The flailing ECB

MB’s got a real European flavour today and rightly so with its credit market’s crisis going from bad to worse with every passing day.

Of course there’s much talk abroad of the ECB electing to “print” money and begin buying sovereign debt to prevent the crisis spreading further into the banking system.

I thought I’d take a look at the ECB’s bond buying to date and see how effective it’s been. Here is the chart:

To me this looks like many a chart I’ve seen when a central bank tries to muscle down a currency. It works initially and then fades quickly, swamped by the trend. As the Swiss central bank has shown recently with its currency peg, if you really want change the trend, you have to go all in.

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Comments

  1. “if you really want change the trend, you have to go all in.”

    this is exactly right and why the Europeans continue to make things worse than they need to be.

    they will go “all in” as they now have no other options

    • Does the bullish case hang on that? What will be the consequences for the equity market if they don’t print?

    • No other options?

      How about declaring bankruptcy.

      “Oh dear, the calamity!” I hear you and a thousand other pro-money printers exclaim….
      ….which is code for your preference for theft from savers to forestall/avert some (but not all) bankruptcy’s by robbing the prudent (savers).

      There is no free lunch. Ridiculous modern economic theories preach this new theory that central planners can manipulate the system and avert disaster, and there appears to be a huge number of people sitting in the church swallowing this nonsense whole.

      • why should countries that arent bankrupt declare bankruptcy? you really think “savers” are going to be better off if this situation keeps spinning out of control? taking away a countries ability to print (as the Eu has done, a design fault ive mentioned many times) is the equivalent of taking away a mechanic’s jack and then asking him to change the diff.

        its not the actual money printing anyway which is what you dont get. its the threat of printing money that’s required. when a country gets into trouble the effect on sovereign bondholders of a default i.e getting no money back or printing i.e getting all your money back but in a devalued currency is toally different.

        your veiw, shared here in the comments section of MB by many, are the people swallowing the nonesense about how sovereign debt markets work. you got a background in any of this stuff by the way to back up your veiws?…..no, didnt think so.

        • My frustration was directed at the concept, not the person. I’m sorry if you thought it was directed at you personally. I probably should have communicated better.

          I should also have been more clear.

          In the case of banks that are bankrupt (surely you aren’t contemplating that their aren’t already a great number of bankrupt banks that are simply hiding that fact), they should certainly default. Do you agree?

          In the case of sovereigns, I agree that they are not bankrupt until they reach the point that Greece is likely to reach. Your suggestion that no sovereign should ever be bankrupt (if you are indeed making that suggestion) would just be a natural consequence of your system which advocates that sovereigns should man the presses when they can’t manage their finances in even a most basic sense for an extended period. So of course no sovereign need ever file for bankruptcy if they control the levers of the presses. But is that the right approach? That is where we differ.

          Again, there is no free lunch. It would take too many lines to discuss all the ins and outs here but I assure you it is no magic bullet (think “smart money” leaving the country, erosion of spending/investment power of prudent savers and distorting normal market dynamics with all the “unintended consequences” that brings).

          As to the “threat” concept, ask Bernanke how that worked out. Total failure by any sustainable metric (unemployment, business confidence, growth etc).

          I think you ought to make a distinction between “how sovereign markets work”, “how YOU want sovereign markets to work”, and “how sovereign markets OUGHT to work”.

          What background do I have? Do I have a modern economics degree. Thank the Good Lord Jesus NO!

        • Oh… and do I “really think “savers” are going to be better off if this situation keeps spinning out of control???”

          For starters, let’s be clear that this situation is not spinning out of control because the powers that be won’t print extra cash.

          It is spinning out of control because an unsustainable situation was permitted to develop in the first place.

          In fact, the original “first cause” of this current crisis was… drumroll… money printing! Excessive fractional reserve lending was a central causative in the current crisis and is a true form of money printing.

          Surely even a “printingist” such as yourself will see the circularity in your suggesting that the solution to a epic era of bank sector money printing could (or should) be solved by more money printing?

          There will be more short term pain, quicker bottoming and faster recovery by clearing the decks and defaulting/bankrupting all institutions that are currently untenable.

          Iceland, whilst not a perfect comparison, is a classic example of how to better manage a sovereign and private sector failure. Did Iceland fall into the abyss? No! Their debt is now higher rated than some PIIGS.

          But hey, these are just the ramblings of someone without an economics degree….. so by economics law 12A-1, anything I suggest is, by default, nonsense.

        • no apology required, when you said “swallowing the nonesense” i thought you were talking about me personally.

          firstly you have to distinguish between sovereigns and corporates they are totally different entities which serve different puposes. corporates exist to serve private shreholders who invest “risk” capital and yes totally agree that bankrupt corporates should be allowed to go broke. shareholders take a risk and it doesnt pay off….too bad. if they pose a systemic risk their downfall needs to be managed but not prevented.

          but thats not what this post is about. we were talking about sovereign debt and it is very different. people compare it to private sector debt because thats what they understand. but sovereigns exist not for the benefit of private shreholders but in order to provide essential services to the people who live in that country. they pay wages, health care, welfare, education, build infrastrucure, all sorts of things. to say “let them go bankrupt” means all these things stop. ie millions of inocent people stop receiving the things they need. do i want to see millions of innocent europeans get flushed down the toilet becuase of the incompetence of a few politicians? no. if it has to come to that then so be it but its the last not the first option. these countries and the whole EU monetary system needs reform, everyone knows that, but they need the chance to reform and thats what money printing provides, time, as it keeps the wolves from the door. at the moment it looks like you have soverieng bond run across the continent as people fear a defualt and it becomes self fullfilling. bond holders sell so up go intersst rates, high rates means the countries debt postion worsens which means they are more likely to defualt so bond holders sell so on and so forth. with the ability to print the default option is taken off the table and everyone calms down abit. thats what they need over there now.

          “the original “first cause” of this current crisis was… drumroll… money printing!” no its not. the EU was always going to come across these problems becuase it was poorly designed 10 years ago. the GFC just exposed what was always going to be a problem the first time a major economic shock came through the system.

          “As to the “threat” concept, ask Bernanke how that worked out. Total failure by any sustainable metric”

          yeah good point and shows your lack of understanding. how did US bond yeilds go in early august when the US breached the the debt ceiling and the risk of a US defualt escalated? did US bond yields spike like they have in italy or spain and compound the US debt issues? no they didnt and thats becuase the market knew there was no way the US would ever defualt. this is my whole point.

          • You make some owrthwhile thinking points GB, but unfortunately I still don’t “get it”. Perhaps I never will.

            On your comments regarding sovereigns… my view differs from yours in that I see the citizens as happy recipients of much of the excess these politicians signed their nation up for. It appears you see them as much more the “victims” than I do. They are not criminals, but they are accessories to the excess and they’ve enjoyed much good times in the “sun” of someone else’s money which they now cannot repay fairly.

            I see where you’re coming from a little better now – you’re basically promoting printing as a short-term stop-gap to avoid default and provide more time to “get one’s house in order”.

            My response would be that I still doubt this will be effective in Europe’s case because they lack the ability and inter-national will to maek the necessary changes to form a fiscal union.

            I would also add that the creditors will still see payments with inflated printed dollars as partial default, and it will still impair their ability to raise funds on an ongoing basis.

            I would also add again that I think Iceland (and Argentina) are useful reminders here that outright default is not the end of the world.

            I still contend that in the absence of the obscene amount of fiat credit (fractional reserve lending), it is quite likely that Europe would have not gotten to this point. But we could debate whether it’s chicken or egg until the cows come home I guess.

            I disagree with your explanation of the US scenario. The debt ceiling issue was an arbitrary construction of congress and any bond trader with functioning neurons knew that. Yields don’t drop for a country when the market participants believe that country is going to print it’s way out of it’s obligations – they inevitably rise because the lenders know they will be repaid with paper that has diluted purchasing power. US yields declined in this case because the markets were shunning risk and participants simply ranked US bonds as safer relative to other countries’ bonds. “Safer” in this context means likelihood of repaying face value and coupon with paper that holds it’s value (ie. is NOT printed).

            As soon as the US Treasury makes it clear that they will repay their obligations with money printed out of thin air, just watch where yields go.

          • yes agree with you clarky, you dont get it.

            A. i was going to put this in the previous post but since you mentioned it twice now you can’t compare iceland and argentina with a defualt inside the eu monetary union. apples dont equal oranges
            B. no, payments with inflated printed dollars ARE NOT a partial default.
            C. “Yields don’t drop for a country when the market participants believe that country is going to print it’s way out of it’s obligations” YES THEY DO if the return on those bonds in printed dollars is higher than the no returns due to a default.

          • GB You are looking at what is going to happen in a Bond market next after a particular event…in this case printing. So your take on things would be correct. Your time frame might be months, even out to a couple of years maybe.

            Clarky is talking about what are the real problems and solutions.
            Comparing anything, in the short term, to the US is reasonably pointless. You don’t seem to notice the difference between the US and any other country in the world.
            The EU is, as you say, badly designed. Printing may, as you say, keep the wolf from the door, but he’s getting hungrier the longer he is out there.
            We are postponing the crisis a year or so for what? There will be a better day to call in all the debts? The world trade scene will be better structured in a years time?…NO

            The debts will be worse because they haven’t been addressed. Printing doesn’t pay debts. It just shifts them around both in distribution and time.
            The imbalances in world trade will be worse because, as long as we keep trying to sustain the unsustainable by printing, the imbalances will just get worse and worse.
            When do you have in mind to stop printing. Bear in mind there is not just one lot of printing. Once you start it just has to go on and on, bigger and bigger. It’s not as if this debate is about whether the ECB should ‘start’ printing. Every CB has been either doing or allowing that for many a long year. The question is only whether we are going to get on with, what now seems to be, some very serious printing.
            I notice also you advocate printing without a single suggestion as to how you will ever stop.
            In summary I’m sure in the short term the ECB will print to fill the yawning credit hole. As a result debt creation on the expanded scale needed to make it seem that the economy is functioning properly will get back into full steam. Remember, it not only has to expand, but it must expand at an increasing rate to keep this boat afloat.will be I’m sure, in the short term, it will have the effect you outline. As a matter of fact I’m heavily invested on that belief. I don’t have the courage to borrow based on that belief however I am sure still thinking about it. Timing, and getting the investment side JUST right will be of the essence.
            However, it is clear this is a short term investment horizon…maybe a couple of years. Eventually the piper has to be paid, not only on the debt we now have but also, on the massively increased debt we will all have after this cycle really gets underway.

            Finally your sneering contemptuous tone at clarky is not only inappropriate but very unsoundly based.

          • I try not to forget that one of the reasons Greece cannot pay back it’s sovereign debt is because it’s people have chosen not to pay their taxes….consistently….for a long enough time for it to have become engrained in their cultural attitudes.
            Lets also not forget that much of the austerity measures are designed to bring salaries and social welfare benefits back into line with other European countries.

  2. Unlike a lot of ‘serious people’, I don’t think the ECB will “print money” to buy PIIGS bonds.

    The preferred German option is for the PIIGS government to go bust, the ECB will bail out the German and French banks, and the PIIGS government will be put themselves under ‘administrationship’ by their new German overlord.

    The preferred option for PIIGS governments is for Germany to pay for everything. They believe it’s the German’s fault for lending them the money in the first place, which is why German have to lend them even MORE money.

    Both sides are playing a game of ‘chicken’ with the European economy. However the expectation gap between the two side is too wide to reconcile.

  3. The French and UK banks are the ones that are really on the hook….BNP, RBS, HSBC, Credit Agricole followed by Barclays, DeutscheBank, ING and Lloyds.

    But it hardly matters, since all the banks have been buying and selling each others’ risk in the CDS market. You can assume that if one fails, nearly all the rest will be instantly insolvent too.

    The other sovereign risk-holders are the insurance companies and pension funds. These account for roughly double the amount held by banks.

    But, as I keep saying, whether the ECB prints or not is not really the point. The deficit economies cannot be saved by printing. They cannot become competitive as long as their economies are based on the Euro. They can only achieve fiscal stability and internal/external income balance end economic growth if they leave the Euro zone and re-base their economies on national currencies.

    The ECB-structure is an object lesson in how not to try to manage economies with high cross-jurisdiction trade. It just will not work. To make matters worse, the illusion that the Euro-denominated sovereign debt is low-risk or even zero-risk has facilitated the creation of the greatest credit bubble of all time. It is safe to say that almost no amount of printing can save the European economies from the implosion of this bubble. How much collateral damage the rest of us are exposed to really does remain to be seen.

  4. There is a suggestion here that bankruptcy as an outcome is not all bad if it affects banks and big-time operators but not people who prudently save money. Problem is that savers who keep their savings in a bank are creditors of the bank. The only winners in that scenario are those shrewd enough to pull their savings out early (before the bank closes it doors) and keep it under their mattress. Everybody else loses their all, unless government steps in and pays them back (with newly printed money). Then there is the other matter of businesses going to the wall and consequent unemployment.

    The alternative is printing money to avoid bankruptcy of the banks, which doesn’t cure the disease but allows the patient to live a little longer.

    But in the longer term if governments are not willing to adopt a healthy lifestyle (balance their budgets, with honest accounting) then nothing will avoid disaster in one form or another.