Courtesy of Mish.
On September 4, ECB President pulled out a financial bazooka including a pledge to build up the ECB’s balance sheet by another €1 trillion.
Draghi confirmed the asset purchases would “include the real estate, the RMBS, real estate ABS. It would also include a fairly wide range of ABS containing loans to the real economy,” but only “the senior tranches, and the mezzanine tranches only if there is a guarantee.“
Now, just three weeks later, he wants to buy outright junk, presumably without guarantees.
Mario Draghi is to push the European Central Bank to buy bundles of Greek and Cypriot bank loans with “junk” ratings, in a move that is set to exacerbate tensions between Germany and the bank.
The ECB’s executive board will propose that existing requirements on the quality of assets accepted by the bank are relaxed to allow the eurozone’s monetary guardian to buy the safer slices of Greek and Cypriot asset backed securities, or ABS, say people familiar with the matter.
However, the idea is likely to face staunch opposition in Germany, straining already tense relations between the ECB and officials in the eurozone’s largest economy.
Bundesbank president Jens Weidmann, who also sits on the ECB’s policy making governing council, has already objected to the plan to buy ABS, which he says leaves the central bank’s balance sheet too exposed to risks.
Wolfgang Schäuble, Germany’s finance minister, has also voiced his opposition, saying purchases would heighten concerns about potential conflicts of interest between the ECB’s role as monetary policy maker and bank supervisor.
While the safer slices – or senior tranches – of Greek and Cypriot ABS only make up a tiny proportion of Europe’s securitisation market, it would free up billions in liquidity for banks in two of the eurozone’s weakest economies, and potentially boost lending to credit-starved smaller businesses in the currency area’s periphery.
Free Up Liquidity?
The idea that swapping money for junk will free up liquidity is as ridiculous as moving a rotting fish from your pantry to the living room in hopes the stench will go away.
In this case, the stench on Greek bank balance sheets will not go away. Instead, stench will also appear on the balance sheet of the ECB….