Playing Chicken With The ECB: The Market Has Issued A Boycott On Draghi Until He Prints

Tyler Durden's picture

If over the past several days the market has seemed as if it is acting more irrational than normal, there is a simple explanation for this: the volumes across all products have collapsed. This includes equities, bonds, single name CDS and index CDS. In essence the market has virtually ground to a halt as the chart below demonstrates. Why? There are two explanations: one is that this gradual shut down of the market is in fact an unintended and delayed consequence of the MF Global bankruptcy, which has seen material liquidity withdrawn from the non-TBTF, which in turn is impacting overall market stability and functioning. The other theory, espoused by BofA's Hans Mikkelsen in tonight's Situation Room publication is that this is nothing short of a boycott by the market on the ECB, and thus the global capital market system, in an attempt to force the European central bank to resolve the helpless situation in which Europe finds itself, where on one side Germany is staunchly against printing more currency for fears of hyperinflation, and instead demands changes to the Eurozone treaty whereby everyone hands over sovereignty to an uber Eurozone headed naturally by Germany, and on the other we have France et al. pushing for immediate monetization but without transfer of sovereignty to Merkel. Obviously the risk is that should Merkel, who has all the levereage, be pushed too far she may simply balk and say "nein, nein, nein" in the process killing the EUR with one statement. Of course Germany will lose from this chain of events as well, which is why as we have claimed for nearly a year, the fundamental equation for Europe is whether the opportunity cost of constantly bailing out European countries and/or taking on the risk of hyperinflation is worth the benefit gained by German exporters from not having a strong Deutsche Mark. We don't know the answer. But apparently BofA does: "We are all waiting for the catalyst to a better or worse market - to us this means that the markets are now waiting for the ECB to step in." And naturally, just like with Deutsche Bank which put together the case for intervention, the outcome is one where the ECB will do everything in its power to resume the Risk On posture. So under what conditions will the ECB step in? Well, BofA conveniently gives us the answer to that as well. Let's dig in.

First, this, according to Bank of America, is how the market is institutes a boycott on the ECB:

Another day, another country sets new highs in interest rates. This time it was Spain following a 10-year auction that cleared at a record yield of 6.975% (vs. 5.433% previously). That represents just the latest episode in a succession of events that sustain the market concern that Europe is not up to its task – in which case the risk of a significant sell-off in the markets is high. Faced with such binary outcomes from an inherently political process, many investors naturally choose to sit on the sidelines and liquidity further dries up. Thus we have seen significant declines in trading volumes of high grade and high yield bonds, as well as single name CDS and index CDS products. We are all waiting for the catalyst to a better or worse market - to us this means that the markets are now waiting for the ECB to step in. The good news is that it seems the  European situation gets resolved in a way that allows US markets to decouple and get back to business sooner rather than later – one way or the other. While the relevant time horizon is highly uncertain it feels more like a matter of two weeks than two months.

In other words, if the ECB persists in its prudent obstinacy, very soon one ES contract or $5MM notional in IG will move the completely frozen market by several percent. And this is precisely what the ECB will want to avoid. That and other things, which is precisely what the Risk On, "inverse" vigilantes will pursue in order to get the ECB to backstop all European risk with German taxpayer capital.

And while we have presented far more in depth analysis on the issue before, here is the broad strokes under which conditions the ECB will have no choice but to intervene:

The ECB may ultimately be prepared to engage in a much more aggressive expansion of its balance sheet, and thereby avert the end of the road for the euro area. However, in our view the ECB is only likely to do so if the crisis threatens to trigger the following:


1. A complete freeze of interbank markets;


2. An acceleration of deposit outflows or wider bank deleveraging affecting funding for peripheral banks and leading to widespread bank failures in the periphery;


3. An adverse feedback loop developing through rising refinancing costs from the sovereign to non-financial corporates via the domestic banking system, which leads to a deterioration in the growth outlook and therefore debt sustainability, reinforcing the rise in sovereign funding costs;


4. Consecutive failed auctions for a European sovereign not currently under a troika programme.

Since we already have seen each of the above 4 bullets in some level of activity, it is only a matter of figuring out which is the weakest link and will be punished the most by the big banks to get Dragi to cry zio.

In fact , BofA has already prepared the script that Monti should deliver to Germans to make it seem that he is not "really" monetizing

In our view, the ECB could proceed with QE without being accused of monetizing the debt as long as it does not target a specific sovereign by arguing:


1. Yield volatility disrupts the normal monetary policy transmission mechanism: the ECB would announce unlimited purchases of bonds to keep interest rates below a pre-determined level. The ECB would not necessarily need to announce its yield target;


2. Deflation is a threat (which was essentially the Fed’s argument to proceed with QE): the ECB would commit to purchase a basket of all sovereign bonds including Germany’s, together with a commitment to maintain interest rates at a very low level over the medium term (akin to the Bank of Canada in 2009-10). In addition, committing through low interest rates all along the yield curve should also engineer a depreciation of the euro, which would support adjustment.

And yet, there is a "but"

In our view the ECB can only alleviate current tensions, but a permanent solution has to acknowledge the implicit fiscal transfers that are increasing across the euro area, and centralise national budget caps at the European level.

In other words, as Peter Tchir explored earlier, the endgame of ECB intervention is nothing but a comprehensive European Fiscal union: precisely the outcome that Germany will be content with and that nobody else will want. In other words, in order to cross the chasm, Europe has to prepare for a lose-lose outcome: on one hand it will risk hyperinflation and alienating Germany by enacting monetization, and then it will threaten everyone else in Europe by forcing them to hand over all or part of their sovereignty to the one entity that has always had the most stable and vibrant economy in the Union.

And why? Simple - just so a few banks can get record bonuses for at least a few more years.

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jdelano's picture

For evil geniuses our tptb seem pretty fucking stupid some times. How much more fucking obvious could it be that if you want to force the ecb into printing now you need to crash the market down to a nice and terrifying 800 on the s&p?

Unprepared's picture

The "market" became very good at frontrunning the CBs and rendering their actions self-unfulfilling.

Absent a high-profile failure, they are forced into a "hint and run" strategy.

DeadFred's picture

I was surprised the triangle broke so soon. It could have gone another week at least. Europe is in sad shape to force an early break like that. Where are the rumors? Really 'they' could have thrown out more China-stick-save or Fed-backed-ultra-leveraged bailout funds for weeks, yet there were no rumors. Best guess it's to force the ECB and Fed to print but how will they get the Germans on board? Concessions? Assassinations? The Germans have too long a memory to print and the rest of Europe has too long a memory to let the Germans be in charge.

Unprepared's picture

Ctrl+A; Ctrl+X; Alt+tab; Ctrl+V; Ctrl+P

puck's picture

Do the gold standard and get it over with. win win

Concentrated power has always been the enemy of liberty.'s picture

"And why? Simple - just so a few banks can get record bonuses for at least a few more years."

That's not the real reason. The real reason is so satanists like David Rockefellar can consolidate world power.

Krieger quoted it:

"We are grateful to the Washington Post, The New York Times, Time Magazine and other great publications whose directors have attended our meetings and respected their promises of discretion for almost forty years. It would have been impossible for us to develop our plan for the world if we had been subjected to the lights of publicity during those years. But, the world is now more sophisticated and prepared to march towards a world government. The supranational sovereignty of an intellectual elite and world bankers is surely preferable to the national auto-determination practiced in past centuries.

– David Rockefeller"

May he burn in hell first and afterwards too.

jdelano's picture

Hilarious part about that is David rockefeller insinuating that he should be counted among the intellectual elite....

Concentrated power has always been the enemy of liberty.'s picture

what would be more hilarious is to have him drown in his own vomit.

Josh Randall's picture

Maybe Mama Cass's chef could make David and the family some sandwiches

LongBalls's picture

Rest your head. It is promised. We will one day witness the total death and destruction of the money-changers and thier love for it's slavery benefits.

sabra1's picture

or, his head,(doesn't matter which one) gets stuck between  janet napolitanos' thighs!  

puck's picture

They have gold. The world as we know it is changing there is not much time left.

get busy and good luck

Hedgetard55's picture
Rev 18:2   And he cried mightily with a strong voice, saying, Babylon the great is fallen, is fallen, and is become the habitation of devils, and the hold of every foul spirit, and a cage of every unclean and hateful bird.
Rev 18:3   For all nations have drunk of the wine of the wrath of her fornication, and the kings of the earth have committed fornication with her, and the merchants of the earth are waxed rich through the abundance of her delicacies.
Rev 18:4   And I heard another voice from heaven, saying, Come out of her, my people, that ye be not partakers of her sins, and that ye receive not of her plagues.
Rev 18:5   For her sins have reached unto heaven, and God hath remembered her iniquities.
Rev 18:6   Reward her even as she rewarded you, and double unto her double according to her works: in the cup which she hath filled fill to her double.
Rev 18:7   How much she hath glorified herself, and lived deliciously, so much torment and sorrow give her: for she saith in her heart, I sit a queen, and am no widow, and shall see no sorrow.
Rev 18:8   Therefore shall her plagues come in one day, death, and mourning, and famine; and she shall be utterly burned with fire: for strong [is] the Lord God who judgeth her.
Rev 18:9 And the kings of the earth, who have committed fornication and lived deliciously with her, shall bewail her, and lament for her, when they shall see the smoke of her burning,
Rev 18:10   Standing afar off for the fear of her torment, saying, Alas, alas, that great city Babylon, that mighty city! for in one hour is thy judgment come.
Rev 18:11   And the merchants of the earth shall weep and mourn over her; for no man buyeth their merchandise any more:
Rev 18:12   The merchandise of gold, and silver, and precious stones, and of pearls, and fine linen, and purple, and silk, and scarlet, and all thyine wood, and all manner vessels of ivory, and all manner vessels of most precious wood, and of brass, and iron, and marble,
Rev 18:13   And cinnamon, and odours, and ointments, and frankincense, and wine, and oil, and fine flour, and wheat, and beasts, and sheep, and horses, and chariots, and slaves, and souls of men.
Rev 18:14   And the fruits that thy soul lusted after are departed from thee, and all things which were dainty and goodly are departed from thee, and thou shalt find them no more at all.
Rev 18:15   The merchants of these things, which were made rich by her, shall stand afar off for the fear of her torment, weeping and wailing,
Rev 18:16   And saying, Alas, alas, that great city, that was clothed in fine linen, and purple, and scarlet, and decked with gold, and precious stones, and pearls!
Rev 18:17   For in one hour so great riches is come to nought. And every shipmaster, and all the company in ships, and sailors, and as many as trade by sea, stood afar off,
Rev 18:18   And cried when they saw the smoke of her burning, saying, What [city is] like unto this great city!
Rev 18:19   And they cast dust on their heads, and cried, weeping and wailing, saying, Alas, alas, that great city, wherein were made rich all that had ships in the sea by reason of her costliness! for in one hour is she made desolate.
SheHunter's picture

Get a grip on yourself HedgeT.  It's all gonna be OK.  Promise.  No need to open the fairy-tale myth book.

e-recep's picture

Actually there will be huge swing towards religion. It already started in Middle East and in North Africa and it will strike the West, too. Nationalism and communism are out and the only surviving guide next to capitalism is religion. If the average Joe loses its faith in capitalism he will hold on to religion.

J 457's picture

Thanks Hedge.  Seems we've been thru this a few times before.

StychoKiller's picture

Others beyond this site are becoming aware of the "Agenda."

Seems kinda flaky, but the analysis of the financial mess is pretty much spot on and will not tell regulars at zerohedge much that they don't already know.  I believe it's important to find out what solutions others are coming up with to transform the financial meltdown into something positive, hopefully, BEFORE the meltdown occurs!

richard in norway's picture

love this quote, i remeber reading it as a 15 year old and it was so obvoius that its new york its talking about


but it still hasnt happened, inless you count 911

Ned Zeppelin's picture

Lots of banker technobabble from BofA. Like this thing can be controlled if only the knobs and switches were turned just so by the genius elite technos who need to be in charge like in Italy and Greece (what a pathetic show).  

Looks like things were worse in September from the charts.  

integrale's picture

That's not compelling graphical evidence, DB. Hope there was more meat to that analysis in the full text... otherwise this is just a meaningless "mood" commentary.


That being said, we need some major vigilante investor shit to get this party started.

The Deleuzian's picture

Hopium is all that's left...Every temporary (present) solution brings more future problems...I envision a 'Fortress Europe' police state for the Southern flank...Or an outright divorce and hyperinflation with the neo-Drachma and Lira...Not to mention Spain, Portugal, and the Irish...What a mess!!!The Euro Oligarchs want control for as long as possible but lying, cheating, and stealing from the German people will probably only go so far...

I don't see how the Euro survives in its current form for much longer...But I didn't think it would last this long...So.......

puck's picture

China is going down. then we dont owe anything

xcehn's picture

Inflating the currency into nothingness.  Check.  Debt paid.

alien-IQ's picture

Shouldn't turning on the printing presses in Europe significantly weaken the Euro and by proxy strengthen the dollar? And with a weak Euro and stronger dollar...shouldn't corporate profits and by extension the stock market take a pretty severe dive? Or is there some magical market levitation fairy that will step in and orchestrate the simultaneous rise of the dollar and the S&P 500?

Something here just doesn't add up. I'm sure I'm missing something...aren't I?


J 457's picture

I played this out same as you.  SPX inverse to USD.  EUR will weaken with ECB printing.  So, no ECB bail-out/printing and EU countries eventually default, sending USD up.  And if ECB prints, its inflationary and USD up.  Regardless, it seems USD up against EUR.  Question is; will the SPX continue the inverse USD relationship.  Or, will EU simply postpone and postpone for the next several months and years gradually imposing more cuts and weak bond auctions with higher yields.  This could be THE moment to place your bets and go for the big win on the short-side.  If USD stregthens and SPX drops to 1,000 range, Bernanke will be in a much better position to expand balance sheet and start buying MBS again.  Short down and then BTFD.  This won't bode well for GLD/SLV or oil.  

blindman's picture

@ "..missing something.." >
that would be the call for qe3^
and this is exactly why many and many
more will buy precious metals with their
federal reserve notes.

CrashisOptimistic's picture

There is that nagging little truth that . . . if the ECB prints, the Euro falls in value from dilution wrt USD.

We know what happens to the S&P (earnings) when that happens.

chump666's picture

Bank of America are f*cking idiots.  You got end yr thin volumes and a broken bond market. Ok so you want the ECB to print so you close off a year of stock gains, lock in some end yr forwards...and we all get paid.

again they miss the oil inflation spectra, winter will be brutal in Europe this year, we get a bid market to the end of 2011 not only will Germany piss on the EFSF and flush it down the Rhine, you can forget about the EUR will be Germany that will pack their bags, re-cap their banks and EZ completely collapses.

"Boycott markets" WTF!!!  No, the market is breaking down.  

Citi is on the money yet bank of America is smoking crack. 

buyingsterling's picture

Remember several years back, when the fed first announced large scale asset purchases of MBSs? Remember all the talk about how they would unwind it? How they would shrink their balance sheet? Now the pretense is gone and it's all explicit, rampant money printing, with the system begging for it.

The point is that at almost every juncture the situation has turned our bleaker than most anticipated, each blow has come sooner and harder, and the can kicking has become that much more desperate. If the big rub is lost sovereignty, a fiscal union that caps budgets but allows lots of other 'discretion' is likely, along with ECB action. It will be sold to Germans as the responsible thing to do. This is their big chance to prop things up for an 'extended' period, which will invariably be shorter than they think.

SheHunter's picture

Great to find this article ZH.  Monday and Tuesday were so decrepit of volumn that I was begining to blame the action (lack of) on my satellite internet.  I've been looking for a ZH article where I could ask ZH-ers if it was just my imagination or had the market gone comatose...could not find anywhere the question fit in with an article-until this one.  Anyway. I went long EOD.  Logic: op ex tomorrow; market is oversold short-term; majority are sounding bearish. Ahhhhhhhhh................the sweet smell of volatility.  Good stuff.

J 457's picture

I would think the bias is down for opex tomorrow.

Western's picture

opex = oversold = faux bearish bias = expectation of a short squeeze = true bullish bias

Painful "game theoretic" reverse double cross is coming up tomorrow. Massive selloff.

sabra1's picture

didn't mike krieger just write:

the reason Europe doesn’t announce a solution is because there is no solution.  They also know that the minute they announce massive monetization gold and silver will go no offer and the gig will be up. 

FischerBlack's picture

Super Mario, indeed. I remember there was a level on the original Nintendo where the player could jump on one of those turtle enemies and get an arbitrarily large number of lives. Draghi needs to figure that one out quick.

ForWhomTheTollBuilds's picture

I was a subscriber to the Nintendo entertainment system newletter when that trick was first published. 


I believe it was called "The Bradshaw Maneuver" if that helps.

rambler6421's picture

The Bernank is gonna print.

Steroid's picture

Nothing is sacred for these BofA idiots.

Jump you Fuckers!

chump666's picture

The machines are pounding the boycott there just a beatdown.

Mr Sir's picture

I have this strange feeling that if the ECB printed euros then the Euro would climb to $2.....this is the ridiculous world we live in. Too bad the ECB would have to print enough to cover all maturities across 5 countries and the deficits of all 5 as well. And then later for all 17. Not even the Bernank did that for us.

Missiondweller's picture

This isn't good. Europeans have an innate dislike of teutonic hegemony regardless of whether its military or mearly economic.

Tompooz's picture

Not much of a "hegemony" when your wallet is ripped  from your pocket. Per inhabitant, the Dutch are paying even more for that "hegemony."

I'd rather call it "hegemoney".

And its definitely not Teutonic.

catch edge ghost's picture

A little too rube goldberg for bank bonuses.  Naw, there's a more sinister and utopian plot beneath it all.

Arthur's picture

It's going to get ugly later today.  Here is Asia via yahoo:

All Ordinaries

4,246.7012:45AM EST

77.40 (1.79%)

Shanghai Composite

2,416.562:00AM EST

 46.48 (1.89%)

Hang Seng

18,410.002:17AM EST

 407.47 (2.17%)

BSE 30

16,288.572:22AM EST

 173.14 (1.05%)

Jakarta Composite

3,748.682:32AM EST

 43.58 (1.15%)

KLSE Composite

1,459.462:17AM EST

 6.01 (0.41%)

Nikkei 225

8,374.911:28AM EST

 104.72 (1.23%)


3,250.89Nov 17

 29.84 (0.91%)

Straits Times

2,737.772:12AM EST

 40.48 (1.46%)

Seoul Composite

1,839.171:02AM EST

 37.50 (2.00%)

Taiwan Weighted

7,233.7812:31AM EST

 154.03 (2.08%)

terryfuckwit's picture

i spoke to my pm stash last night.. i said "do you guys lie cheat and deceive like the rest of these asshole"  they all said "NO BUT TPTB try very hard to make it look that way".. then i awoke with wifey slapping me round the head again