€47 Billion Down, Several Hundred Billion More To Go: Europe's Monetization Is Just Warming Up

The world's undisputed monetization grossmaster (Electronic Liability Outsourcing rating of around 1.8 trillion), representing Wall Street, the Federal Reserve, may be about to see some stiff championship title competition from the little Central Bank that could - the ECB, in a blitz (and very much blind) game of quantitative easing. In a speech, that not too surprisingly missed all the main wires earlier, Fitch head of sovereign ratings, Brian Coulton, warned a banking conference, in discussing the ECB's monetization activity to-date, that "there has been an unwillingness to follow through, and markets are going to want to see the ECB's money. It will require hundreds of billions in my opinion." Which means that Bob Pisani will report on many "extremely successful" Spanish bond auctions over the next year or so, as the ECB buys up every single primary issuance not just out of Madrid, but every single country in Europe, where the non-subsidized (i.e. private) capital markets are now officially dead. Courtesy of Greece, and the fatal decision to bail it out, the Eurozone will one day be described in textbooks as the greatest ponzi scheme ever created (or, at worst, joint in first place by the Fed).

And since the Fed will never stand idly by and watch as Europe's manufacturing sector actually has someone to export to, courtesy of the 0.97 EURUSD that BNP wrote about earlier, he will rerereraise his quintuple all in, and announce the $5 trillion or so in QE that Bob Janjuah discussed previously.

The Telegraph adds some additional detail in this pursuit to the teleological Keynesian bottom:

The ECB agreed to start buying Greek, Portuguese, and Irish bonds in April to help buttress the EU's `shock and awe' package, known as the European Financial Stability Facility. Total purchases so far have been €47bn (£39bn).

It has focused its firepower on Greece, mopping up some €25bn of government bonds. This has prevented a collapse of the Greek debt market but at the high political price of letting banks and funds dump their holdings onto the EU taxpayer.

ECB council member Jose Manuel Gonzalez-Paramo said it was "not entirely correct" to assume that the ECB was the sole buyer of the debt. "We will continue buying bonds until the situation has stabilized," he said.

The Bundesbank is reportedly irked that French banks have led the rush to the exits while German banks have stuck by a gentleman's agreement to keep their Greek assets. The ECB's council insists that it has "sterilized" all purchases, offering no net stimulus. In effect, the ECB has done little to offset severe fiscal tightening by some eurozone states, and as the M3 money supply contracts.

The gross inexperience of the ECB is even being lamented by European financial analysts:

Silvio Peruzzo from RBS said the auction does little to help Spanish banks and firms that have been frozen out the debt markets and face a funding crunch.

"The ECB needs to act before contagion becomes endemic. Spain's banking system in at the heart of an ice-storm and there is a risk of 'sudden stop' if they can't roll over debt. We expect intervention, probably in covered bonds," he said.

David Owen from Jefferies Fixed Income said the eurozone may start contracting again in the second half of the year. He said the "core problem" haunting the European debt markets is that investors have little faith in the EU strategy of forcing states to carry out draconian cuts in the middle of a recession.

Mr Owen said these countries need sustained growth to claw their way out of debt-deflation traps, and that will require fully-fledged quantitiatve easing by the ECB, and drastic currency depreciation. "If the euro falls to parity or down to 80 cents against the dollar, we would start to see a solution," he said.

And for all those counting down the days to the Mayan TEOTWAWKI, the catalytic event may in fact emerge out of the old continent:

Fitch said European banks must refinance nearly €2 trillion of long-term debt by the end of 2012 in an unfriendly market. "There's an awful lot of debt coming due in 2011 and 2012, and that is becoming a concern," said Bridget Gandy, the agency's banking expert.

At this point the course before the ECB is certain: sooner or later the bank will have to go all in on monetization, and pray that its intervention is more successful than that of the SNB in the CHF market. Which only leaves the Bernanke wildcard - the Princetonian is still biding his time, knowing that the ECB will be forced to take the next step, yet comforted that the world still thinks that the dollar is a reserve currency. Alas, he may be a little confused here, as confirmed by his recent remarks highlighting his "misunderstanding" of the acrobatics in the price of gold. Should more and more investors shift their assets to gold before the time of the next QE iteration announcement, at the end of the day, it may just end up being Europe that outwits the "smartest" nouveau-Ponziers in the room. Which really wouldn't be all that surprising: after all Europe has been learning from (failed) monetization and devaluation attempts going all the way back to the Romans, while the Fed has not even been around for a hundred years.

The endspiel in the blind blitz will be one to watch.


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