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ECB Stealth QE Euro 489 Billion Money Printing to Prevent Eurozone Banking System Collapse

Interest-Rates / Eurozone Debt Crisis Dec 21, 2011 - 08:46 PM GMT

By: Nadeem_Walayat


Best Financial Markets Analysis ArticleThe ECB's first ever long term Refinancing Operation (LTRO) that had been estimated to provide upto Euro 350 billion to Europe's bankrupt banks in the form of cheap 1% 3 year loans, instead a huge Euro 489 billion was borrowed by 523 banks in a rush to grab cheap money that amounts to QE in all but name regardless of ECB propaganda.

The ECB's stealth QE objective was first to prevent the insolvent euro-zone banks from collapsing over the next few weeks as they were unable to refinance their short-term maturing debts as well as a run on the banks in progress in the euro-zone, and secondly (directly related) to encourage the banks to buy sovereign debt of bankrupting euro-zone countries because the ECB is not allowed to buy sovereign debts. Today's actions of giving cheap money to the banks (1% per year interest rate) achieves both objectives as the banks took the money to use it to cover short-term maturing debt as well as buy a load of PIIGS debt, and thus are buying time (a couple of months at best) and so greatly diminishes the risks for what was looking like a near imminent collapse of the euro-zone (regardless of whether the trigger was a bankrupt Sovereign or large bank as both ).

Let me again explain more precisely what happened today: The ECB is not allowed to buy PIIGS government bonds, so ECB lends banks Euro 489 billion at 1% that put up PIIGS debt as collateral (which means they cannot sell it), so that they hopefully go and buy more PIIGS debt that pay 5%+, this is exactly the same objective of UK and US Q.E. to monetize their own debt. Though it has the same flaws in that they cannot tell the banks what to do with the money (but governments do bully their banks) so probably less than 1/3rd will be used to buy non german sovereign debt.

Today's ECB action also sends a clear warning to speculators who have been betting against the euro-zone which ranges from actions such as shorting the euro, shorting euro-zone banks and shorting euro-zone (non german) government bonds that they are now fighting against the ECB that is prepared to stealthy print as much money as is needed to ensure that they will be on the losing end of these bets, that is the warning, whether it works or not remains to be seen.

My opinion has been and has remained the same right before publication of the January 2010 Inflation Mega-trend ebook (FREE DOWNLOAD) that Governments have only one solution to first the banking crisis and the subsequent bank bailout sovereign debt crisis which is to print money and monetize debt which I again covered by specifically dealing with the Eurozone debt crisis in September 2011 (Euro-Zone Prepares to Print Trillions).

Since which time the crisis in the Euro-zone has continued to worsen which led upto the failure of the meeting of 9th December 2011 that was supposed to mark an agreement for a rescue of the Eurozone instead it failed to achieve anything, which led me to increase the risks of a collapse of the Euro-zone over the next 4 weeks from 5% to 10% and repeat warnings for depositors to protect their funds form the bankrupting Euro-zone as it looked like we would be looking at a 20% risk of collapse by year end, that risk has now fallen a little to about 7% because there is still a run on the euro-zone banking system in progress, remember that the banks are over leveraged and that they only have a fraction of the deposits available which is why countries such as Italy are restricting cash transactions because all it takes is say 5% of deposits being withdrawn to collapse the whole banking system.

Now that the ECB has effectively thrown its rule book for not monetizing government bonds into the dustbin by embarking on a programme for the stealth monetization of government debt which is transpiring exactly as I stated it would near 3 weeks ago - 03 Dec 2011 - How to Protect Your Bank Deposits, Savings From Euro-zone Collapse Financial Armageddon

Ignore what the ECB and German politicians are publically stating, they WILL print money, they WILL bailout the european banks because the Inflation reasons for not printing money are fundamentally flawed, perhaps it has not dawned on those in charge yet because they are listening to clueless academics. The reason is this, if they fear inflation from QE money printing then what the hell do they think will happen to the Euro-zone inflation rates if the Euro collapses ?

The bottom line is that the ECB had no choice but to play catchup to the UK and USA, in terms of money printing which I estimated should be to the tune of Euro 1.5 trillion to match UK money printing to date, which today's action added to previous stealth money printing puts the Eurozone equivalent total at about 1trillion, so expect more rounds of similar money printing from the Eurozone with further QE also from both the UK and USA, probably coordinated to take place during February 2012, as that remains the only option they have (not that I agree with money printing, but that's where my analysis concludes as by far the most probable action that central banks will take).

Off course the ECB by expanding its balance sheets to several trillions by continuously bailing out bankrupt banks will ultimately turn the ECB itself into a bad bank, the consequences of which will play out in the currency markets.

Implications for Inflation and Asset Prices

When you print money (electronically) you debase the currency, and far more than you can imagine from the headline number as a consequence of our fractional reserve banking system. Regardless of the official name be it QE or LTRO or whatever, it will result in higher inflation, with those assets most sensitive to inflation responding to a greater extent that's dividend paying and raising stocks and commodities such as crude oil at the top of the list, as well as supporting all other assets such as housing to varying degrees and off course feeding into consumer price inflation.

Money Printing Outlook for 2012

Based on today's action lets pencil in Euro 1 trillion more of QE for Europe, $600 billion of QE for the US and say £150 billion of QE for the UK, then that's a potentially inflationary boost to the western economies of $2 trillion during 2012 which as a consequence of the fractional reserve banking will be leveraged up to at LEAST a factor of X10 or $20 trillion. Many can argue that the money is not being lent out but rather hoarded and used to pay down debt, which is true to some extent but there will be such a potential of leveragable liquidity sloshing around by the end of 2012, that it could eventually result in inflation rates soaring to levels that we cannot even imagine today, which is something I will come to in a week or so in my in-depth Inflation forecast for 2012 (ensure you are subscribed to my always free newsletter to get this in your email in box).

The world is sitting on an Inflation time bomb that the worlds central banks keep adding more dynamite to virtually every month, all it takes is one stray spark and BOOM !

But for now, we can all sleep a little easier perhaps into Mid Jan 2012.

Source and Comments:

By Nadeem Walayat

Copyright © 2005-2011 (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of three ebook's - The Inflation Mega-Trend; The Interest Rate Mega-Trend and The Stocks Stealth Bull Market Update 2011 that can be downloaded for Free.

Stocks Stealth Bull Market Ebook DownloadThe Interest Rate Mega-Trend Ebook DownloadThe Inflation Mega-Trend Ebook Download

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 600 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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