CORRECTED - ECB Pumps €50 Billion Into Markets Ahead of Meeting

Thursday, January 31, 2008

-- CORRECTION -- The next meeting of the ECB's governing council is on February 2 and NOT today as I had originally and wrongly written. I apologize to my readers. The conclusions of the post remain unchanged.

The product of the European Central Bank (ECB) may not be as cheap as borrowers are hoping, but rest assured there will never be a shortage of Euros. The ECB allotted €50 billion in a one-week repo on Thursday at an average rate of 4.33%, just ahead of the regular governing council meeting. ECB president Jean-Claude Trichet will announce the results at 1430 hrs local time on February 2. The ECB's leading interest rate stands at 4% while both inflation and money supply M3 growth rates remain far above the target rates of 2% and 4.5% respectively.
It is a safe bet that the ECB will again fail its mandate to really act and fight the worrisome monetary expansion that is the root of the crisis in global capital markets that bubbled to the surface last August. 
The inflation target has been overshot dramatically since mid 2007 and money supply M3 growth has always exceeded the self-set target rates since the inception of the common currency. In this context it does not really matter that M3 growth decreased marginally to 11.5% in December, after a record of 12.3% in October and November.
Tough Talk - Easy Money
The ECB adheres to a split-tongue strategy of tough talk and easy money, as an analysis of the EBC's balance sheet clearly shows a sinking quality of credit collateral accepted for banks' refinancing. Rumours that the ECB accepts collateral of dubious quality have been market talk for while by now. The Telegraph today runs a story that highlights how the "liquidity" is rather used to shore up ailing banks. This way the Eurozone's high priests of perpetually expanding credit can calm the public, avoid a total credit crunch - and delay all problems a littler further.
But the record amounts of freshly digitized money with no corresponding value are a band-aid only while the patients (banks) actually suffer from gangrene. 
Remembering the immediate announcement of Societe Generale about recapitalizing the bank with €5 billion after its record losses in futures markets it appears that the collapse of one major European bank would set a domino-effect in motion, pulling ist counterparties into the abyss too. As these 5 billion will not come from the vault of a rich uncle, this is all about creating more paper, but no values. 
These problems would not be around, had markets really normalized, as Trichet said prematurely in September. Even the multiple repetition of his statement did not end the crisis that has seen corporate financing come to a virtual standstill since August.
This lack of money for real investments will affect European industry in 2008. An industry that is already suffering from record commodity prices and the highest labour costs in the world.
All the new money coming from the ECB does not go to companies modernizing their business operations. These fresh billions, or like today 166 new Euros for each Eurozone inhabitant, are almost exclusively created to help financial institutions avoid bankruptcy. European papers are filled with reports on banks' solvency problems on a daily basis. The ECB's balance sheet has explosively grown since 2006.
We are facing the danger of a total collapse of the banking system, no matter what officials say.
And printing more worthless money has never solved similar situations in history.
The saddest conclusion is this: Whatever the final outcome of this mega-giga crisis in development, Europe's taxpayers will foot the bill. This will raise the question of political responsibility for the folly on behalf of central bankers.


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