As we observed two weeks ago, Europe's year-end liquidity situation is dire and deteriorating. On December 17, the ECB failed to sterilize its cumulative €184 billion in SMP bond purchases by a whopping €32 billion, the second such failure in one month. Since then things have gotten progressively worse, as banks, already scrambling for year-end liquidity, and eager to preserve their windows well-dressed by having crisp European currency on their balance sheet instead of sterilized ECB bonds on December 31, have led to two more sterilization failures, first a week ago when 103 bidders only indicated interest for €140 billion of SMP bonds, leaving a €39 billion shortfall, culminating with the sterilization failure from this morning, when a tiny 89 banks submit bids for only €104.8 billion in ECB purchased bonds, leaving a record unsterilized gaping hole of €74 billion.
Remember when the ECB's bond purchases were quote unquote sterilized? If this pace continues, in early 2014 the ECB's bond purchases may remain on its balance sheet fully unsterilized. But that's ok - now even Germany is slowly starting to habituate to central bank activity with no fears what this may mean for future inflation. Because it, like subprime, is contained.
Finally, since even the theatrics of ECB's bond buying sterilization are fading, can it be long before the ECB proceeds to monetize debt outright, and unsterilized? According to BNP, the answer is a resounding no.