Why The ECB's Monetization Is Doomed In One Simple Chart

Tyler Durden's picture

By now every Zero Hedge reader should be familiar with the two step process that is supposed to rescue Europe. First, the ECB will do more of the same whereby its SMP program will purchase billions in bonds, this time Italian and Spanish (after it already tried the same with Greek, Irish and Portuguese bonds) for temporary stabilization. Then, the EFSF will take over, and acquire up to the entire outstanding debt of all the PIIGS and whoever else afterward, with Germany ultimately footing the bill following the French downgrade from AAA which would make it an ineligible funder (and, hence, shortly thereafter: a drain). Well, the ECB is already pregnant to the tune of €74 billion. And shortly, this number will likely double, and taper out there in advance of the EFSF launch in 2 months. Yet as Bloomberg's Michael McDonough demonstrates, the current ECB intervention has been nothing short of an abysmal disaster, with the ECB spending the abovementioned amount only to see average 10 Year peripheral rates double over the same time period. Alas, this is precisely what the chart will show once the SMP resumes and another €150 billion in worthless Italian and Spanish bonds is purchased (yes, none of our Centrally Planned leaders still get that IT.IS.ALL.ABOUT.CASH.FLOWS.... and far more importantly the lack thereof). Net result, spreads will likely double yet again, at which point Germany will say enough as the risk of cumulative 100% loss becomes non-trivial and the potential loss of up to 133% of its GDP forces Germany to close the curtains on the euro experiment. So prepare for a rip in bond yields tomorrow morning as the ECB goes hog-wild in secondary markets, only to be followed by a bleed wider in spreads first slowly, and then very, very fast.

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azura888's picture



Getting a 'generals re-fighting the last war' vibe from the G7 statement. This isn't a repeat of 2008; it's a debt crisis, not liquidity. Politicians are awful.

Left Right Wrong's picture

Has anyone heard from CPL recently?

July 31st came and went...



Ahmeexnal's picture

And so, the ECB marches forward towards it's very own battle at the Horns of Hattin.

fx's picture

most people here seem to enjoy the pre-endgame show that is going on in Europe and obviously can't await the moment everything blows up there. But make no mistake, if the ECB's last line of defense fails, the Fed, the BoJ and the PBoC will step in, too. If Europe were to fall down hard, the rest of the world will follow suit, thanks to a globalized economy and a globalized financial industry. So we all better hope the ECB's bazooka succeeds. $10.000/oz Gold may be fun for everybody holding the stuff, but rest assured, even  they don't want to live in the world that inevitably comes along with Gold at $10.000!

One of the most important lessons I learnt over the past 30 years in financial markets: never ever underestimate the resolve and the firepower of the world's central banks. the endgame will come, for sure. but not today, not tomorrow and not even in 5 years. maybe on 10 or 20 or 40? who knows. So all the calls of the demise of the world 's financial system as we know it are a bit premature.

chump666's picture

Germany will have the last say, as the ZH article points out.  ECB is write-off they start printing - German will shut down a chunk of that bailout fund.  EZ endgame countdown begins

Hulk's picture

+1696 Bitchez! Need any more be said???

silvertrain's picture

and the band plays on...

Pegasus Muse's picture

$1764 -- the next critical number; marks the transition to the exponential phase 


Jim Sinclair interviewed by James Turk


StychoKiller's picture

Do I hear $1710/Toz??  Aparently I do!

chump666's picture

very good call.  Italian bond market/s are huge as is Spains, so this crazy ECB buy up is just insane.  You are right, 10yr should spike again, probably in a week or so, when the EZ crisis goes to the endgame

Id fight Gandhi's picture

Germans always get stuck with the bill.

StormShadow's picture

Germany will not fund the EFSF.  It will ccease bailouts, let it all crash, then go in an buy all of Europe for ten cents on the dollar without a shot being fired (much quicker and more efficient than what they did 70 years ago).  That's been their endgame all along.

Quixotic_Not's picture

*Game Over Man* Game Fuckin' Over!

seek's picture

"We better get back, 'cause it'll be dark soon, and they mostly come at night... mostly."

It's going to be fun watching them all get ripped apart by the alien money they created.

Newsboy's picture

New Game.

Who's in?

Quixotic_Not's picture

I'm your huckleberry  ;-)

Stormdancer's picture

There will be a new game for sure, but not now. Gonna take awhile to clean the vomit and clear the table before the new global system of institutionalized theft can be put in place.

Mucho wailing and gnashing of teeth in the meantime.

StychoKiller's picture

Unfortunately, there's gonna be a lot of Racists/Tribalists/Idjuts with scores to settle -- not looking forward to the bloodbath!

TruthInSunshine's picture

Germany will go along.

They signed into a suicide pact when joined the EU (and they were also among the primary sponsors of the EU, while England chose to view the EU much more skeptically), and they're damned if they do, but they're damned if they don't.

Bailing on the EU would be Germany's rational decision, but rational decisions are exceedingly rare today, anywhere.

dwdollar's picture

One thing you can say about the Germans.  When they commit to something they go all the way until the bloody end.

HungrySeagull's picture

Damn Straight.

I am half German by ancestry and frankly have bled my enemies white over the years. Although I have wear and tear to show for it too LOL.

TK7936's picture

Is it realy the rational decision? There is also alot of opportunity here, it will just take a smart leader to recognize that. I do not know if Merkel is that one but we will see. Also the best way to "End the Fed" is for the Euro to prevail.

NumberNone's picture

S&P wants to play the authority figure and decide that they need to be the one that pulls the punch bowl away from the US and the rest of the world.  Justification being that they are some sort of financial UN and every country needs to be judged by the same financial standards.  I'm sure in their mind they are acting on behalf of the world and doing the world a favor.  This may be the case in the long run but in the short run they may have just jailed the smack dealer and the rest of the world is about to feel the withdrawals.  Instead of thanking S&P the world may just wind up cursing them.  Unintended consequences just starting to appear.  

RockyRacoon's picture

If not them, who?  If not now, when?

S&P just drew the short straw, that's all.

I don't care who did it, why they did it, or how.   Just glad that some "official" recognition of this shit sandwich we call an economy has been acknowledged.

John Law Lives's picture

Central Banking in a nutshell:

Stock markets are supposed to be a venue for free and open price discovery... UNLESS they make sustain downward movements... at which point Central Banks intervene to make sure markets go up... because Central Banks are completly f'ing clueless re. how to actually run an economy.

G7 intervention = FUBAR and doomed to fail

silvertrain's picture

Bernake will come to the rescue..Didnt EU banks like Dexia get most of the bailout money before? Why wouldnt we bail them again?

Yen Cross's picture

 All things aside TYLER<    I love trading with smart, well versed people!   I'll die for you Z/H er's      


     I can't even begin the "honesty"  and stead fastness!   ABSOLUTE CLASS!



nobita's picture

+1 I've said it before and I'll say it again, zerohedge is the greatest website in the history of the internet.

I have a great sense of empowerment from the knowledge I have gained from reading this site daily the last few years and for that I am ever so thankful. You rock Tyler(s)!

zorba THE GREEK's picture

ECB just needs to print EUROs like U.S. Fed prints dollars and buy all EU debt. Problem solved.

If printing is not in their charter, then change charter. There is no alternative other than total

collapse of EU and European banking system. It is time for EU to kick the can like U.S. is doing.

Monetization of debt is not the best solution to debt problems but it is the only temporary

solution available at this time for both EU and U.S. Long term fiscal solutions will take time

to implement and should be started very soon because monetizing will cause future inflation

problems and is not a long term solution.

lolmao500's picture

Since SP is too pussy to downgrade France, it'll be alright... who am I kidding... bondzilla will stomp all over Europe.

Germany needs to kick that witch Merkel out as soon as possible and get the hell out of that economic union of chairsatan.

Mr Lennon Hendrix's picture

Burning Eurodollars to save the Euro.  Brilliant.  EUR/USD $2.00 by X-mas.

TruthInSunshine's picture

Not a chance.

Love ya, brah, but this would devastate Germany's export led economy, and if that goes down in flames, any hope of even kicking the Eurozone expirement down the street another several hundred feet ends abruptly.

karzai_luver's picture

Can da choppers fully loaded cross the ocean in time?



Maybe Santa and his fukin rain-dears can help!

Timmay always kinda reminds me of donner!







Mediocritas's picture

Damn straight ZH. It looks like the first nation to leave the Euro will be the last nation anyone expected: Germany

Just who the do the ECB elites think they are to demand that Germany takes a big hit redirecting capital flows to the periphery just so the periphery can proceed to piss it up against the wall again? Meanwhile, nothing will have changed regarding the cause of the whole problem (a fixed exchange rate), and the whole mess will happen all over again.

The Eurocrats have gone all-in here. It's complete union or bust. They want every eurozone member to hand over their sovereignty on a plate and demote themselves to states of the United States of Europe. They really think European citizens are going to accept that?

All in with a 2 & 7 off suit. Idiots.

Snidley Whipsnae's picture

Does anyone recall that Goldman Sachs helped Greece use off balance sheet (SIV type) financial instruments to hide the true amount of Greek dept?

Which, allowed Greece to gain entry into the EU...

One line of thought... the US doesn't want the Euro competing with the dollar, GS plants a bomb (Greece) into the European Union, Greece blows up and voila draws lots of attention to Spain, France, et al... That is US Media attention.

Also, how is it that the big US banks created mountains of MBS that was full of AAA rated crap and sold it to the entire EU?

Quite a tangled web, eh?

Anyone that thinks there are friends in continual economic warfare is delusional.

karzai_luver's picture

there won't be a bank with U.S. ties left standing if/when that shit pile collapses.


Bernake better find that fukin rabbit soon.


RockyRacoon's picture

Ennui, bitchezz!!

I can dig it.

If I hear "S&P downgrade" one more time I'm gonna... well, something bad.

Yen Cross's picture

 I do! GREENSPAN) I like you more every day!

Itsalie's picture

So are they still holding that 75b euros of PIIGS bonds? What is it worth now relative to the ECB's capital? Oh sorry, ECB has adopted "mark to fairy tale" standard. EFSF will also adopt said accounting standard, and the CCP who will buy EFSF, will further add meaning to the standard.

Snidley Whipsnae's picture

I find it interesting that China bought a little bit of Euro nations crap bonds but then stopped...

They did just enough that no one could say that they didn't try to help...


Mike2756's picture

Il Duce II? He sure looks like him!


AustrianEconomist's picture

The whole fiat system of only 40 years age does not stand a chance when it comes to a store a value as gold, which has been around for thousands of years and represents sound money rather than worthless paper.

Check out the latest from the Capital Research Institute (CRI)
"It’s Time for Sound Money" www.capitalresearchinstitute.org

Yen Cross's picture

 China is toss accross!   I hate it!

Buck Johnson's picture

Germany won't cross that red line of printing money, they just won't.