Nearly two months ago, when we commented on the recent string of unprecedented failures by the ECB to sterilize its legacy bond buying operation, the SMP, we commented that “judging by the feverish pace of purchases of every peripheral bond available, is this merely just another indication how little the ECB cares about sterilization, and is just a hint at an upcoming full-blown and unsterilized bond monetization about to be launched by Mario Draghi?” Sure enough at the subsequent February 6 ECB meeting Mario Draghi hinted as much when he said that among the things the ECB was looking at was precisely the “de”sterilizing of the SMP program. However, one stumbling block was getting the Bundebsbank’s tacit approval to proceed with this plan which would make the ECB’s bond monetization mirror that of the Fed where bonds are purchased on an unsterilized basis. And, as expected, overnight the Bundesbank threw in the towel on sterilization, meaning that the SMP will no longer be sterilized with an announcement divulging just this likely as soon as the next ECB meeting.
From the WSJ:
Germany’s central bank said Monday it would support suspending the European Central Bank’s nearly four-year-old policy of draining funds from euro-zone banks to offset the ECB’s government-bond holdings, saying the shift would stabilize money markets and cement the bank’s pledge to maintain an ultra-loose monetary policy. The Bundesbank’s stance, contained it its monthly report, would likely give the ECB cover in Germany if it decides to take this course. The weekly funding drains, known as sterilizations, helped to shield the ECB from criticism that it printed fresh money to bail out struggling countries such as Greece and Italy.
This concern is particularly pronounced in Germany, where purchases of government debt stir deep-rooted fears of inflation and a loss of central bank independence. The Bundesbank opposed both of the ECB’s bond-purchase plans in 2010 and 2012. By ending the weekly funding drains, the ECB would potentially leave an extra €175 billion ($239.6 billion) in the banking system, which in turn may reduce the rates banks charge each other for short-term cash.
The Bundesbank said in its monthly report that it “is open-minded about a possible adjustment of the current liquidity absorbing operations when it is appropriate to stabilize the money market and liquidity conditions.”
Such a move, it said, would “signal the accommodative monetary policy stance of the Eurosystem even clearer than before.” The Eurosystem refers to the ECB and 18 national central banks in the euro zone. The ECB has pledged to keep interest rates at their present record lows, or reduce them further, for an extended period
One implication, of course, is on European money-market rates which have been volatile in recent months and the result would be at least some short-term anchoring.
Analysts said that while suspending the weekly drains would have a short-term effect in anchoring money-market rates, it may not prove long-lasting. Because banks can also borrow unlimited amounts of money from the ECB, they may simply keep the extra funds and borrow less from the central bank, leaving the money supply largely stable.
A bigger question is whether now that sterilization is effectively history, will this open the gates for full-blown QE which the market has been largely anticipating for months, roughly since November when we penned “Next From The ECB: Here Comes QE, According To BNP” and which argued that in order to deal with Europe’s record low loan creation the ECB would have no choice but to step in and do just what the Fed has been doing to battle the same scourge: monetize assets outright in hopes of offsetting the monetary pipeline blocks that have haunted Europe for the past 5 years. Of course, that will not work and will merely send European stocks to recorder highs, even if the recent surge in Europe has been largely driven by the market pricing in of just this outcome. Another question is when will ECB unsterilized interventions finally impact the soaring EUR whose relentless rise is crushing European corporate revenue and profit lines. For now, the EUR does not appear too concerned.