ECB's Latest Deja Vu Bluff: Rate Caps On Sovereign Bonds

Tyler Durden's picture

Just as Germany was warming its "Nein, Nein, Nein" machine, now that Merkel is solidly back from vacation and has caught up with all the desperation emails in the inbox, as reported yesterday, the ECB, in a furious attempt to preempt the unwind of every innuendo, speculation, "unsourced rumor", and everything else the ex-Goldman controlled printer of European currency (which however now and always is powerless without German support) has done in the past month to keep sovereign rates low, has just resorted to yet another deja vu preemption tactic: rate caps on sovereign bonds. Spiegel reports the based on unsourced data, "The European Central Bank (ECB) is considering to establish in its future bond purchases interest rate levels for each country. Thus, it would buy sovereign debt of the crisis countries whenever interest rates exceed a certain spread to German Bunds... At its next meeting in early September, the Governing Council will decide whether the interest rate target is actually installed." Which of course it won't for one simple reason: the same reason the ECB has done lots of talking in the past 3 months, and implemented absolutely nothing: the Bundesbank's Jens Weidmann, and the fact that as Danske (see below) and everyone else already explained when this idea was floated unsuccessfully the first few times, it would require an infinite balance sheet, something the ECB does not have, especially not when Germans are 'consulted.'

Furthermore, for the ECB to proceed with rate caps, it would need to trigger the "conditionality" phase of the crisis which as we have explained countless times, would require first Spain, and then Italy, to demand a bailout, which in turn would lead to political turmoil, coupled with a government turnover as well as ceding sovereignty to the Troika (explicitly) and Germany (implicitly).

Finally, to all those who are having a glitch in the matrix moment at this attempt to further jawbone rates lower without actually doing anything, the deja vu is indeed correct. Because as the following note from Danske from November (and countless other unsourced reports and articles from around the same time) confirm, the ECB was indeed considering rate caps at the most acute phase in the Euro crisis last year. And passed. In other words, the ECB very well may go ahead and implement a rate cap solution... after the periphery has demanded a bailout, and after both Spain and Italian 10 year notes are trading well above 8%. Until then, it will simply continue doing what it has been doing for the past 6 months. Talk, lie, and make empty promises.

From Danske, November 22, 2011: "ECB to defend an informal cap on rates"

  • The debt crisis is heading towards the end game. Mistrust has spread to Italy, Spain and beyond. In the absence of further policy action, interest rates spreads would probably continue to widen and the whole euro project could come to an end.
  • A number of feasible backstops are available, but face resistance. The German government as well as the Bundesbank is rejecting the use of the ECB as the lender of last resorts. It is also rejecting the idea that the ECB lends money to the IMF, which could then provide a temporary credit line for Italy. An increase in IMF quotas is an alternative approach, but this also faces resistance from, e.g. the US.
  • The two models for leveraging the EFSF presented at the euro summit a few weeks ago were designed to alleviate the debt crisis, but have attracted very little investor interest and seem unlikely to work unless they are made more attractive to investors.
  • Eurobonds that would allow government to raise funds up to a ceiling with collective guarantees could provide a much needed pause for governments. However, Eurobonds also face German resistance and would probably not be deployable as quickly as needed to combat the current debt crisis.
  • The ECB could provide a backstop by formally announcing a cap on individual countries’ yield spreads and saying that it stands ready to buy unlimited quantities of government bonds to defend this cap. However, the ECB and not least the Bundesbank, fear that this will remove incentives for structural reform. Therefore, in our opinion, the ECB is not going to make such a formal announcement unless the situation deteriorates significantly.
  • So, with no backstops immediately available will the debt crisis spiral completely out of control causing government defaults and possibly a euro break-up? We do not expect this to be the case. The ECB will not provide any formal guarantees to the market, but that does not mean that it will stop buying.
  • We believe that the ECB will defend an informal cap at possibly 7% interest rates on 10-year Italian and Spanish government bonds. The ECB will be averse to it, but do it nonetheless. This is due to the fact that until austerity measures succeed in  restoring confidence in Italy and Spain there are not many viable alternatives if the ECB wants the euro to survive.
  • The ECB has so far used its Securities Market Programme (SMP) to buy peripheral government bonds to the tune of as much as EUR200 bn. We would not be surprised to see them spend half a trillion or more before confidence is restored. It takes a lot of money to defend an informal cap.

And.... nothing. Why? One word - Germany.... and two more words "unlimited quantities" - good luck.

Full note below


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Seorse Gorog from that Quantum Entanglement Fund. alright_.-'s picture

In case of emergency, dial 'Nein, Nein, Nein'.

SeverinSlade's picture

Just dialed 999...ringing...Herman Cain just answered.

Which algo programmer decided to have them trade strictly on rumors and never on facts? If they traded on what is actually DONE instead of what is SAID the market would be 10 to 20 pct lower.

flacon's picture

Can I get a "rate cap" on my Credit Card please?

max2205's picture

And they may get the cash back feature

knukles's picture

"Whip Interest Payments Now"

monad's picture

How much did he say you owe him?

oogs66's picture

Been calling Nein Nein Nein since 1275 on spx? Maybe this time IS different. I will junk myself, but when was last time Germany really said Nein?

fonzannoon's picture

If they are going to cap rates why not cap them all at 2%? Or better yet 1%? Since there is obviously no reprecussions....Why 7%? That still leaves some doubt in a few people's minds that perhaps things aree not actually well.

Tyler Durden's picture

In one case it is "unlimited purchases", in the other, "unlimited +1 purchases"

Germany will just say 9 to both.

fonzannoon's picture

If the day ever comes where Germany actually has to choose between printing like mad to save the piigs or taking their ball and going home I guess it gets interesting. Everything between now and then is just posturing and can kicking IMHO.

bank guy in Brussels's picture

For now, need more 'euro-crisis' for short term to lower euro exchange rate and pump up German exports

For longer term, despite superficial 'euro-football', 'Germanic Bankers vs Indebted Latins' ...

When things get really pushed and pressed, Germany will agree to printing scheme in some form - as some Zero Hedge articles have long suggested - in order to attempt to save German banks and insurers and pension funds, and their exposure to EU debtors and contagion risk ... ditto other northern countries

Can will be kicked into 2013 ...

Something like the EU Sinking Redemption Fund may well be done after intensive autumn 'euro-crisis' ...
- taking on all euro-zone sovereign debts over 60% of GDP at moment, but no further debt, like USA and Alexander Hamilton did in 1790s for US states' debt
- being a finite and limited and defined amount - in trillions, yes, but still finite and capped - this can thus fit the German Constitutional Court's objections against open-ended blank cheques

As Jim Sinclair has long said regarding Western sovereign and bank bailout debt ...

« Whatever is required will be provided.

QE is coming. About that there is no doubt.

Regardless of the denials, all that is required here and there in terms of liquidity will be supplied.

It has begun and will continue in many ways and definitions ... »

oogs66's picture

Great color. Nd I agree with you, they are pushing the envelope to find a way. So long as debt keeps rolling its just "profit" for ECB

mendigo's picture

Germany will not act to save another country.
Germany will only act in thier own interest - as is thier charge.
While I can understand the frustration these people are not stupid our even short sighted - they are simply behaving to protect thier butts and will sacrifice anything to do so.
To portray these wealthy powerful people as stupid only plays in thier favor and is misguided.
The question would be that given that these people are smart and have unlimted resources and write the laws how are they going to bail themselves out. It is not a question of if the only point in doubt is how will the working people suffer for the transgressions of the wealthy/powerful and when will they somehow become aware of what is happening - which is simply that in this global economy we will all have same standard of living in the near future though some will manage to float above the unwashed uneducated masses.

sablya's picture

What is interesting is that the political power structure finds itself more and more at odds with the market.  The political powers can't allow the market to freely set the rates so an intervention is in order.  Right?  Wrong!  The idea of capping the bond rates will have horrible unforeseen consequences.  The ECB is declaring war on the financial markets and if it is war they want, it is war they are going to get.  The ECB will end up making things much worse for Spain and Italy with this brain damaged idea.

resurger's picture

If the German Court Cardinals either say "Nein" or "Ja" , it will be all fucked up ..

The 2008 marked the start of the great depression, keep an eye on APPL (AKA the market)

DavidC's picture

Indeed, after Friday's ridiculous moves in APPL, it seems to be the only thing holding the market up (because it sure ain't Facebook or Manchester United's IPO).


gatorengineer's picture

Well..... Lets just say Barry gets re-elected..... What would stop Ben from Printing to bailout the PIIGS.......  Nuttin........  So the can only need be punted 10 weeks or so.....

Neethgie's picture

The idea is not to do it, its to hoodwink the market into doing it first.

TwoJacks's picture

rate cap, short selling ban. absolutely no difference and just as ineffectual

fonzannoon's picture

The short selling ban seems to have worked in that the spanish markets have exploded higher since. I say cap rates. Let's see where it takes us. I also say that any citizen who buys spanish debt gets a free hooker. If you sell your gold to buy the debt you get two hookers. We need to start thinking outside the box if we want real solutions is my point....

Tyler Durden's picture

Hot off the NY Fed presses: 'Market Declines: What Is Accomplished by Banning Short-Selling?"


Taken as a whole, our research challenges the notion that banning short sales during market downturns limits share price declines. If anything, the bans seem to have the unwanted effects of raising trading costs, lowering market liquidity, and preventing short-sellers from rooting out cases of fraud and earnings manipulation. Thus, while short-sellers may bear bad news about companies’ prospects, they do not appear to be driving price declines in markets.

fonzannoon's picture

Fair enough. I will go with your charts etc. anyday. From my rough estimate the Spanish short selling ban went into effect around July 23rd. I have the Ibex around 6k that day. I see it over 7k now. That was all I was getting at. I hope my sarcasm about this whole thing is evident. These stop gaps are never going to work.

Edit - I am leaving this up there because I wrote it. I did not have my coffee yet and so I forgot that Draghi gave his stupid speech on July 26th which probably has a lot more to do with the Ibex than the short selling ban. Tyler have mercy on coffee yet.

Hype Alert's picture

Jawboning and promising the markets endless floods of money are much more effective.  For some reason.  Did Zimbabwe or Weimer Republic bother banning shorts?  I don't know, but one would think endless promises of moar QE would make people question the similarities.

Offthebeach's picture

Ban long buying. Central planners need to get ahead of speculators criminally running up prices. Thus there would be no need for short bans. Matter of fact the Fed should have price stock stability. Maybe fix prices according to some formula +3% each year.

/central gosplan off

AynRandFan's picture


That's the logical extension of the regulatory and monetary baloney we have already.

Randall Cabot's picture

What are these "price declines in markets"?

gatorengineer's picture

I heard in the old days stocks were actually allowed to decline..... can you believe that????

fdgdfgd's picture

Outside the box, override laws to get the rate cap into the bond contracts. Now, how far are we from this solution moving inside the box?

fonzannoon's picture

someone down arrowed free hookers

Global Hunter's picture

no such thing as a free lunch?

Hype Alert's picture

Maybe they thought "free hookers" and thinking outside the box was contradictory in nature.

SilverDoctors's picture

' The German government as well as the Bundesbank is rejecting the use of the ECB as the lender of last resorts.'

Germany doesn't seem to want to play ball. 
Anyone believe the official story that the Frankfurt International Airport dismantled it's massive € sculpture  (identical to the one in front of the European Central Bank) Thursday because the plastic parts were getting weak?

Looks like Germany is getting ready for a return to the Deutsche Mark.

bank guy in Brussels's picture

John Ward of 'The Slog' has also been writing about how they have mostly stopped working on the new ECB bank building skyscraper in Frankfurt since last March ... and no longer putting out their cheery newsletter about construction progress

One more item for those thinking the euro future is questionable

Tho personally I believe they will kick the euro-can for a while yet

Winston Churchill's picture

Its time for Draghi to change his name Quixote.

The windmills of the market will not stop.

SeverinSlade's picture

They already have a short selling ban...when is europe going to implement a ban on lying? Oh wait, jawboning the markets higher and yields lower is one of Europe's only "solutions" so never.

resurger's picture

this is the Joke of the day, right!!

Rathmullan's picture

Well at least it's "informal" -- as if in a nod to those last few free "marketeers". The styrofoam lady will cave. And no, the cap can't be relative to the German bund. It must be absolute because without a doubt bunds are headed to 7% under such a scheme.

JustObserving's picture

The US manages to keep its interest rates low (ten year at 1.625% or so now) with a debt of $16 trillion and unfunded liabilities (medicare and social security - politically impossible to cut) of $120 trillion and these together growing at $8.2 trillion a year.

Spain and Italy are in much better shape than the US as far as debt and rate of growth of debt is concerned.  So why should they be paying 3 or 4 times the interest that the US is paying?  Spanish 10 year yield is at 6.44% and Italian is at 5.79%.

Time for the ECB to put a cap on European rates before all the countries slide into a depression. After all, everyone knows that Western debts can never be repaid.  So might as well print your way out of the situation.  The sooner the ECB acknowledges that, the sooner the crisis in Europe can be managed.  As it has been in the US and the UK.

fonzannoon's picture

Yes yes lets "print our way out". seems relatively painless. I am surprised no one has thought of this yet. Give that Krugman guy a nobel prize, he was early. Lets do this.

malikai's picture

Man, you may not have had your coffee yet, but you're on a roll here. You're killing me.

LawsofPhysics's picture

Hey, he did say "managed" not "averted".  Spoken like every other highly "educated" arrogant insider fuck.  Wake me when folks like this start losing their head, literally.

SeverinSlade's picture

I technically agree. Only reason why bond markets don't is becsuse the US owns the world reserve currency and can devalue it at will. Spain doesn't and cannot print without Germany's blessing. But yes the fact that yields are where they are considering all the debt (you also didn't include all of the US derivatives market) is insane. It's a ponzi scheme...what do you expect? Party keeps going until the money stops.

AynRandFan's picture

It's perfectly obvious that the ECB and EU officials are already using a rate cap and will continue to do so.  It doesn't matter what steps are taken, jawboning, outright bond purchases, unlimited liquidity, etc.  The fact remains that every time rates on Spanish and Italian debt come into the 7% range, a combination of actions are taken until rates fall.

The real issue is not whether the EU and its alphabet soup functionaries will defend the Euro, but to what extent private traders will continue to participate in this cartoon marketplace.  There simply is no place else to put the massive amount of liquid capital sloshing around the globe, so equity markets are bid up, bond prices are stratospheric, commodities are treated like tulip bulbs, and every kind of illiquid asset is treated like uranium tailings.

This boiling frog of a worldwide economy will not see a price dislocation in liquid assets until confidence collapses.  The trigger will be imperceptible.

Nachdenken's picture

"There simply is no place else to put the massive amount of liquid capital sloshing around the globe.....The trigger will be imperceptible.."

....the trigger has been pulled, takes time for this complicated old market blunderbus to go off.

MFLTucson's picture

"The European Central Bank (ECB) is considering to establish in its future bond purchases interest rate levels for each country. 


The height of stupidity just reached a new level.  

slewie the pi-rat's picture

marioECB is no brianSack, BiCheZ!

Colonel's picture

Short selling ban = price controls.

"Economic affairs cannot be kept going by magistrates and policemen." - Mises

AynRandFan's picture

Except in Japan, the anime version of a national economy.

Offthebeach's picture

Chicago and every other shake down city.