As Liquidity Swap Impact Fades, ECB Is Back To Propping Up Peripheral Bond Markets In Size

Last week, in the aftermath of the global coordinated liquidity swap facility expansion (OIS+100 to OIS+50) from November 30, with the added benefit of the contemporaneous Chinese RRR cut, bond yields plunged on short-term hope that the Fed's action would be a long-term solution for the Eurozone. It wasn't. But not before the ECB received a brief respite from manipulating bond markets. As a result of the November 30 action, the ECB proceeded to buy just €635 million of Peripheral (read Italian) bonds as the BTP yield plunged. Days later, following the realization that this is nothing but yet another band aid mechanism, yields once again soared, and depending on the benchmark used, pushed beyond 7% once again. In the meantime, the story of the ECB's 3 year LTRO rescue, lost in the aftermath of the Fed action, was resurrected, and is now attributed by some as being some pseudo bazooka that will rescue the ECB. It won't as was explained yesterday. And sure enough, one week after the knee jerk reaction from the liquidity intervention, the ECB was once again out in full force picking up pennies in front of the steamroller, buying up €3.361 billion in bonds in the week ended December 16, which brings the total purchases at €211 billion (net of maturities).

Needless to say the latter number keeps getting bigger and bigger with each passing week, and tomorrow the ECB will attempt to sterilize the full amount in a liquidity absorbing operation for a total amount of €211 billion. It will be coupled with a 7 day MRO which should provide banks the funding necessary to absorb the liquidity in what can only be explained as an infinte Ponzi loop in Europe where the ECB provides banks the funds they need to conduct daily operations which are allegedly non-inflationary. On the other hand banks already parked €214 billion in cash with the ECB's deposit facility as interbank confidence continues to be largley missing in Europe. However, with the ECB's 3 Year LTRO due on Wednesday, the last thing Europe can afford is a failed sterilization procedure. Which is precisely why watch this space tomorrow: if indeed somehow banks are unable to procure the €211 billion in cash needed to sterilize the SMP's purchases and we have another failed sterilization, then it will be major risk off all over again.