And not for small companies either.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Money for nothing, for everyone: This is supposedly the next stage of the treatment program for today’s debt-addicted economic system. Milton Friedman’s hypothetical scenario of giving every citizen direct money transfers in a desperate bid to stoke inflation is gaining traction with growing legions of mainstream economists.
In their theory-addled brains, a massive one-off injection of central bank-conjured money into people’s bank accounts would do wonders for the real economy — in particular a terminally stagnating one like Europe’s. Rather than creating asset price inflation, as QE has done, it would fuel consumer price inflation. This is seen as the solution to the recently created and now unpayable mountain of debt: the central bank would simply erode it away via inflation.
In April, however, the ECB dashed such hopes, at least for the immediate future. “It’s not on the table,” ECB Executive Board member Peter Praet told a bunch of economists who’d been pushing for an answer at a conference organized by the Center for Financial Studies in Frankfurt.
That’s not to say that the ECB is opposed on principle to the idea of showering people with money they’ve done nothing to earn. It just depends what kind of people.
Indeed, in many ways the central bank is about to do just that, but the lucky people on the receiving end will not be normal, everyday people; they will be corporate persons, including some of the richest, most powerful companies in Europe as well as the European subsidiaries of huge foreign multinationals.
The amount of free money these corporations are about to receive will be counted not in the hundreds or thousands of euros, but in the millions or billions. And instead of transferring money into their corporate accounts, the ECB will just buy up to 70% of any new corporate bond issuance.
The ECB unveiled its latest cunning plan some months ago, when global investors were begging for a bone to chew on, but the bond purchases are scheduled to begin in earnest next Thursday. To be eligible for this new central banking welfare scheme, the bonds must be issued by non-bank corporations established in the euro area. But just as with everything the ECB does, the conditions could change at any time.
Indeed, they already have.
Back in March the central bank stated that it would buy only investment grade rated debt, but then concerns were raised about what might happen if a name they owned was downgraded to below investment grade. Today a representative of the bank put such fears to rest by announcing that it “is not required to sell its holdings in the event of a downgrade” to junk, the FT reports, raising the prospect of it holding so-called “fallen angels.”
For the moment it’s not clear exactly how much the ECB will splurge each month on corporate bonds but estimates range from anywhere between €3bn and €15bn. “It’s a massive market, so they need to buy a vast amount of paper to have any impact,” said one bond syndicate banker. “Consequently, the risks of that process being less than optimally managed increase substantially.”
There’s also no telling who exactly will be the biggest beneficiaries, though the obvious candidates are big German, French, Spanish, Italian, and Dutch firms in the energy industry (Enel, EDF, Shell, Repsol, Iberdrola), telecommunications (Telfónica, Orange, Deutsche Telecom), and the automotive sector (Volkswagen, BMW, Daimler).
Europe’s small and medium size enterprises could also benefit from the ECB’s latest actions, according to Goldman Sachs. Last week, it forecast that the program would “provide a healthy boost to the equity prices of the continent’s small and medium-sized companies,” even before it was known the ECB would impose non minimum bond size.
This must be a joke. Most small firms do not even have the means to issue corporate bonds, especially in Europe where the debt capital markets are far less developed than in the US. And if we’ve learned anything from this interminable global financial crisis, it is that central banks do not give a fig about small businesses. Their prime — some might say exclusive — constituencies have always been big banks and big corporations. The former have already received what amounts to trillions in state aid to the detriment of their smaller competitors, and now the latter are about to be gifted billions of euros of helicopter money.
With the ECB offering to buy up just about anything and everything that isn’t already nailed down, including “old bicycles“, Europe is about to witness yet another monstrous asset bubble — this time in corporate bond. Yields have already begun plunging and spreads narrowing as companies from around the world are tempted to sell euro-denominated debt. The more that come, the more the yields will fall.
Barnaby Martin, analyst at Bank of America Merrill Lynch, predicts that ECB corporate bond buying could result in a doubling of its size over the next five years. That implies euro investment-grade issuance of €2.5 trillion between now and 2021, and means that the bumper €70 billion issuance seen in March “could become the norm rather than the exception,” Mr Martin said.
Which will be great news for all the corporations waiting eagerly under Mario Draghi’s helicopter. Of course, all this meddling in the markets is triggering very dangerous distortions, and when they come home to roost, the ECB will probably begin directly propping up European stocks, as it has already said it might. As for the average folks out there, well, they can just keep dreaming that one day they, too, might get some free money. By Don Quijones, Raging Bull-Shit
“Europe is caught in a trap,” said BBVA’s Executive Chairman González. The ECB is trying to boost growth potential, but it’s these “negative interest rates which are killing us.” Read… NIRP is “Killing Us,” Wheezes Spain’s Second Biggest Bank
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There are those who say voting should be mandatory.
There are those who say we need a “money drop” to stoke the economy
I say, combine the 2.
With today’s computers, where one can actually do banking on their computer, and just about everybody, legal and illegal, can have a SS number, all we need to do is:
When you show up to vote, and vote, you get a Federal Reserve Check for $10,000 in notes. You vote, you get the check. Vote on line, get the check credited on line. You can have the “check” sent to Wal-Mart, Amazon, Ashley Madison, or your bank account, if you have one.
This will encourage everybody to vote, even those who have no clue who or what they are voting for, and it will insure equal distribution, and equality is very important.
IT is not real money anyway, IT is credit issued “notes”. Poor people will spend it immediately, the middle class will buy more stuff, and the “upper” classes will pay down debt (not the intentions, but it just cancels the previously issued credit notes…so no harm).
I assume you’re being your sarcastic self… no?
Your idea is brilliant except I would pay dummies not to go to vote and screw up the otherwise good system.
How would we identify who is the dummy? Well, by optional exams.
The top performers would get ten votes, the bottom, or non-participants one. Everyone else in between.
The brilliant part is that the dummies would get paid.
New technologies allows this to happen.
I would call this system – democracy.
OK, that makes sense. Any non-bank company in the Euro can issue bonds, and the ECB will print Euros and “splurge each month on corporate bonds.”
No one would ever try and cheat this system would they? I mean, if you have a company registered in the EU, you want cash and you sell bonds to the Central Bank, you have to be honest, don’t you?
Seriously, readers may want to checkout today’s http://www.wallstreetonparade.com
regarding the Brexit vote and Jamie Dimon.
Pink Floyd’s ‘The Dark Side of the Moon’ seems appropriate somehow.
I’m sure Wallstreet is quite busy to make sure that all the big US multinations are on the receiving end of the ECB’s generous financial firehose.
“That’s not to say that the ECB is opposed on principle to the idea of showering people with money they’ve done nothing to earn.”
If we were against it on principle, we would have to abolish inheritance.
It’s all part of the master plan for the new world order.
Everyone is an investor and no one does any real work, with Central Banks printing all the wealth.
The derivatives market is nearly ten times the size of other markets, which are becoming increasingly irrelevant.
The goal is to phase out all other markets apart from derivatives.
The real economy is a legacy from the 20th Century and has no place in the new world order
The printed wealth from Central Banks is all we need for our brave new world; it will trickle down to all.
No one in ‘command’ of US economic policy seems to realize that China is a black hole of excess capacity that can absorb any amount of money the US consumer can throw at it.
Since the US promotes slave labor and environmental degredation through its pro-China policy, I say lets triple down on that bet.
There is absolutely NO REASON WHATSOEVER that the US government could not hand each American consumer tens of thousands of dollars to buy, cars, food, clothing, etc from China. How about trillions to buy up the raw materials to invest in infrastructure?
The money would be for the sole purpose of purchases from third world countries. Why not treat China as a slave state subject to out whims?
As long as the money stays outside the US, inflation will not be a concern (which is why we can’t stimulate inflation in the USA by buying foreign goods). Oh yeah, we’ll need capital controls, but so what?
actually wages in many Chinese factories are getting pretty close to the ‘slave labor’ wages in some US companies and certainly in parts of Europe; and probably buying power for the Chinese workers is ahead of many other countries.
The ECB should not be buying corporate bond’s.
It should defiantly not be holding them once they are downgraded to the lowest investment grade.
This will end badly.
Probably with a large number of Italian, Spanish, and greek companies.
Walking off with a huge chunk of German Taxpayers money.
I have always called Draggi the Mafiosi in charge of the ECB.
Clearly I am correct.
This is a blatant scam, the Mafia, would be proud off.
we are quite close to that in Europe, and because of that I disagree with the general suggestion of this article (and many others to the same tune).
Yes, ECB policies primarily benefit the financial elite, banks, multinationals, politicians and speculators. But debtors – especially those with a maximum mortgage – are also profiting hugely as long as this scam is continued (and as there is no turning back from these idiot policies, they may continue for many many years).
In Netherlands most people can still buy a home with NO downpayment, in fact the loan even includes the closing costs etc. for the mortgage. And the mortgage rate is below 1%. As a result, a home that would cost 1000-2000 euros a month for a renter now costs maybe 100-200 euros a month for a ‘homeowner’, thanks to the generous subisidies from the ECB. You can bet that many homeowners are using this to their advantage to live the good life again.
Of course, financially responsible and risk-averse people would take into account that at some time the money has to be paid back but nowadays many people say ‘if the sky falls everyone has a blue hat’ and count on being bailed out by the taxpayer – they have learned from previous crises that nothing can go wrong as long as you act stupid like the majority of the voters. And in general in Netherlands it doesn’t apply to most homeowners in the first place, because the is a free government provided put option for all mortgages up to 275K (and with a little bit of fraud, also for far more expensive homes).
The problem is that despite the bonanza for a good chunk of the population others (savers, renters, in future possibly pensioners) are getting severely punished by these policies, so the economy as a whole will not benefit but likely get even worse as the ECB policies strongly favor malinvestment and financially irresponsible behavior.
BTW, the same I said above about being responsible with a mortgage also applies to some extent for companies buying their own stock. It’s nice for management if you plan to retire in a few years and can cash out in time, but at some point the chickens will come home to roost and I doubt it will be possible to unload all the losses on the ECB (= EU taxpayers). Even if multinationals in general are TBTF just like the banks, they should understand that the current policies can’t last forever.