With the world (or mostly the Japanese) front-running Draghi's ever-increasing threat of QE in Europe, Spanish and Italian government bond yields have reached levels commensurate with insanity compared to their risk (event and macro). Lower rates are great news right? They encourage growth... as the cost of borrowing drops across the nation's capital assets and the phoenix rises from the flames. Well - as the following 2 charts show - no! The lower rates are not 'trickling down' to real loans and loan creation continues to contract. So, aside from direct lending to SMEs [7], what exactly will Draghi's direct monetization of peripheral European bonds do aside from provide the leveraged speculators with their willing buyer to take profits (just as it did the last time he decided the time was right to buy bonds) [8].
Chart 1 - Despite record low government yields (black), real borrowers (red) are not seeing rates falling -in fact risk premia for non-government borrowers looks like it is at a record high!!
[9]
(h/t @M_McDonough)
Chart 2 - Demand is not there...
the balance sheet recession has left people and companies minimizing debt as opposed to maximising profit and a deleveraging banking system (stoking its balance sheet with 'riskless' sovereign debt as it collapses any form of risky - and therefore haircut - lending) mean loan creation continues to contract - despite record low costs of funding...
So what exactly is the point of European QE? Why now? Who for?
As we noted before...
Draghi continues to be in a no way out, since credit destruction is not bad enough to prompt much more easing, or certainly QE, and is not nearly good enough to stimulate any economic growth except net of GDP definition revisions.
Here is the breakdown by country on a three year basis:
[10]
And the Y/Y change in outstanding levels:
Given the anticipation that is now built-in for this week's ECB meeting, we hope that Draghi has a little more up his sleeve than reviving the Treaty-testing, bondholder-subordinating SMP. Presented with little comment is the market's reaction during the last two periods of buying as it seems that Italian and Spanish bondholders are more than happy to know that there will always be a buyer no matter how much they keep selling their exposure down.
Lower pane is the weekly purchases of bonds by the ECB and the upper pane is the now all-important spread between Italian and Spanish bonds and the German Bund - higher being more risky.
[11]
Well that plan didn't work so well eh? It would appear that during the 2010 period spreads doubled from 100bps to 200bps and once again during the 2011 period, spreads almost doubled from 260bps to over 500bps in Spain.