodi was an Economist and PM of Italy 1996-98, and 2006-2008 and in between President of the EU Commission. That's why Italy has no problems at present.    As for Papdemos he was Central Bank Governor in Greece 1994-2002 so he knows a lot about swapping Drachmas for Euros and must have brought his powerful Economics doctorate to bear when helping Goldman make that stew.  Apparently he is a Modigliani disciple on Natural Rate of he will be translating that into Greek 


Rajoy in Spain as a Property Registrar in the Civil Service; his predecessor was a lawyer.  David Cameron has a PPE degree but is mainly a Politics/Philosophy graduate as he knows diddly-squat about Economics.


In Europe even Finance Ministers are lawyers - look at Germany !!

swani's picture

Well, Italy has huge gold reserves, 2,541 tons to be exact. So, if the Italian government gets into the very likely situation that they won't be able to pay this new debt that is being created, they can always put this gold up as 'collateral' to borrow more money to pay for it. The Central bankers and Monti have 3 years to make this happen, through the IMF or other newly created organisation where the preferred creditor will be the same banks that get preferred status in all IMF bankruptcies, so that when Italy finally defaults under this enormous debt obligation, the central bankers will get their gold to back a new currency! Sounds like a plan, or a hedge. Either way, it seems pretty obvious. 

GreetingsFromGermany's picture

'A new article of FTD "EU kuscht vor den Briten" about extensive dilution of the latest decision made at the Euro-summit last weekend fits to this report (see:

In addition to it - as FTD reports - the Bundesbank warns about increasing risks related to the conceived plan of printing IWF-money (200 Billions Euro, 45 Billions Euro by Germany) for the PIIGS by national central banks in order to circumvent the German bailout-limit. As it is forseeable, that Italy and Spain will request for bailout-money it meens that IWF-credits will be senior facilities which results in much higher credit default risks for the remaining creditors like EFSF and especially Berlin (even more as Italy and Spain by requesting bailout-money will leave the EFSF funding-club). Even the idea of IFW-bailout-money would ensure the financial markets and cause enormous pressure to Germany in agreeing to more and more funding - at risk of the german tax payers.

See: FTD, "IWF erhöht Risiko für Deutschland",







Sandmann's picture

It will never happen. The FT is so pro-EU it should be subsidised by the Commission, and probably is. They will never get any such agreement as it is simply barmy. Germany doesn't want to pay for economic profligacy in Club Med Statelets of the EU; but it is under pressure from its bankers and from France where Sarkozy needs to pretend his banking system is not going to do a Lehman.  This circle cannot be squared. Merkel's coalition partner just rigged a Membership Referendum and will most likely disintegrate as a party and she will have an early bath in 2012. This is the End of the Ancien Regime unlike anything we've seen in Europe since 1914. They can draw up secret agreements and play Kings and Emperors to their hearts content, but they have no gold and they have no substance. They are simply Debt Traders hoping Germany will sign up for Reparations so the Bank of International Settlements can trade Reparations Payments like the first time around.


Merkel, Sarkozy, Von Rompuy  - these are the names of marionettes


slewie the pi-rat's picture

hey, mamselle!

i hear you're into subordinated bonds...

if i put up some hard collateral, maybe you'd like to open a position to get flooded with liquidity by a back-door bazooka...?...?

defn8Dog's picture

Internally funded, the European Clusterzone.  Japan, b i t c h e z.

pineyard's picture




....   MISTER !

Sandmann's picture

Any danger of a circularity here ? Could some of those private sector assets be Bank Shares, Government Bonds, Deferred Taxes, or even Fixed Assets to which no depreciation charge has been assigned ?  I always thought Private Sector "Savings" were calculated as the residual in national Income Accounts and with the recent "discovery" of re-hypothecation, do we really know the private sector assets are unencumbered ?

Britain had 5390 private pension funds deep under water with around a £222 billion funding gap and lots of FTSE companies with Pension Fund deficits greater than the Market Value of the Corporation; and the situation is made worse by  ZIRP and the rigging of financial markets to favour banks, especially when the British Stockmarket used to be Oils, Banks, Mines and Telecoms - and nowadays has very few entities. With only The Netherlands having private sector pension funds akin to those in the UK and US, I do wonder if these guys think they can seize private homes and declare a Soviet Republic across Western Europe because I simply do not see these private assets as being fungible as they are probably Claims on the Public Sector or Claims held through insolvent Banks.

I mean Consumer Credit Card Debt is a private sector asset, bundled as a CDO and leveraged it becomes a super private sector asset, but if the guy with the card doesn't want to pay - that's quite a chain of insolvent rentiers holding traces of CDOs


steve from virginia's picture


Same story on Business Insider, earlier.


Everyone ('Everyone') knew the ECB was going to print. If they aren't printing on Tuesday, perhaps the Tuesday after. The ECB either prints or the euro dies along with the countries of Europe, economically.

The Bundesbank (and other EU central banks) was able to print long ago but didn't. The Greek central bank could rescue the euro by printing on the account of the Greek government by didn't and won't. The Greek treasury could issue drachmas as pure fiat and keep the euro as a reserve and F/X currency using the drachma as a means of exchange for the Greek economy. Govt fiat is poison to the debt-pimps so that never happened and is unlikely without structural change.

Assume the ECB is printing now (soon). The bank will buy Greek bonds that are now depressed in value b/c nobody will lend to the Greeks. Now, the ECB will lend to the Greeks so everyone will want to lend to Greeks, the price of Greek bonds will skyrocket. Once everyone else is lending to the Greeks the ECB can sell the Greek bonds that it bought for 25 cents on the dollar for near par. The plan pays for itself.

Then what?

The real problem is energy waste, lenging imaginary 'wealth' to bankrupt countries is pointless. At some point people will realize the 'new' lending is having the same effect as the 'old' lending that had no effect at all ...

Without ending the waste and jettisoning waste- enablers, the 'new' lenders will be taken to the cleaners as follow-on lending dries up. Why would it dry up? Because there is no return on either the old lending, the new lending or from lending that takes place after the new lending.

ECB can create cheap liquidity but cannot create returns.

EU has no fiscal mechanism so forming money capital is out of the question. As Bennie recently said, the central bank(s) cannot print oil.

Nothing has really changed, only the purchase -- with borrowed money -- of some extra time. The first thing the EU needs to do after it solves the immediate liquidity crisis is raise fuel prices to fifteen euros per leter. Then they need to close the car factories. Then they can tell OPEC to fuck themselves.

Europeans also need to return to makiing their own basic goods themselves ... by hand. Food, clothing, housing, entertainment, art and culture, literature, etc. This process has 'legs', it worked for five thousand years before fossil fuels, before television, before rapacious business, before Andy Warhol and 'fifteen minutes'. Time to embrace it.

jmc8888's picture

The will of the people bankrupted Europe? No, MONETARISM bankrupted Europe. With every on the take politician in service of the banksters in service of the oligarchy.

The will of the people bankrupted Europe? Every bankster NEEDS you to believe that.  In reality, it was the banksters, utlizing bullshit monetarism.


So if the problem is that the world has been utilizing a bullshit, oligarchical monetary system as it's blood, don't you think we need a transfusion to the right blood type, rather than surgery?


The author thinks something that won't work needed to be done in the past three years.  But doesn't realize what he prescribes does nothing to solve the problem of monetarism that got us here.   You don't need surgery, just a transfusion to a different blood and economic type.  A credit system, not monetarism.