The monetary sequester of the ECB

In December 2011 and February 2012 Mario Draghi used the term “Dicke Bertha”, a huge German canon used during the First World War to describe a monetary action by flooding the monetary markets in Europe with about 1 trillion Euros. The time frame of the fixed rate tender was three years, i.e. in 2015 the liquidity offered to the commercial banks of the Euro area has to be paid back or rolled over. The first operation has date of maturity ending on the 29. January 2015 and the second has a date of maturity on the 26. February 2015. The first round offered 489.191 bill. Euro and the second round 529.531 bill. Euro, i.e. a total of 1,018.72 bill Euros. In the first round 523 bidders and in the second round 800 bidders were involved. The initial idea of Draghi and the member of the ECB council might have been that in three years time the Euro area crisis would have disappeared and the credibility in the stability of the commercial banking system re-established. But this might easily prove to be an illusion. Offering liquidity at such an extreme amount and long-term time frame has some similarities to the quantitative easing (QE) policy of the Fed in the US. However, this operation more or less lowered only the yield curve at the shorter-end up to three years for a limited time.
What if …?
The potential risk associated with such a policy is that the financial market crisis in Europe will be not over when the maturity dates strike. What will happen, when the financial markets are still in turmoil and interest rates are rising as they already did in the US recently quite dramatically? After Ben Bernanke mentioned that there would be a tapering out the of current QE3 program during this and the coming year, the interest rates moved up rapidly. What if the ECB has financed a large number of commercial banks in particular in the crisis countries of the Euro area which are more or less bankrupt and only survive on the regular provision of liquidity through the ECB? We know quite well that during the Japanese financial market meltdown a large number of so called zombie banks survived for years. A similar process might be under way in Europe. Since there is still strong resistance of most European governments to close such institutes to clear the market from them because they foster their own national champion policy, the situation will not become better but worse over the years. Those institutes will hardly be able to pay back their debt to the ECB especially when such huge amount lent out by the “Dicke Bertha” mature. Should they then be officially declared bankrupt and go into default?
EU Monetary Union: A still birth?
Currently the EU governments and the EU-commission and the ECB work feverishly to setup a banking union. This should according to plan become operational at the beginning of 2015. It might be no accident that EU banking union should just start when the monetary sequester matures in January and February 2015. It would be the time of reckoning. In a major cleaning-up operations a large number of de facto insolvent banks should be closed down. However, the interesting question still would be what will happen to the losses the ECB will have to face to have lent out huge amounts of money against bad collateral? Up to now the ECB tends to operate this kind of collateral like a bad bank, i.e. holds those assets until the maturity date strikes. Their hope is that the debtors will be able to service their debt until then. But this might be rather optimistic. If defaults happen at a significant number and respective volumes at the beginning of 2015 the recovery rate of the ECB from such monetary operations associated with the monetary sequester will cause major trouble for the ECB itself. Who will at this time be able to bail out the ECB?
ECB should become more transparent and accountable towards their risk position
The major problem is that the ECB took on huge risk with the “Dicke Bertha”, i.e. monetary sequester, which is still hidden in their balance sheet. There is a major lack in transparency. As long as the ECB is not publishing the difference between their actual valuations of the assets on their balance sheets minus the mark-to-market values, the internal risk position is hidden from the public. This should be changed immediately. The ECB should not be enabled to disguise their risk position. She should be made accountable for their policy to the public and the financial market community. This will lead to a necessary market discipline to the ECB council not to take steps which would could take on catastrophic dimensions simply because nobody outside the bank know enough about the internal risk structure.
There is not much time left to get things right. Otherwise the monetary sequester might simply strike because of the uncertainty in the public and in financial markets during this time. Without a clear guidance how the ECB will deal with the situation inherited from their past policy, i.e. roll over or pay back and the respective conditionalities, the situation will open-up a major agenda for speculators of any kind.
It’s time to become accountable now, not later.


3 Gedanken zu „The monetary sequester of the ECB

  1. Oh my amazing benefits! an amazing report dude. Many thanks However I ‚m experiencing trouble with ur rss . Dont know why Unable to sign up to it. Can there be anyone acquiring identical rss problem? Anybody who knows please respond. Thnkx

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