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Ecb Fixed-Term Deposit Fail

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http://ftalphaville.ft.com/blog/2010/06/29/273606/ecb-fixed-term-deposit-fail/

Oof.

The European Central Bank’s latest attempt to sterilise its government bond purchases has landed with a resounding thud. Results from the ECB’s Tuesday one-week fixed-term deposit (FTD) auction, in which it planned to drain the €55bn of extra liquidity created by its €55bn of bond-buying, are in.

And they are not pretty:

fixtedterm.jpg

The ECB failed to auction the €55bn in fixed term deposits it had planned to, and what it did auction (€31.86bn) was at a much-higher rate (0.54 per cent) than what it offered at the start of its Securities Markets Programme (SMP). The market seems to be holding tight to liquidity.

What’s going on? A lot, and that’s probably the difficulty.

As Barclays Capital’s Cagdas Aksu pointed out before the results of the FTD:

Also ahead of the 3m LTRO on Wednesday, the ECB will conduct two operations today. First, there will be the normal weekly MRO: amounts have increased there to stand at EUR152bn, and some of that might be rolled over into the 3m LTRO tomorrow, maybe up to EUR50bn. Effectively, the less the roll today in the weekly MRO, the higher the chance that we might get a higher roll in general in the 3m LTRO tomorrow. There is a one-day gap between the settlement of the two operations, and this might lead to some usage of the marginal lending facility for one day. Also, the ECB will be draining the EUR55bn that it has bought in bonds in the SMP. This is interesting since, with the big rollover just one day later and likely a drop in the overall liquidity surplus (to say EUR100-150bn), it might get more difficult/expensive for the ECB to drain that surplus liquidity, which could start pushing Eonia rates higher.

Still I'm sure it's contained and there is nothing to worry about.

I mean what's one failed auction?

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http://market-ticker.denninger.net/archives/2461-Neo-Keynesian-FAIL-Take-Heed-Bernanke.html

Now we're really in trouble:

The ECB failed to auction the €55bn in fixed term deposits it had planned to, and what it did auction (€31.86bn) was at a much-higher rate (0.54 per cent) than what it offered at the start of its Securities Markets Programme (SMP). The market seems to be holding tight to liquidity.

The wall has been hit.

This is a clear warning to the money-printing screamers (of which there are many adherents) and the "we can do this without impacting aggregates" crowd (commonly known as Central Banks with God complexes.)

Sadly, as I have repeatedly pointed out, all Ponzi Schemes fail, and they fail at the most inopportune time, after you have spent the proceeds of your previous scamming and thus lack the ability to deal with the failure to sell your latest batch of whatever it is you're attempting to do.

Oh, and by the way, it gets better. Much better.

See, the ECB has a rollover problem coming, in that they need to roll a significant amount of term liquidity deposits Thursday.

If those rolls fail, the markets will crash. Both credit and equity.

If the ECB tries to machine it's way around a failure the results could be cataclysmic.

I have warned for over two years that these BS games played by the various governments and central banks WOULD NOT WORK and in fact CANNOT, mathematically, work.

We had to force these institutions to go under two years ago. We had to force them to fail back in March of 2009, rather than legalize accounting fraud. President Obama had the opportunity to take the medicine and accept it, but in the process of doing so clean the system and ensure it's survival.

But doing so meant JAILING the "captains of industry" that had created this mess (including Bernanke and Gethner), repudiating the "pension promises" that cannot be kept for those public-sector union crooners including police, firefighters and teachers, and telling the neo-Keynesians like Larry Summers (who incidentally took a damn good run at bankrupting HARVARD!) to get stuffed.

Now we pay for the hubris of people like BEN BERNANKE, HANK PAULSON, TIM GEITHNER, PRESIDENT OBAMA, SARKOZY and the CEOs and boards of major national and international banks that have goaded and prodded the respective governments into attempting to protect them from the consequences of their own greed and stupidity while literally robbing the public, municipalities and states BLIND.

Our refusal to FORCE Congress and the Administration to JAIL the lawbreakers and BANKRUPT their firms has DOUBLED the economic damage that must now be absorbed to clear the system.

IF WE DO NOT STOP THIS BS SOON THE COLLAPSE WILL COME **HERE**.

If you listened to Dennis Kneale, Larry Kudlow and the other cheerleaders at CNBS and elsewhere who called "Pax Americana", you deserve what you are about to get.

Game's up folks.

I told you so.

PS: Oh Dennis and Larry? Game for a rematch on air with a few facts and charts? You guys need to both go the local courthouse and change your first name to "Charles." Last name? PONZI.

Does Denniger think the US is going to somehow avoid all this? The financial system is too interlinked, once the chain reaction starts there will be no stopping it.

The crash of 29 I fear will look like a teddy bears picnic compared to what's coming.

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Attempts to sterilise the most recent bond purchases by the ECB were bound to fail in the face of a massive maturity of loans from the ECB to banks.

The ECB have just crossed the line (perhaps unintentionally or perhaps intentionally under the guise of a liquidity squeeze) from bond repos to QE. I am sure that the Germans and the Dutch are not happy. Everyone else in the EZ is probably rejoicing.

This is another step closer to the end of the game.

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Attempts to sterilise the most recent bond purchases by the ECB were bound to fail in the face of a massive maturity of loans from the ECB to banks.

The ECB have just crossed the line (perhaps unintentionally or perhaps intentionally under the guise of a liquidity squeeze) from bond repos to QE. I am sure that the Germans and the Dutch are not happy. Everyone else in the EZ is probably rejoicing.

This is another step closer to the end of the game.

Yes. Good post, as ever L O.

It's getting tense again.

Nick

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Attempts to sterilise the most recent bond purchases by the ECB were bound to fail in the face of a massive maturity of loans from the ECB to banks.

The ECB have just crossed the line (perhaps unintentionally or perhaps intentionally under the guise of a liquidity squeeze) from bond repos to QE. I am sure that the Germans and the Dutch are not happy. Everyone else in the EZ is probably rejoicing.

This is another step closer to the end of the game.

Yes. Good post, as ever L O.

It's getting tense again.

Nick

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Yes. Good post, as ever L O.

It's getting tense again.

Nick

Thank you.

You are right about the spring getting wound tighter. The state has a larger borrowing capacity than the private sector but too much debt is too much debt no matter who the borrower is. The consequences of too much debt have been delayed by the change in borrower from the private sector to the public sector but the eventual outcome remains the same.

Having the "grim reaper" as my avatar is not a surprise given my views about debt. I fear that I am right and hope that I am wrong.

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Having the "grim reaper" as my avatar is not a surprise given my views about debt. I fear that I am right and hope that I am wrong.

You're not wrong.

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Thank you.

You are right about the spring getting wound tighter. The state has a larger borrowing capacity than the private sector but too much debt is too much debt no matter who the borrower is. The consequences of too much debt have been delayed by the change in borrower from the private sector to the public sector but the eventual outcome remains the same.

Having the "grim reaper" as my avatar is not a surprise given my views about debt. I fear that I am right and hope that I am wrong.

I would say the state only has the capacity to borrow as long as people believe it can tax the populace and repay. That trust can disappear over night.

Someone is going to be left holding a giant turd.

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I would say the state only has the capacity to borrow as long as people believe it can tax the populace and repay. That trust can disappear over night.

Someone is going to be left holding a giant turd.

Agreed.

As I have said before, common wisdom is that the state cannot default on obligations denominated in its own currency because it has the capacity to print money and to tax its citizens / residents.

Russia's experince in the late 1990s should have ended this myth. To date, it appears that people are ignoring the lessons from Russia's experience.

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Agreed.

As I have said before, common wisdom is that the state cannot default on obligations denominated in its own currency because it has the capacity to print money and to tax its citizens / residents.

Russia's experince in the late 1990s should have ended this myth. To date, it appears that people are ignoring the lessons from Russia's experience.

Well the Russian experience was that everyone was on holiday and couldn't pass the legislation required to print.

That said, the euro is in pretty much a similar position for a different reason - there is no way to get the hundreds of different politico's together to agree this and if anyone went printy mental off their own bat there would be hell to pay. The political weakness might actually save the currency, or some banker might just go mad anyway...but the consequences of that would also be spectacular.

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Agreed.

As I have said before, common wisdom is that the state cannot default on obligations denominated in its own currency because it has the capacity to print money and to tax its citizens / residents.

Russia's experince in the late 1990s should have ended this myth. To date, it appears that people are ignoring the lessons from Russia's experience.

The Russian state debt in Rubles was backed by currency swaps issued by private Russian banks. It was a case of bust the state or bust the banks.

It was not as straightforward as it seems.

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The Russian state debt in Rubles was backed by currency swaps issued by private Russian banks. It was a case of bust the state or bust the banks.

It was not as straightforward as it seems.

So are things even more complicated now than they were in Russia in the late 1990s with currency swaps between the Fed, the BoE, the ECB, the BoC, the RBA, the RBNZ, the SNB, the BOJ etc?

Is it possible that we have upped the ante from a relatively local cross border problem at domestic Russian banks to a completely global problem with systemic sovereign risks?

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So are things even more complicated now than they were in Russia in the late 1990s with currency swaps between the Fed, the BoE, the ECB, the BoC, the RBA, the RBNZ, the SNB, the BOJ etc?

Is it possible that we have upped the ante from a relatively local cross border problem at domestic Russian banks to a completely global problem with systemic sovereign risks?

I need to do some homework on this, I'm not even sure they were currency swaps.

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can you go over to the 3month BOTHERED pit and see if there are any bids ?

thought not... with the 442 billion ECB stimulus about to expire this is a bit like trying to put out a house fire with a thimble of water I appreciate they are testing the water to see if anyone has any cash... but its just not going to happen...

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I need to do some homework on this, I'm not even sure they were currency swaps.

My recollection matches your initial proposition.

The Russian banks were big borrowers of Dollars and lenders of Roubles through the basis swap market.

As the level of printing in Russia increased and the Rouble collapsed, the net obligations of Russian banks increased because of their basis swap positions.

Eventually the size of the problem increased to the point where Russia chose to push its banks into default and defaulted on its domestic obligations.

Because of their oil revenues and the lessons that they learned from their past, they chose not to default on their physical (as opposed to derivative) foreign currency obligations.

I am happy to be corrected if your homework refutes my recollection.

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So are things even more complicated now than they were in Russia in the late 1990s with currency swaps between the Fed, the BoE, the ECB, the BoC, the RBA, the RBNZ, the SNB, the BOJ etc?

Is it possible that we have upped the ante from a relatively local cross border problem at domestic Russian banks to a completely global problem with systemic sovereign risks?

No sleep for me now this morning!

Thanks.

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So are things even more complicated now than they were in Russia in the late 1990s with currency swaps between the Fed, the BoE, the ECB, the BoC, the RBA, the RBNZ, the SNB, the BOJ etc?

Is it possible that we have upped the ante from a relatively local cross border problem at domestic Russian banks to a completely global problem with systemic sovereign risks?

OK, tut tut I should have talked about 'forward contracts' and not swaps. Got my knickers in a twist there.

I seems clear to me the Russians had a choice between bankrupting the state (Russian bond default, currency stabilises and then goes back up) or bankrupting the biggest private banks that belonged to oligarchs (state prints as already anticipated by markets, currency falls even more, banks that issued the forwards are toast) .

What we see nowadays is that again, TPTB will happily bust the western states to save our very own oligarchs.

How far will they go? They've gone pretty far already and they're still going now.

I don't know what the ECB will do but the other CBs seem quite content to print to keep ZIRP in place and there's nothing any wannabe bond vigilante can do about it.

Currencies is where something would be more likely to happen but things like swaps that can be pretty much unlimited and are just about costless would keep things straight. Now that's for the big currencies. As for sterling... I'm not so sure.

The biggest risk is the one they don't know of yet and as you say, since everybody's very much fully committed and interconnected...

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No sleep for me now this morning!

Thanks.

Sorry.

The inter central bank swap lines were extended to allow CBs to address foreign currency liquidity squeezes locally.

The mechanics are similar to basis swaps. For example, the ECB borrows Dollars from the Fed and lends them Euros.

Both parties agree to re-exchange the Dollars and Euros at the same exchange rate as the initial exchange at some point in the future no matter what exchange rates are at the time of the future exchange.

If we ever get to the point where one central bank is unable to return the foreign currency that it borrowed from another central bank at the historical exchange rate that prevailed at the time of the initial exchange, global markets will implode violently and simultaneously.

The potential for systemic risk is increased through central bank swap lines because of the assumption that central banks will always be able to return foreign currency borrowings at par.

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My recollection matches your initial proposition.

The Russian banks were big borrowers of Dollars and lenders of Roubles through the basis swap market.

As the level of printing in Russia increased and the Rouble collapsed, the net obligations of Russian banks increased because of their basis swap positions.

Eventually the size of the problem increased to the point where Russia chose to push its banks into default and defaulted on its domestic obligations.

Because of their oil revenues and the lessons that they learned from their past, they chose not to default on their physical (as opposed to derivative) foreign currency obligations.

I am happy to be corrected if your homework refutes my recollection.

I read somewhere else that even the Russian CB sold forwards (?). Not sure about that one.

I think it is fair to say that Russian sovereign debt was in effect denominated in foreign currency via the forwards. Hence a default rather than printing?

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OK, tut tut I should have talked about 'forward contracts' and not swaps. Got my knickers in a twist there.

I seems clear to me the Russians had a choice between bankrupting the state (Russian bond default, currency stabilises and then goes back up) or bankrupting the biggest private banks that belonged to oligarchs (state prints as already anticipated by markets, currency falls even more, banks that issued the forwards are toast) .

What we see nowadays is that again, TPTB will happily bust the western states to save our very own oligarchs.

How far will they go? They've gone pretty far already and they're still going now.

I don't know what the ECB will do but the other CBs seem quite content to print to keep ZIRP in place and there's nothing any wannabe bond vigilante can do about it.

Currencies is where something would be more likely to happen but things like swaps that can be pretty much unlimited and are just about costless would keep things straight. Now that's for the big currencies. As for sterling... I'm not so sure.

The biggest risk is the one they don't know of yet and as you say, since everybody's very much fully committed and interconnected...

Apologies for using lingo.

Arithmetically, basis swaps and fx forwards are analogous. Central bank swap lines carry very similar risks to basis swaps / fx forwards in the event of a failure to deliver foreign currency by a central or commercial bank under duress.

I am not sure of the multiple but I do stick by my implication that central bank swap lines are a massive multiple of the potential problem of Russian banks' basis swap / fx forward positions. The probability of a delivery problem in central bank swap lines is smaller than the initial probability of delivery problems in the fx forward / basis swap positions of Russian banks but it is materially above zero.

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I read somewhere else that even the Russian CB sold forwards (?). Not sure about that one.

I think it is fair to say that Russian sovereign debt was in effect denominated in foreign currency via the forwards. Hence a default rather than printing?

The SARB also built up a huge fx forward position while they were using the unfunded fx forward market to intervene in fx markets (as opposed to funded spot markets).

This position cast a massive shadow over the South African market for at least a decade.

To your point, default by domestic Russian banks (including their fx contracts) would break the effective redenomination of some debt from Roubles into foreign currency.

The debts originally denominated in foreign currency were honoured. I do not recall whether the foreign currency derivatives of the Russian central bank were honoured or not.

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The probability of a delivery problem in central bank swap lines is smaller than the initial probability of delivery problems in the fx forward / basis swap positions of Russian banks but it is materially above zero.

Yes I agree, but my thinking is that any loss that could occur realised would be promptly negated by QE'd Treasury injections into CBs.

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To your point, default by domestic Russian banks (including their fx contracts) would break the effective redenomination of some debt from Roubles into foreign currency.

Yes but from what I understand that was not the chosen path, hence the default of the Rouble denominated contracts. One or the other had to happen.

The debts originally denominated in foreign currency were honoured.

From what I remember they were bought on the market at a huge discount by the Russian government.

I do not recall whether the foreign currency derivatives of the Russian central bank were honoured or not.

The info I've looked at is on the light side... If you ever come across some in depth analysis you could recommend I'd be grateful.

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