Is it the ECB or Euro area banks which most resemble Agent Smith?

This week has seen a new stage in the battle between the European Central Bank and the economic malaise which is affecting much of the Euro area. One factor in this has been that it announced this on Friday.

The ECB announces that the Eurosystem starts covered bond purchases on Monday 20/10.


Covered bonds that are eligible for monetary policy operations in line with section 6.2.1 of Annex I to Guideline ECB/2011/14 ….. and are issued by credit institutions incorporated in the euro area, shall be eligible for outright purchase under the CBPP3. Multi-cédulas that are eligible for monetary policy operations in line with section 6.2.1 of Annex I to Guideline ECB/2011/14 and are issued by special purpose vehicles incorporated in the euro area shall be eligible for outright purchase under the CBPP3.

I have taken out a little of the detail there but left in the bit about special purpose vehicles qualifying as that is the sort of thing that can return to haunt a central bank. But the crucial point is that the ECB began to purchase covered bonds again this week. The operations  have been observed by market traders. According to Bloomberg it did this on Monday.

The ECB bought short-dated French notes from Societe Generale SA and BNP Paribas SA as well as Spanish securities.

Yesterday it did this.

The European Central Bank bought Italian covered bonds …………Debt issued by Intesa Sanpaolo Spa (ISP) was included in the purchases,

I think most readers will be clear why Italian and French debt was chosen although it is less clear why the debt of the supposedly recovering Spanish economy was chosen. I suspect that the mortgage related problems of the Spanish banks are far from over.

What will it achieve?

According to the ECB it will be all-singing and all-dancing when combined with its existing measures.

the CBPP3 will further enhance the transmission of monetary policy, facilitate credit provision to the euro area economy, generate positive spill-overs to other markets and, as a result, ease the ECB’s monetary policy stance, and contribute to a return of inflation rates to levels closer to 2%.

Does it also supply apple pie and ice cream?

What is a covered bond anyway?

Here is the definition from the Financial Times.

A bond backed by assets such as mortgage loans (covered mortgage bond). Covered bonds are backed by pools of mortgages that remain on the issuer’s balance sheet, as opposed to mortgage-backed securities such as collateralised mortgage obligations (CMOs), where the assets are taken off the balance sheet.

What does this mean?

We see that there are two very familiar themes to this particular operation. The first is that apparently the way to rescue the real economy is always via another bank bailout or subsidy. The second is that most of these moves involve the housing market and finance on it. If we stay with the concept of an implicit bailout for the banking sector we see the depth of their troubles I think  as bailout follows bailout. The theme here is along the lines of Agent Smith in the film the Matrix Revolutions as he cries “More,More” as he replicates and clones himself throughout the system. Indeed Agent Smith has another line in that film which reminds me of the modern banking sector.

This is my world! My world!


What has so far been missing in the Euro area has been any real transmission of the ECB’s policies to the economies of the weaker nations. It has got stuck in the banking system in these places and has never emerged. After all the traditional measure for firing up the engines of the various housing markets (or stopping price falls) has been to reduce mortgage rates by cutting official interest-rates, except with a headline rate at -0.2% we can see that this has been tried. There have been various extraordinary measures too such as LTROs and now TLTROs as the ECB has gone acronym crazy but what has been missing is any real sign of economic recovery.

Even worse the banks started to give some of the money back earlier this year and at times this has approached a flood. Along this road the balance sheet of the ECB which reached a peak of 3 trillion Euros has shrunk to just over 2 trillion. Last Friday saw yet another example of this.

Accordingly, on 22 October 2014 EUR 3317.70 million will be repaid in the tender 20110149 by 4 counterparties and EUR 2504.50 million in the tender 20120034 by 6 counterparties.

Thus another 5.8 billion Euros departed the balance sheet of the ECB in what has become a regular Friday drumbeat. This poses a darker problem than you might think as it looks as though the banks feel that they have enough liquidity and do not want anymore however cheap it appears. The prospect of them lending more in such an environment do not look optimistic as we see something of a reverse for this type of extraordinary monetary policy. They no longer seem especially keen to borrow such funds and put the cash into sovereign bonds which I suppose is a side-effect of the lower level of bond yields available these days.

Is there an element of deja vu here?

Actually you could say deja vu squared as the ECB has had two goes at this before and the clue is to be found in the 3 of CBPP3. This has been missed by much of the media which has announced that this is the ECB’s first effort at Quantitative Easing. There were Covered Bonds Purchase Programmes in both 2009 and 2011 and the ECB still has some 45 billion Euros of bonds from those purchases.

Here of course we hit a problem, if the past purchases were such a success how did we get to this position? Why did the ECB start and then stop it twice? The truth is plain that the purchases did not seem to be ing having either the required or the hoped for effect so they were quietly binned. As they had little publicity anyway  this was not that hard to do.

Accordingly I note that the ECB is back not because it really believes that such purchases will work but because it is a large enough market for it to look like it is doing something substantial. Here monetary policy morphs into a form of public relations.

What about Asset Backed Securities?

As 2014 progressed we saw Mario Draghi offer ever more impassioned pleas for the ABS market to grow. But the truth is that the amount available to buy may only be of the order of 15 billion Euros.

What about Corporate Bond purchases?

This subject roared into life only yesterday as rumours that the ECB would announce purchases at its December meeting spread like wildfire. Those who recall that November comes before December might have already been wondering what happened to it?

One plus of entering this market is that it is a large one and the ECB would be able to expand its balance sheet substantially by buying some of it.


Having pointed out that bankers have become like Agent Smith in our economy  it is even more true of central bankers. If we recall that 2014 was supposed to be the year of recovery it is a way especially troubling to see the ECB both planning new measures and reheating old ones. The supposed end product of boosting small and medium-sized businesses always seems to morph into a subsidy for the banking-sector in reality. Yet the cry goes up again and again “More! More!”. One day there will have to be a valuation of the paper,bonds and markets they have got involved with  and I expect there to be “surprise” shortfalls.

Perhaps the one way this may impact the euro area economy is via a lower exchange rate and the value of the Euro has fallen. But in a way this is just exporting the problems of the Euro area to other countries as we mull the competitive devaluations of the 1920s.

Meanwhile rumours spread that 11 Euro area banks have failed the latest stress test.


11 thoughts on “Is it the ECB or Euro area banks which most resemble Agent Smith?

  1. Hello Shaun, I am currently in the Algarve with limited internet access so will keep it short! Euro has dropped a bit recently but still puzzled that Euro isn’t on the floor! It would be if it was Sterling. Things here are much the same – no improvement evident but probably not any worse. Plenty of evidence of corruption though – even at a local level. Government buildings being constructed for which there is no need etc, whilst previously constructed ones stand empty. Corruption still a major problem in much of Southern Europe.

    • Hi Pavlaki, Its not just Portugal. Bodmin former hospital in Cornwall is the new building site for Cornwall County Councils offices, in pure irony opposite their building site is the razed to the ground remains of a former manufacturing factory and former larger local employer. The train of events is tragic, hospital “uneconomic”, close it 10 years ago, Manufacturing business fails\relocates – raze building to ground. Wait a couple of years and then build swanky eco statement local government building…. and who pays?

      • Hi Guys

        I am afraid that corruption is on the march in many areas including the UK. Over the past week or two news has been emerging about plans for Crystal Palace running track and stadium. There are plans where some of the options involve not only no stadium but no track either. Er Olympics Legacy anyone?

        I confess to a personal bias on the issue as I trained there as a schoolboy and watched many races from the stands.

  2. If they want to give money away and at the moment it’s getting stuck at the level of the banks instead of percolating through to the real economy, why don’t they give some away directly to their poor beleaguered citizens to spend in the economy directly?

    I’m sure we’d all be able to find a use for it!

    • Hi Jan (and hi Shaun)

      As Shaun’s resident economic know-nothing i shall restrict myself to saying that, back in 2007/8 when this all turned turtle, “helicopter drops” of money to the lowest levels were indeed proposed by some but such ideas were dismissed as morally undesirable … just handing money to poor folk will only make them profligate poor folk. (or something along those lines).

      No sirree … much better to give it to those wily old Bankers who will know what to do with it!

      • ” much better to give it to those wily old Bankers who will know what to do with it!”

        yah , stuff it in their back pockets and walk off with it !


  3. Hello Shaun ,

    So its funny isn’t it that I’ve said its the Banks that are still bust even 6 years after the collapse . Even the collapse is being penciled out with fake GDP revisions , even so the Banks are bust !

    And theirs no sight or sound of the pollies doing anything about it – David Camel-head and the Tories put back any changes until 2018 with the support of the other two colours of the State Party.

    You couldn’t make this up!

    more failed the stress testing ? what those nice “harder” ones that are supposed to prevent a further bailout? So as they failed we ( or they , the pollies ) bail them out anyways ?

    How does that work?


    Madness – by Madness

    • Hi Forbin

      Earlier this week the rumours of stress test problems encircled a past subject of this blog which is Monte dei Paschi di Sienna of Italy. Such rumours are doing the rounds in some of the Italian media again tonight.

      Meanwhile the ECB has issued an official denial.

      “The comprehensive assessment, which consists of an asset quality review and stress tests of bank balance sheets, is not yet completed. No final results have been sent to banks involved. The results will not be final until they are considered by the Governing Council of the European Central Bank on Sunday 26 October, after which they will be published. Until that time, any media reports on the outcome of the tests are by their nature highly speculative. ”

      What was that about never believing anything until it is officially denied?

  4. I remember being profoundly disappointed by the matrix sequels, and how poor the Agent Smith fight looked was the first sign that the Wacowski brothers had seriously overstretched their ambition.

    But enough about self indulgent people who have bought their own hype and have no concept of their limitations, back to, erm, central bankers.

  5. Remember, these people’s multi-million salaries are insufficient to retain this specially-skilled elite, they need grotesque bonuses too!

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s