By John ward
ECB boss using sealed money-flow scam to hoodwink markets
Bundesbank’s Weidmann continues to sound alarm bells
“Draghi is misleading sovereign investors and heads of government into thinking that Italy and Spain will not go the same way [as Greece]. Of course they will – and we Germans will have to pay for it” he told The Slog within the last two hours GMT. Zero Hedge was first with the story yesterday, producing detailed, charted backup for the claims the site picked up from a number of prominent Wall Street analysts. But the story also ties in significantly with both rising mortgage rates in the UK, false bond market optimism in the eurozone, and the now hugely divided feelings in the EU about the Greek bailout attempt. The Slog presents a broad analysis.
You may have noticed a number of UK/Euro banks putting up their mortgage-lending rates yesterday. The standard claim across the piece was that the price of ‘funding’ money for lending had increased.
There’s an oddly vicious circle to this spin – as indeed there is with most banker ‘explanations’. Zirp has meant very few retail customers placing deposits with the banks. Zirp was allegedly done in the US and UK to create cheap commercial loans, but we’ve known for years that that’s bollocks: it was done to give hugely over-leveraged banks a margin on sovereign debt purchase…and multinationals cheap money to take to the bottom line, give out dividends, and thus keep the Dow and FTSE nice and buoyant.
So with very few customers making deposits, banks have had to turn to the wholesale money markets. But they’re as tight as a drum through lack of trust in each other (aka ‘credit crunch’) and that increased sense of risk pushes up rates. So now we’ve finally come full circle to where things normally both start and end: we the punters wind up paying more.
As long ago as mid 2010 The Slog insisted that this must be the medium-term result of banking insolvency: sooner or later, lending rates have to go up – and in a deregulated banking system, thereafter it makes not a sou of difference what rate the Fed or the Bank of England MPC say they should be….lending rates will go up.
The really cool thing about QE and Zirp in tandem is that the banks get to dump their toxic assets on central banks via QE (paid for by us, again) and in return, Zirp allows the banks to buy Sovereign debt at a profit margin, thus keeping the bond markets confident…and the price of sovereign borrowing down…and pensioners knackered.This is why the Fed note/gilts markets in the US and UK repectively are so cheap and bullish now. Of course, the economy comes to a grinding halt, but hey, who cares about the economy? It’s always about saving the pols and the bankers.
Thanks to incontinent bank sovereign lending policies regarding cheap money, Jean-Claude Trichet nodding off, Goldman Sachs advice about accountancy cheating, Silvio Berlusconi – and a host of other factors and gangsters – in the eurozone, this turned into a major-league sovereign debt crisis….and the realisation that the private eurobanks (plus some Americans) would fall over rather noisily given that southern European borrowing was completely out of control, and repayment anything from highly unlikely to are you kidding or what. Somebody had to pay, and as both the bankers and the pols were broke, well, it was only ever going to be us. Again.
So was the Troika brought to life, and the Greeks made to pay higher taxes and have their salary cuts backdated by six months….while the frantic ECB/Berlin/Paris axis tried every trick they knew to invent some new money. By last November, none were forthcoming – and a credit crunch of Lehman-like proportions was looming over the horizon. Since then we’ve had two enormous bouts of LTRO from Mario Draghi, who is now proclaimed Saviour of the World. As the last person to claim that title was Gordon Brown, things can only get worse for Mario from here on.
But the LTRO has so far been depicted as liquidity to help business lending and thus growth (lies) and – by financial sites and a few of the MSM – as a disguised way of giving the eurobanks more sandbags against the Tsunami of toxic crap heading their way from Greece. You may recall that in News Ketchup last week, I posed the question as to why a nice fat and allegedly safe bank like Barclays would have piled into the trough to take some Mariomoney. And given that all this (relatively) cheap money has been power-hosed into the system, exactly what excuse the mortgage-rate increasers might have for putting up loan prices in a housing market already flatlining.
Well now it seems that Daily Collateral at Zero Hedge may well have provided the answer…complete with elucidatory charts. It made my brain hurt along the way, but the Sun headline is this: Draghi is in fact employing the exact same ‘sealed money circle’ employed by the UK and the US to keep both the banks and the sovereigns upright at the same time.
The evidence presented in favour of this is:
1. A spike in distressed sovereign-bond buying among eurobanks
2. An increase in the proportion of ClubMed bank monies invested in their own government’s debt
To be honest, it looks pretty irrefutable to me. The borrowed money is going back into the ECB on overnight at a paper loss, being used the next day to buy sovereign bonds at a paper profit, going back to the ECB that evening or soon thereafter….andonandonandon. The ECB’s reserves look secure, the banks look stable, and the bond markets look more buoyant. Hence the improvement in the costs of Italian and Spanish debt in recent weeks…and the successful auctions in both countries. It had nothing to do with ‘market sentiment’….and everything to do with a Goldman Sachs-trained illusionist called Mario Draghi.
Wolfgang Munchau took a pop at Jens Weidmann of the Bundesbank in the FT this morning (paywalled) for being disingenuous about the ECB LTRO decision he’d himself signed off on. But Munchau is off beam about this: Weidmann signed off on one liquidity exercise – not an inflationary circular saw.
There are other problems with this stealth bailout. Number one, it’s way beyond the ECB’s legal remit. Technically, a national Central Bank from any EU member State could challenge it. Number two, it leaves eurobusiness out in the cold….and yet another economy being starved of funds by barmy neocon austerity polemics. And Number Three, the risks of the circle breaking to cause hyper-inflation mean that one day soon we may well all be in the Number Two.
The Slog’s Bankfurt Maulwurf was contacted first thing today – the EU being an hour ahead of GMT. His view was typically trenchant:
“As I said last week, Draghi is a disgrace,” he began accomodatingly, “And had he not made the political moves he did at the ECB, such behaviour would not be allowed. Weidmann is being discreet, but he is one of us….he sees the madness coming, as more and more of us do. For this Greek bailout to go through now would not only be a disaster for Germany, Draghi is misleading sovereign investors and heads of government into thinking that Italy and Spain will not go the same way. Of course they will – and we Germans will have to pay for that.”
As always, Herr Maulwurf remains coy about his own involvement in any ‘plans’…as you’d expect. But I can only say this lends further support for the Slog’s belief that powerful influences in many institutions across the globe will do almost anything to derail the Greek bond-swap/restructure process.
The analyses summed up at Zero Hedge come at a key point in the Greek bailout-or-default guessing game. But far more fundamentally significant is the way the EU’s Central Bank boss is now steering it into the realms of pure deception….along with its faithful allies at ISDA. Current and future eurozone junk bondholders would do well to heed that significance.