The ECB’s ‘sterilization auction’ failed today. A corner stone of the ECB’s attempt to bail-out every bank in Europe BUT NOT to actually print any new euros to do it with, has collapsed.
The ECB plan was this. Buy up any and all debts, lend to any and all who can’t get funding from anyone alse and accept any and all ‘assets’ of whatever poor to non-existant quality as collateral, BUT THEN run reverse repo auctions to withdraw the same amount of cash that was spent on all the above. This requires, obvioulsy, banks to be willing to buy ECB IOU’s essentially, with cash. The money supply, therefore is cleansed of any extra cash and the ECB can say it hasn’t printed any new. From the beginning it was questioned whether this wasn’t just an elaborate three card trick. Because it was also said the ECB’s IOU’s would be elegible for placement back at the ECB for cash. Which made the whole thing an eloborate money-go-round. But all that has now, it seems, become irrelevant. Because the IOU cash-back plan seems to have failed already.
This auction did not attract enough banks willing to put up enough cash. Result, the ECB is left with a fist full of its own IOU’s and NO ONE willing to buy them. The cash the ECB was trying to withdraw, therefore, remains in the system.
‘So what’, you might say. A little inflation might result but hey, don’t panic. No, no one would if that were the problem. But it’s not.
The problem is what this failure says to the world about the state of Europ’e banks. The bond market is already looking at them thinking, ‘they are broke, I’m not going to lend to them’. Now the bond market knows they are broke They are so broke, so short of hand-to-mouth cash that they can’t stick to the ECB agreement to withdraw the extra cash and keep the ECB money supply from exploding. Basically there are two types of banks in Europe now. Those which are broke and those who will be, when the broke banks fail to pay the debts they owe to the ones that aren’t quite broke yet.
What form of Euro-blather will be squeezed out of the fax maxchine to explain this as no problem, forseen, even planned – I can’t imagine.