Europe's Quantitative Easing

The singular hope here is for growth and when none commences very bad things could happen

by Mark J. Grant

Most people do not think that Europe engages in Quantitative Easing. They know that the United States engages in it, that Britain engages in it and now that Japan engages in it but they think that Europe has so far refused to be involved. They think this because this is what they have been told. Unfortunately this is inaccurate.

The European Quantitative Easing takes place every day just not in the manner utilized by America and others. However, it takes place all the same and it is done in a manner to circumvent the rules of the European Union. This is also why the ECB has such a massive balance sheet.

What Europe has done is gotten around their own regulations which forbid the ECB from lending money directly to nations. This is supposed to be handled by the ESM and approved by the various parliaments. Since this is either politically impossible in some countries or politically a nightmare in others the ECB has concocted a scheme to bypass the political rules with all of Europe’s politicians blinking and nodding in silent agreement.

In Spain, as one example, the ECB lent the banks $172 billion. This was done by the country of Spain guaranteeing the debt of the banks and various bank securitizations and then the bank debt and the bank securitizations were pledged to the ECB who handed them back the cash. The money, in large part, has been used to buy the debt of Spain which, in fact, hands the sovereign back the cash. A good trick, an interesting ruse which is the major reason, perhaps the only reason, why the yield of Spain’s debt has declined.

In Greece, as another example, the same game has gone on. Not only does the EU not count contingent liabilities as part of a country’s debt to GDP ratio, where Greece has guaranteed the debt of their banks, but no inclusion is made of the money handed to the sovereign as a result of assets pledged at the ECB and funneled back to the sovereign nation. One more good trick!

Another ploy is what has happened in Belgium and various other countries.  Dexia got into trouble and Belgium, France and Luxembourg had to step up and lend the bank money. However it was not called a loan or termed a loan and was marked on their balance sheet as an “investment” so it actually increased the assets of the various countries as any proper categorization, a “loan,” would have raised their debt to GDP ratios. Magic abounds in Europe.

In fact all over Europe, in almost all of the countries, the ECB has accepted bank debt and corporate debt guaranteed by some nation and handed back cash to the banks that can either loan money to the sovereign or buy their debt in the open market when auctioned.

There is much ballyhoo that sovereign yields have gone lower because of the better economics in Europe. Europe is in a major recession. Even an idiot savant would not take this notion at face value and yet that is what is contended. The truth is that yields have gone lower because the ECB hands the banks money which is utilized to force them lower. The banks are just a conduit in this scheme; nothing more.

Now the ECB holds about 80% of their assets at face value declaring them “risk free.” This isanother part of the farce because the banks get the money at the “risk free” rate of 100% of the loan or securitization. These securitizations include mortgages, commercial loans, construction loans, gyro stands in Athens and only God and perhaps Mr. Draghi and his band of merry men knowing what else is in them.

Make no mistake; Europe is fully engaged in Quantitative Easing.

There are rumors, snippets in the wind, that one or more of the French banks has gotten into trouble. Each time, perhaps, loans were securitized and handed to the ECB which handed cash bank to the bank or banks. It is impossible to know but with a banking system four times the size of the GDP of the nation it would not surprise me to find that certain items had been incorrectly categorized if not covered up.

Then let’s play out this scheme to its logical conclusion. The loans in the securitization do not pay. Bankrupt companies, Real Estate that has gone south, construction that has stopped and there is no ability to pay from the primary sources. Then what? More securitizations pledged, more cash handed out to the banks and new loans pay old loans and the scheme continues. The singular hope here is for growth and when none commences very bad things could happen.

‘Tis but a mid-summers night’s dream

Crafted by some clever bard

A pleasant slumber upon a balmy day

Pray tell what happens when the dreamer awakens?