Draghi’s Great Bond Buying Plan To Be Sterilized

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Bloomberg has leaked ahead of tomorrows ECB meeting that Draghi’s hyped up plan to buy bonds is not at all what Draghi had hinted. Instead any bonds purchased will have to be sterilized. In other words, no new money added to the system.

European Central Bank President Mario Draghi’s bond-buying proposal involves unlimited purchases of government debt that will be sterilized to assuage concerns about printing money, two central bank officials briefed on the plan said.

Under the blueprint, which may be called “Monetary Outright Transactions,” the ECB would refrain from setting a public cap on yields, according to the people, and a third official, who spoke on condition of anonymity. The plan will only focus on government bonds rather than a broader range of assets and will target short-dated maturities of up to about three years, two of the people said.

Most likely to be announced tomorrow.

Policy makers are deliberating on the plan today and Draghi will announce whether it has been agreed to at a press conference tomorrow.

..but any bond purchased by the ECB has to be sterilized.

To sterilize the bond purchases, the ECB will remove from the system elsewhere the same amount of money it spends, ensuring the program has a neutral impact on the money supply.


Is Spanish Bank Run Panicking ECB Into Bond Buying Scheme?

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It will come as no surprise that in light of Spain’s woes, capital has been leaving Spanish banks in droves. In July 5% of the country’s entire asset base (€74 billion) left the country. That’s over 17% in just over a year. The most likely place for those banks to come up with the cash has been selling sovereign bonds. The question remains has this prompted Draghi in recent weeks to make comments about doing “what it takes”.

A need to raise cash to meet those withdrawals may have prompted the recent bond sales, as other assets owned by banks – mainly loans and mortgages – are far less liquid. Spanish bank bond holdings are dominated by Spanish government debt, but also include those of other countries.

So where does this leave Mario Draghi? While Spanish banks are selling SPGBs, Spain has 8 bonds auctions planned in the next 6 weeks. Draghi is under serious pressure to get aggreement on a sovereign bond buying scheme. 

…..while Mario Draghi is furiously trying to come up with a bond buying plan that is endorsed by Germany, Buba and Weidmann, all of whom have, to date, said, “9-9-9”, regardless of what the final construct is, whether it includes the ECM, EFSF, and/or ECB buying bonds directly, the key distinction is that no monetary authority can buy bonds in the primary market, as that is a direct breach of Article 123/125, and absent a thorough revision of the Maastricht Treaty, investors will dump as soon as the ECB starts breaking the rules unilaterally. Certainly bonds can be monetized in the secondary market, but someone has to buy them from the government. And if Spanish banks are unable to stem the deposit outflow, there is simply no practical possibility for banks to be buying SPGBs in the primary market even as they are forced to dump them in the secondary market.

In other words, the ECB may or may not surprise next week, but unless the Spanish public is convinced its banks are safe, and the remaining EUR1.5 trillion in Spanish deposits do not explicitly remain within the Spanish bank system, anything Draghi does will be for nothing.

As for next year, the requirement to sell even more SPGBs increases by 40% on this year while competing with Spanish banks dumping bonds. The monster continues to grow. We already know from Mark Grant that Spain’s real debt/GDP figure is closer to 134%.

All in all, the total amount of gross bond issuance from Spain in 2013 could be in excess of EUR 120bn. That is around 40% higher than this year, 10-20% higher than in 2009 and almost four times larger than the average amount of Spanish bond issuance recorded in the previous four years.

 As far as another LTRO, its unlikey to suceed as Spain is fresh out of collateral.

…and the inevitable LTRO X, which the ECB will have to do in order to provide additional funding to Spain, which unlike before, however, will no longer work as Spain and the rest of Europe, are out of eligible collateral, meaning the ECB will have to get the Buba to agree to even more last minute rule changes to keep Spain “solvent.”

So, the pressure is on Draghi to push through with his Bond Purchase Plan. In fact it has been reported that he has number of options but rushing it through by giving only 24 hours to digest it before debating a solution. Serious pressure!

Sept. 1 (Bloomberg) — The euro area’s 17 national central bank governors will have about 24 hours to digest European Central Bank President Mario Draghi’s bond-buying proposal before they start debating it, three officials said.

The ECB’s Executive Board will send a list of options for the bond-buying program to the governors on Sept. 4, a day before the Governing Council convenes in Frankfurt, the central bank officials said yesterday on condition of anonymity because the plans aren’t public. The meeting concludes on Sept. 6, after which Draghi holds his regular press conference. No single policy option has emerged as preeminent, the officials said. An ECB spokesman declined to comment.

The lack of a clear preference, the complexity of the issue and the shortage of time increase the risk that Draghi won’t present a detailed plan next week, according to economists at Commerzbank AG and JPMorgan Chase & Co. The ECB may choose to hold back some details of the plan until the German Constitutional Court rules on the legality of Europe’s permanent bailout fund on Sept. 12, two of the officials said.

The battle between Draghi and Weidmann of Buba is a serious roadblock for the ECB’s plans. Another resignation from the Bundesbank would apply pressure to Merkel and with elections coming up next year and an ever ailing economy, Merkel and Germany has little room for manoeuver for backing the ECB’s Bond Purchasing Scheme. Best of luck Draghi 😉 

Mr Weidmann, the only ECB council member opposed to ECB president Mario Draghi‘s plan to buy bonds in some shape or form, has decided to remain in his post to defend his position at next week’s policy meeting, ‘Bild’ reported. The second resignation of a Bundesbank boss in as many years would send shockwaves through the markets and make it much more difficult for Chancellor Angela Merkel to soften her stance towards bailouts for countries such as Ireland.

Her room for manoeuvre ahead of next year’s general election is already shrinking as the German economy rapidly slows down. The Bundesbank has repeatedly made clear that it has deep misgivings about the ECB’s determination to press ahead with such a scheme.

Mr Weidmann’s predecessor as Bundesbank chief, Axel Weber, quit last year in protest at the ECB’s previous, now-dormant bond-buy plan. Juergen Stark, a former ECB chief economist, followed him out of the door. Earlier this week, Mr Weidmann told ‘Der Spiegel‘ magazine that bond-buying can become “addictive”, like a drug.

He added: “I hardly believe that I am the only one to get stomachache over this.”

Source: Zero Hedge, San Francisco Chronicle, Irish Independent

Humour: The Keynesian Plan To Solve Everything

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Brilliant analogy 😉 by Mark McHugh of Across The Street,

My Doctor’s an idiot.  A few years ago, he started expressing concerns about my weight, pointing at this chart supposedly showing how much a man of my height should weigh.  One glance at his stupid chart and it was clear to me that he had completely misdiagnosed my condition.   There was nothing wrong with my weight, I just wasn’t tall enough.  Clearly I needed to grow my way out of this. So I went home and googled “how to stimulate growth.”  Once I got past the all the baldness cures and penis pumps (it’s not my bag, baby), I found hundreds of papers so incredibly boring I knew they had to be true.  In no time, I was able to design and implement my own stimulus plan based on the irrefutable scientificky principles of Nobel prize winners and other people so smart they never had to do an honest day’s work in their lives.  Despite the difficulty climbing stairs, I was feeling pretty good about things until my last check-up….

“Hi, Doc.”

“Hi,” he said, examining my file.  He looked up, “You’ve put on twenty pounds since the last time I saw you”

“Thanks for noticing,” I beamed.

He frowned.  “I remember now.  You’re the guy on the diet designed to make you grow.  What’s that called again?”

“The Keynesian Plan.”

“Is that the one where you eat bacon and cheese, but not vegetables?”

“No,” I replied, “But I have incorporated some elements of that plan” (I don’t like vegetables).

“And how’s this whole Keynesian thing working out?” he asked.

“I’ll admit I’m a little disappointed.  I’ve only grown and inch and a half so far, but..”

“No you haven’t,” he interrupted, pointing, “You’ve just got those stupid elevator wedges in your shoes to make you look taller.”

“They’re to get me acclimated to being taller.”

“Which you’re not,” he declared.  “I told you, you’re fully grown.  The only thing you’ve succeeded in doing is collapsing you arches and giving yourself  Type 2 Diabetes.”

“We Keynesians call things like that “unintended consequences” (I used finger-quotes to let him know it was a technical term).  And trust me, Doc, I’m no happier about them than you.  Can I see that height-weight chart of yours again?”

He handed me the chart. After a moment, I sighed, “Looks like I’ll have to do more QE.”


“Quantitative eating.  It’s how you stimulate growth, Doc.  It’s technical.”

“Oh,” he said.  “Because it sounds an awful lot like what we in the medical profession call “stuffing your fat face”  (giving me finger-quotes, but in a condescending, not-at-all-helpful kind of way).”

I tried to stay calm and empathize.  “Doc, it’s not your fault you haven’t been educated about Keynesian principles.  They only teach it at top-notch schools like M.I.T. and Harvard.  I don’t know about you, Doc, but I feel better knowing that no matter what happens on election day, the White House will be occupied by someone who attended Harvard.”

“As did the Unabomber,” he added.

“Still better than the bumblefuck medical school you went to!”  I snapped.

“Johns Hopkins?” he queried, thrusting his eyebrows up.

“John Hopkins.” I corrected (Friggin’ Idiot!)

“Tell me, how are you paying for all this stimulus?”

“Food Stamps…and my ex-wife’s credit card.”  (I just knew he wasn’t going to understand this part…)

He looked at me with a curious mixture of confusion and utter disgust.  “What….Does she even know?”

“I’m no Dr. Bernanke, but I know one of the most important aspects of Keynesian stimulus is sticking someone else with the bill. It works out better for everyone if the victim, er , stimulus provider is unaware.  She’ll be OK.  I’m going to make it all up to her.”

“Really?  How?” 

“Look at your damn chart, Doc!”  I bellowed.  “I’m going to be taller than Shaq when all this stimulus kicks in!  Can you say NBA contract?“

“No,” he said, unimpressed, “just over-sized casket.”

(I could tell he was about to launch into another one of his “austerity” sermons.  You know, “Consume less, do more, stop spending other people’s money, blah-blah-blah.”  Pinhead.  Obviously Dr. Quackenstein was beyond all hope.)

“No offense Doc, but I need help from people with a better understanding of these things.  Any chance you can refer me to the Mayo clinic?”

“Is that where the treat illness with mayonnaise?”

“Yes,” I said.

“No,” he said, and walked out.

As I sat down to rest in the lobby on the way back to my car, I remembered that the key ingredient to the Keynesian system is confidence and realized that what I was feeling, beside the tingling sensation in my left arm, was nothing more than the sting of rejection felt by true visionaries like Jon Corzine and the Octomom.

So if anyone asks, I’m at the grocery store.


Eurozone Banking And Fiscal Union Or Bust

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It’s always been leading towards this. As the old saying goes “never leave a good crisis go to waste”, especially as your deliberate dithering has caused it in the first place. The EU is pushing towards a banking and fiscal union. Spain has refused a humiliating bailout and drastically looking for some alternative solution. More EU and not less is the solution proposed. 

Sources familiar with the Spanish government’s thinking said its negotiating position was that the fundamental quandary facing the eurozone was not Spain, but a European failure of leadership in persuading the financial markets that the euro would be defended at all costs.

A Brussels summit at the end of the month would have to remedy that by agreeing to establish a eurozone banking and fiscal union – major federalising steps certain to be fought over. Without that commitment, Spain fears the single currency would be finished in months.

The Spanish government believes that the eurozone’s fourth-biggest economy is too big to rescue and that the consequences of abandoning Spain to the markets without a pledge of major European reform could be so ferocious that the single currency would not survive.

The current rules governing eurozone bailouts stipulate that a government has to request help and that the money may only be channelled via governments – increasing the national debt burden.

All hopes are on the end of month meeting.

But Spain is stalling until key euro group meetings, the G20 summit and the Greek election later this month. Some analysts believe that if Spain is finally forced to request a full-scale EU/IMF bailout it is likely to come around 20 June.

Sources in Brussels confirmed that a rescue plan was being hatched for Spain – but it could be limited to desperately-needed banking aid, rather than a full national bailout.

All eyes are on Merkel to come up with a plan to save the euro.

Berlin is pushing the fiscal union, but on its own terms. It wants to force common rules and targets but avoid any early commitment to sharing liability for the debt or bank savings of individual countries. David Cameron is to go to Berlin on Thursdayto try to push Merkel into a more protective stance on the euro, which would entail German pledges to underwrite struggling countries’ debt. Following a telephone conversation with Barack Obama, the British prime minister will tell Merkel the US and the UK are insisting on “an immediate plan” on the euro, Downing Street said. The prime minister will tell Merkel the eurozone has no more than weeks to act to shore up the single currency.

She is priming the Germans for a political union and handing over more power to Europe.

Angela Merkel said Thursday she would work toward a reinforced political union in Europe “first and foremost,” saying that it cannot wait for all nations to be on the same page economically.

“We need more Europe… a budget union… and we need a political union first and foremost,” Merkel told German public television. “We must, step by step, cede responsibilities to Europe.”

“We must not remain immobile because one country or another does not want to follow yet,” She added


“We need not just a currency union; we also need a so-called fiscal union, more common budget policies. And we need above all a political union,” she added. “That means that we must, step by step as things go forward, give up powers to Europe as well.”

Ultimately the end game is to give up more power to the beaurocrates and cede economic sovereignty. It’s just a matter of playing this game until then.

Source: The Guardian, PressTV

Irish Government Admit Clueless About Economy

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Businessmen attending a lucheon given by Minister of Communications Pat Rabbite have reported to the Irish Independent that the Minister admitted the Irish Government has no plan to deal with the economy and are struggling. In other words “clueless”.

A number of leading businessmen have told the Sunday Independent that Communications Minister Pat Rabbitte has said that the Government is unable to formulate a plan to deal with the economy such is the speed and ever-changing nature of the crisis.

In an alarmingly frank admission, which was made on condition of confidentiality, Mr Rabbitte is said to have stated that the Government has been pre-occupied with challenges as they arise and has not managed to construct a strategy for recovery in the medium to long term.

Mr Rabbitte asked that his remarks, which were made at a luncheon attended by figures drawn primarily from the energy sector, not be repeated outside of the meeting.

The Minister for Communications, Energy and Natural Resources set aside his speech and/or speaking notes at a specially arranged luncheon at the headquarters of Ernst & Young in Dublin on April 11 last, which was attended by around 25 business people.

According to one of those present, Mr Rabbitte said: “The Government don’t have a plan. We don’t know what we’re doing. This is an unprecedented time. Things are moving so fast.”

Another said: “I came away with a definite sense that the Government is in reactionary mode. The minister said the Government is ‘very reactionary at the moment’, that it is ‘not dictating policy at all’ and that it ‘can’t plan’.”

This source added: “The minister said the Government was not sure day to day, week to week, what might happen, that there were curve balls coming at them all the time.

“He said something about it being difficult to have a plan, that they were in reactive mode all the time, that they were doing what they could in terms of what they were in control of, but that, basically, they were working on the hoof all the time.”

Another businessman present said: “He was talking in the spirit of a meeting which was being held in private. He was saying, ‘look, we are living in unprecedented times and we are dealing with these challenges as they comes at us’.

“He was saying that, as opposed to saying, ‘we have a strategy for the next five years and we know from month to month and year to year what it is we are hoping to achieve’.”

Official Denial from the minister.

Yesterday a spokesman for Mr Rabbitte said: “The minister is happy to confirm that he attended that meeting in Ernst & Young on the date in question. But he flatly denies making any of the comments as suggested.”

Mr Rabbitte declined an opportunity offered to paraphrase what he believed it was he had said at the meeting.

Last night the Sunday Independent reported Mr Rabbitte’s categoric denial to one of those who had attended. He said: “Ah well, fair enough then, but I can tell you for a fact he said this, verbatim, ‘we don’t have a plan’. It was off the cuff stuff.

“It’s a bit scary at one level, when you think about it, but it was refreshingly honest too. He knew there was no point bullshitting the people in the room.”

Another attendee said last night: “If somebody said they recall him saying verbatim, ‘we don’t have a plan’, then I’m not going to deny that’s what was said. For my part, I know I heard him say the Government ‘can’t plan’.”

The luncheon took place in the boardroom of Ernst & Young on Wednesday, April 11, last. It got under way at 12.30pm and continued until 3pm. It was hosted by Tony Spollen, the former AIB auditor, now of Ernst & Young.

Mr Rabbitte took notes while guests spoke and then he replied towards the end of the lunch, making a point to set aside what was said to be either his prepared speech or speaking notes.

Source: Irish Independent

EU Admit Working On Greek Exit(Grexit) Plan

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It has been reported in the Irish Independent that the EU has been working on a Grexit. Its like pulling teeth sometimes trying to get the EU to admit what is sometimes blindingly obvious. Two years many felt that the debt burden Greece carried was too large and would come to this. The only question now is this too little too late.

THE EU is working on an emergency plan for a Greek euro exit, a key economic commissioner admitted for the first time today.

Karel De Gucht, a former Belgian foreign minister before he became EU trade commissioner, said that the EU is ready to handle the “cataclysm” of Greek exit without a “domino effect” – despite the financial turmoil engulfing Spain. ”How much will it cost? I do not know, but it will cost money. What I am assured of is that there will be no contagion: a Greek exit does not mean the end of the euro,” Mr De Gucht said. Painting a grim picture the commissioner said that if Greece left the euro it was “finished” and that, while the euro would survive it would have to fight off a “cataclysm”.

 ”C’est fini. It [Greek exit] means that after a while you can no longer pay your officials who can no longer pay your pensions,” he said.  ”All you can do is have your central bank to print money, and then you get hyperinflation. That would cause a cataclysm in other countries that are now under pressure.”

Citibank fear the contagion affect.

“Contagion Risks Are Trickier – In the run-up to potential Grexit, all eyes would likely be focused on the contagion risks to Ireland, Italy, Spain and Portugal (IIPS). With sufficient fiscal resources and an accommodating ECB, contagion to Italy and Spain should be manageable. We estimate the ECB would need to deploy up to an additional €800bn in liquidity to support potential deposit outflows and debt refinancing for the IIPS banks – the equivalent of a one LTRO and a half. ECB’s assets could rise to around 41pc of EA GDP versus 33pc today.

Apparently, its a piece of piss to start printing new drachmas, just give DeLaRue a shout and tell them how much you want printed.

De La Rue has drawn up contingency plans to print drachma banknotes should Greece exit the euro and approach the British money printer, an industry source has told Reuters. 


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