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Non-Tech : The Conflicted Thread
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From: Amark$p12/13/2011 5:31:40 AM
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Behind this macho posturing, however, the ECB may be moving towards a programme of sovereign debt monetisation and quantitative easing on a scale that even Ben Bernanke and Mervyn King would never contemplate.

The three-year unlimited liquidity operations announced last Thursday could provide infinite monetary support for European banks and through them, their sovereign debt markets. Once these three-year repos get started, banks in the Club Med countries will be able to borrow as much as they want from the ECB at 1% and use this money to buy government bonds now yielding 6% or more. Because of the unprecedented maturity of these repo-operations, banks will now be able to theoretically acquire unlimited government bond portfolios without exposing themselves to rollover or maturity risks. Banks will therefore be able to pick up 500bp of carry, with zero risk-weightings, by hoovering up all the debt their governments can throw at the markets. Of course there would be risks—we cannot say banks will want to jump on this deal, but in theory they can.

This Ponzi scheme could potentially result in an even bigger money-printing operation than anything the US, British and Swiss central banks have done on their own accounts. It would allow the banks to rebuild their equity with no dilution to shareholders. And if the banks in Italy or Greece became too "profitable" by using cheap ECB funding to buy up their entire sovereign debt markets, then the Italian or Greek governments could always recover the "excess" profits with special taxes. The governments could thus effectively reduce their own cost of funds to the 1% rate offered to banks by the ECB. Of course if the Italian government defaulted on its debts, Italian banks would go spectacularly bust. But these banks would go bust anyway if the Italian government ever defaulted. All the incentives for Italian bank management will therefore be to go for broke in their sovereign debt markets, making maximum use of the new ECB credit lines

http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2011/12/12/sorting-out-the-euro-mess.aspx?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+John_Mauldin_Outside_The_Box+%28John+Mauldin%27s+Outside+the+Box%29
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