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What Happens Once Mario Draghi Unleashes The European Creosote Bank

Tyler Durden's picture


In two days Mario Draghi may, although without Germany's blessing most likely will not, announce vague terms of how the ECB plans on monetizing hundreds of billions in short-term (sub-3 Year) bonds by Spain and Italy, which according to the ECB is not really monetization, and the only thing that is needed is for the two countries to admit they are insolvent, something which paradoxically will never happen as long as the ECB does everything in its power to spook markets away from fair clearing levels, and to keep the cashflow implied price at record divergence from the centrally-planned "valuation" determination. But let's assume Draghi does go ahead and one up Bernanke, announcing the next easing round a week ahead of the September FOMC meeting, as both central banks take the lunge into the latest lap of currency devaluation. What happens then? Well, as JPM's Michael Cembalest puts it quite succinctly, Draghi will unleash nothing short of the transformation of the ECB from the European Central Bank to the European Creosote Bank (see below for the reason). Numerically, this will mean that once the ECB is done monetizing another €1 trillion or so in bonds in the next year, the ECB will then hold just shy of a unimaginable 50% of the entire Eurozone GDP, taking the New Normal monetary world well beyond the rabbit hole and deep inside the twilight zone.

One thing is certain: if the ECB reaches the nosebleed levels predicted above, all the other central banks will not stand idly by, and will certainly join in to do more of the same. In fact, it is almost assured that by the end of 2013 half of the developed world's GDP will be held by its central banks. It is also certain that since central-planning always fails, the outcome of this aggregation of assets, will mak the Mr. Creosote scene below a pleasant appetizer to what will happen once the world's monetary machinery burps and forces the pipeline to hit reverse.

How Cembalest sees the festivities unfold:

ECB President Draghi said all steps will be taken to preserve the Eurozone, and that elevated Periphery credit spreads are interfering with EU monetary policy. As a result, he will presumably step in to correct them by either buying bonds or lending to entities that will do it for him.


In doing so, the ECB’s balance sheet could easily grow by another trillion Euros (see below), at which point it’s fair to describe it as the European Creosote Bank. I can’t go into much detail as to what I mean by that; it has to do with a fictional character who sat down for dinner and ate several plates of mussels, pate de foie gras, beluga caviar, eggs benedict, leek tart, frogs' legs, and quail's eggs; a plate of jugged hare with truffles, bacon, Grand Marnier, anchovies and cream; all washed down with six bottles of Château Latour, a jeroboam of champagne and six crates of brown ale. The results in this case were not pretty.


How will it work out in Europe? The immediate benefits of central bank debt purchases feel great: defaults by banks and governments are postponed, banks benefit from increased net income due to cheap funding from the central bank, and there’s a perception of normalcy as the ECB forces short-term bond yields back down. Markets get a respite from bad news, since investors don’t have to wake up every morning to see what happened in Europe that day...


There aren’t many precedents for what the ECB indicates they may do. Of course, one thing we are watching is inflation in Germany. While wage gains are starting to pick up and home prices are rising modestly for the first time in a long while, economy-wide German price increases are still well below 2%.



Another risk relates to losses at the ECB. Central banks can recognize losses over long periods of time, and do not have to disclose how or when. They can even earn “seigniorage”, which refers to the difference between the yield on bonds they buy or lend against, and their cost of money (zero). Eventually, however, the ECB might have to engineer a massive “Paris Club” debt renegotiation, which is how governments forgive and restructure debt owed by developing countries. A Paris Club outcome seems more likely than the ECB having an actual exit strategy for its purchases and loans. After all, let’s remember why the ECB is printing like crazy: southern Europe is seeing the largest outflow of capital that the modern world may have ever seen (see below). Pictured from above, it rivals the great annual migration of the wildebeest across the Serengeti, and the chaotic migration of millions of Hindus, Sikhs and Muslims when British India was divided into India and Pakistan in 1947. Without the ECB, there would probably already have been more sovereign and/or bank defaults in Europe.


To summarize: From the Creosote Bank to the second coming of the Paris Club. And all made up as we go along. Surely, there will be no tears at all involved as this entire tragicomedy mercifully comes to a close. Eventually.

In the meantime, here is another tragicomedy.


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Tue, 09/04/2012 - 15:42 | 2761538 ziggy59
ziggy59's picture

He would be better off if he were to release the Kraken

Tue, 09/04/2012 - 16:09 | 2761616 Long-John-Silver
Long-John-Silver's picture

Shouting Beetlejuice three times would be more productive.

Tue, 09/04/2012 - 16:30 | 2761723 flacon
flacon's picture

Why don't these Goldman Sachs intellectuals just cut to the chase already. "You greedy bastards ran up so much debt and now you can't pay, so we are going to hyperinflate your fucking currency so we can get our pound of flesh." Enough of the panzy talk.... let's kill!

Tue, 09/04/2012 - 15:52 | 2761540 Zero Govt
Zero Govt's picture

What Happens Once Mario Draghi Unleashes The European Creosote Bank

Hundreds of prickly little critters (not hedgehogs) need rescuing?


Tue, 09/04/2012 - 16:56 | 2761544 Ghordius
Ghordius's picture

"Paris Club" rhymes with debt jubilee

Tue, 09/04/2012 - 15:45 | 2761550 Wood
Wood's picture

When a man dies he usually shits his pants.  That's what this will be.

Tue, 09/04/2012 - 15:53 | 2761576 JustAnotherHack
JustAnotherHack's picture

Gross!!  We all knew that, but did you have to say it?

Tue, 09/04/2012 - 16:14 | 2761635 bdc63
bdc63's picture

:0 .. I didn't know that ...

Tue, 09/04/2012 - 20:10 | 2762657 shovelhead
shovelhead's picture

Thats why they tie your ankles when they hang you.

So the turds wont roll out.


Tue, 09/04/2012 - 15:49 | 2761564 mick68
mick68's picture

Too bad the number isn't 1tn, but actually 2-4tn. This plan is unworkable now, wait until the real number emerges...

Tue, 09/04/2012 - 19:43 | 2762542 brunoaa
brunoaa's picture

All the existing gold in the world is worth around 8 Trillions USD..... OMFG!!!!

Tue, 09/04/2012 - 19:55 | 2762598 BurningFuld
BurningFuld's picture

Not to worry we can adjust that upwards a bit. Actually all the existing Gold in the world is worth all of the money in the world. Going with the saying: "Gold is money and nothing else."

Tue, 09/04/2012 - 15:49 | 2761565 youngandhealthy
youngandhealthy's picture

I question the first graph. I dont think it is right....I dont have the figures in front of my but my "napkin" calc shows something completely different.

Tue, 09/04/2012 - 16:00 | 2761594 Zero Govt
Zero Govt's picture

i'm hanging here... any chance we can have your napkin figures and you post the other calculations later?

Tue, 09/04/2012 - 16:09 | 2761621 Dr Benway
Dr Benway's picture

He is young and healthy. He reads his cloudy Kleenex for clues, detecting divergent data.

Tue, 09/04/2012 - 16:35 | 2761684 youngandhealthy
youngandhealthy's picture

Apples are apples...from a pure balance sheet perspective...yeah...but FED has monetized gazilions more. Your choise what is worse. Why the F... do you think EURUSD is still at the level it is?

Tue, 09/04/2012 - 16:40 | 2761764 Zero Govt
Zero Govt's picture

You are not in compliance with Internet Protocol 7 Sub-Section 12b which states, "Bloggers shall not mention a fact without having said facts at hand as other Bloggers are impatient bastards who should not be left hanging"

You've said the graphs figures you think are incorrect and they're on your napkin.. can we have your corrected figures?

Tue, 09/04/2012 - 15:50 | 2761569 Bam_Man
Bam_Man's picture

Before this ends (with the same sort of "bang" as in the sketch) every single Central Bank will be a "Creosote Bank".

To paraphrase Nixon, "We are all Mr. Creosotes now".

Tue, 09/04/2012 - 16:11 | 2761622 machineh
machineh's picture

'Creosote' is a polite euphemism for crap, which in turn is a polite euphemism for 'toxic dogshit.'

Witness the European Coprophagiac Bank board members, with their shit-smeared grins!

Just one of those charming Old World customs that Americans will never understand.

Wed, 09/05/2012 - 07:47 | 2763839 deez nutz
deez nutz's picture

Just one of those charming Old World customs that Americans will never understand.

One Old World custom I understand is MONEY PRINTING and it looks like the Old World will continue with that custom!

Tue, 09/04/2012 - 15:52 | 2761572 ParkAveFlasher
ParkAveFlasher's picture

Gold, bitchez!

Tue, 09/04/2012 - 16:04 | 2761609 Long-John-Silver
Long-John-Silver's picture

They are working so hard to make Gold the worlds reserve currency and have no idea they are doing it.

Tue, 09/04/2012 - 16:26 | 2761704 Freegolder
Freegolder's picture

Wrong and wrong on those thoughts.

Firstly, gold is better of NOT as money/curerency at all, hence the Eurosystem holds its massive gold as reserves, marked to market every quarter.

The ECB/BIS know exactly how this ends, they only have to outrun the dollar (not difficult), and when eventually hyperinflation hits the States, and gold is set free from paper, the ECBs gold reserves will make the Euro 99.999% reserved by free-floating gold. The perfect wealth reserve to save in.

Luckily we can buy it now before it is revalued.

Note...silver is just an industrial metal, and will merely hold its buying power if that.

Tue, 09/04/2012 - 16:47 | 2761796 tocointhephrase
tocointhephrase's picture

Silver has been MONEY for 4000 years. But as you correctly state, as it has been used and is increaseing in use, IT MAKES THIS THE MOST UNDERVALUED AND EXPLOSIVE COMMODITY THIS CENTURY!

Tue, 09/04/2012 - 17:03 | 2761846 ParkAveFlasher
ParkAveFlasher's picture

"Gold, bitchez!" is NEVER WRONG.

Tue, 09/04/2012 - 15:55 | 2761581 falak pema
falak pema's picture

Soros bought into Facebook bigtime; he must be biting his finger nails on that, like a lot of others. 

Soros also said that if he had to bet on anything it would be on Italian bonds. So maybe he will sell Face-drop to invest in Draghi bank props from cinecitta decor box.  Its a new beginning to the spaghetti western of the Draghi machine. 

Silenzia, we are making the new film of the Good, the bad and the Ugly, with Mario, Mario and Mutti.

Wait for the last scene; awesome climax!  

Tue, 09/04/2012 - 15:57 | 2761584 buzzsaw99
buzzsaw99's picture

how conveenient!

Tue, 09/04/2012 - 15:57 | 2761585 LawsofPhysics
LawsofPhysics's picture

Look at the U.K go!  Almost caught up with Japan and the ECB, go you hypocrite motherfuckers go!!

Tue, 09/04/2012 - 16:54 | 2761724 Zero Govt
Zero Govt's picture

Yes those ballooning figures represent the 'success' of Mervyn Kings brilliant reign as the worst Governor in the BoE's history

Don't let his abhorant wage increase, inflation linked Gold-plated pension and the fact he's still in the job fool you ...King is garbage at overseeing the banking industry, a sick joke at addresing and reducing systemic risk, completely clueless at finding solutions to problems the blind git never saw coming and has been a complete failure to uphold any of his responsibilities toward a healthy banking system or fiscally responsible Govt

he's like a wet nurse to gambling junkies handing out free acid and more needles to shoot up for their next card game

Shut down the f'n Bank of England stinks and so does Mervyn King

Tue, 09/04/2012 - 15:57 | 2761586 Manthong
Manthong's picture

I'm getting hungry just looking over the pre-explosion menu.. need to add a liter of vintage Chicago Malort (Obama Estate Reserve) .,2529/

Tue, 09/04/2012 - 15:57 | 2761587 Conman
Conman's picture

Ponzi scheme- so ecb buys and will eventually have to forgive all the debt it buys anyway. other bondholders get screwed again and ponzi goes on because bankers always win.

Tue, 09/04/2012 - 16:15 | 2761593 HardAssets
HardAssets's picture

Its about the banks.

We all know that.

If they placed their own bets and lost, it would be on them and theyd disappear. Instead, they pass on a few crumbs to the 'citizens' and set it up so theyre now 'too big to fail'. And the citizens get the blame for their 'bad behavior'. The banksters don't give a damned about the countries, much less the people. This is a game theyve played many times throughout the world. 'Austerity' is taking what people would be able to spend on themselves (including private health care) so it can be funneled to the banks - - and to those in government (a revolving door) who they bribe to deceive and suppress the citizenry so they can be robbed.

They try to drag as many as they can under the umbrella of financial ruin so they can offer a 'saving solution' and a reset for an even bigger con game. The next step is European financial/economic/and political union - - with the common people left as little more than debt serfs with no voice in their own lives.

These bastards are meglo-maniacs and crazy.

 Draghi will do what's in the banks interest.

They want the whole thing to crash.

Tue, 09/04/2012 - 17:04 | 2761850 cranky-old-geezer
cranky-old-geezer's picture



Actually it's about wild-spending governments who can't tax the people into poverty for political reasons, so they do it indirectly, allowing banks to implement a fiat currency then borrowing everybody's wealth, never intending to pay it back of course.

Taxing people's wealth, or borrowing it indefinitely.  What's the difference?

If central banks stopped buying government debt they would be shut down and dissolved in a week.


Tue, 09/04/2012 - 21:18 | 2762870 HardAssets
HardAssets's picture

At the 'top' there is no distinction between the banks and those holding the strings of governments.

You 'loan' (made up out of thin air nothing) so that the governments can tax the citizenry for your usury interest. It works better than sending a montly bill  to citizens from GS or JPM.

Tue, 09/04/2012 - 16:01 | 2761597 Long-John-Silver
Long-John-Silver's picture

Alice has gone past the rabbit hole and is now headed for the Centre of the Earth.



Tue, 09/04/2012 - 16:05 | 2761613 ali-ali-al-qomfri
ali-ali-al-qomfri's picture

is QE3 = 'wafer thin mint'

Tue, 09/04/2012 - 16:16 | 2761640 l.kimbot
l.kimbot's picture

A bucket for Monsier?

Tue, 09/04/2012 - 16:19 | 2761641 willien1derland
willien1derland's picture

A ZH Poster 'Teahouse' posted a link to the US GAO's Federal Investigation of the financial crisis assessment on page 131 there is a table that listed the largest total (non-term adjusted) transaction amounts across the broad-based emergency programs provided by the US government - if you add the top 3 (Citi, Morgan Stanley, BoA (including Merrill Lynch) it totals $7.847 TRILLION DOLLARS!!!! - Assuming an average US GDP of $15 TRILLION  for the period of December 2007 - July 2010 that would compute to roughly 52.31% of EMERGENCY LOANS TO GDP - Therefore,  despite the galant efforts of JPM's Michael Cembalest analysis the Ponzi appears totally capable of marching on unfortunately -

Page 131

Tue, 09/04/2012 - 16:18 | 2761653 Wm the Shrubber
Wm the Shrubber's picture

Better get a bucket!

Tue, 09/04/2012 - 16:22 | 2761671 in4mayshun
in4mayshun's picture

So basically the author is telling us that we have another 2 years to wait until KA-BOOM...

Tue, 09/04/2012 - 16:33 | 2761732 common_sense
common_sense's picture


GFYS with your F. QE (n+1) !!!!





Tue, 09/04/2012 - 16:34 | 2761738 ginunn
ginunn's picture

There might be a more appropriate understanding of the idea of a Creosote bank. Creosote is the material from burning cetain types of wood that accumulates in chimneys. At some point the buidup ignites in a flash fire that usually burns the house down.

Tue, 09/04/2012 - 16:38 | 2761763 SafelyGraze
SafelyGraze's picture

we'll have to ask you again not to say "monetise" to mister draghi. you've now said it twice already.

we should very much like in future that you say "short end bond purchase"

Tue, 09/04/2012 - 21:33 | 2762930 HardAssets
HardAssets's picture

'monetise' = counterfeit, (more than before)

yeah, that outta fix it

From old 1950s Lucy black& white t.v. program rerun -

Ricky (the husband):  "Hey Lucy, the bank just charged us for your NSF check."

Lucy: " Don't worry, honey. I'll write a check to cover it. "

Tue, 09/04/2012 - 16:53 | 2761809 asteroids
asteroids's picture

This buys more time at the expense of falling deeper into a debt hole. Like falling into the gravity well of a black hole. Nothing, nothing, nothing, and poof, you are gone.

Tue, 09/04/2012 - 17:05 | 2761854 Joebloinvestor
Joebloinvestor's picture

According to Wikipedia:

The International Agency for Research on Cancer (IARC) has determined that coal tar creosote is probably carcinogenic to humans, based on adequate animal evidence and limited human evidence

Can't even imagine how toxic it will be based on bad debt.

Tue, 09/04/2012 - 17:10 | 2761868 Miss Expectations
Miss Expectations's picture

Here's another food video John Pinette "France & Italy"

Tue, 09/04/2012 - 17:11 | 2761872 Aquaman
Aquaman's picture

Whoever had the idea for attaching the video is an absolute genius.  I laughed so hard I threw up in my mouth a little bit.

Tue, 09/04/2012 - 17:34 | 2761973 steve from virginia
steve from virginia's picture


ECB stuffed up with nothing ... there is no good collateral, capital is exhausted. The ECB it can lend to banks but depositors will take any funds they can get and race out the door.

Lending to support depositor redemptions only works when the assurance is cultivated thereby that deposits will return when conditions change. Conditions have changed already, from bad to much more bad, from insolvent to bankrupt. It isn't just the banks that are ruined, it is the entire continent ... more than that, entire idea of modern finance and Mickey Mouse 'progress'.

There is a good reason why people are buying gold. It's not because of inflation or Bernanke or the ECB or currency debauchery. It is because gold is old fashioned ... Like the world we are rapidly becoming.

Tue, 09/04/2012 - 18:29 | 2762185 gnomon
gnomon's picture

The solution is to lose all historical memory of these events and most of man's accumulated knowledge.

And that will happen.

Civilizations always thrash around at the end, thinking they are going to escape the inevitable.

Tue, 09/04/2012 - 18:45 | 2762265 Quantum Nucleonics
Quantum Nucleonics's picture

What did people expect when they picked an Italian, AN ITALIAN, to run the ECB?  Of course he's going to print because the moment Spain asks for a bailout, all eyes will turn to Italy.

Tue, 09/04/2012 - 19:21 | 2762435 saturn
saturn's picture

I feel like in Grossery store.

Tue, 09/04/2012 - 19:47 | 2762563 BurningFuld
BurningFuld's picture

They just like to keep on thinking their currency is actually worth something....and I find that really quite funny. Note to Europeans reading this...try tangable assets, or alternate currencies at this time please. (Not USD) You are welcome.

Tue, 09/04/2012 - 19:46 | 2762565 CDSMonkey
CDSMonkey's picture

we probably rally like a mofo until the wafer thin mint explodes just as roubini says all will get better still after 2 years of being wrong

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