The ECB Morphs into the Mother of All “Bad Banks”

More than just a few “fallen angels.”

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

As part of its QE operations, the ECB continues to pour billions of freshly created euros each month into corporate bonds – and sometimes when it buys bonds via “private placements” directly into some of Europe’s biggest corporations and the European subsidiaries of non-European transnationals. Its total corporate bond purchases recently passed the €100 billion threshold. And it’s growing at a rate of roughly €7 billion a month. And it’s in the process of becoming the biggest “bad bank.”

When the ECB first embarked on its corporate bond-buying scheme in March 2016, it stated that it would buy only investment-grade rated debt. But shortly after that, concerns were raised about what might happen if a name it owned was downgraded to below investment grade. A few months later 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, raising the prospect of it holding so-called “fallen angels.”

Now, sixteen months into the program, it turns out that the ECB has bought into 981 different corporate bond issuances, of which 34 are currently rated BB+, so non-investment grade, or junk. And 208 of the issuances are non-rated (NR). So in total, a quarter of the bond issuances it purchased are either junk or not rated (red bars):

The ECB initially said it would only buy bonds that are “rated” — and rated investment grade. Thus having a quarter of the bonds on its books either junk or not rated represents a major violation of that promise.

The ECB is clearly loading up on risk and possibly bad credit that Draghi’s successor is going to have to eat at some point further down the road. Already home to hundreds of billions of euros worth of artificially low-yielding peripheral sovereign bonds, the ECB is becoming a dumping ground for risky corporate debt that is paying super-low yields.

Under Draghi’s tutelage the ECB has morphed into the world’s biggest bad bank with over €4.23 trillion in “assets,” including:

  • Toxic Greek sovereign debt
  • Dubious other periphery sovereign debt
  • 242 junk-rated or non-rated corporate bonds
  • 149 negative-yielding bonds. The main reason those bonds bear negative yields is Draghi’s massive multi-year bond buying binge.

It’s difficult to know which companies are benefiting the most. The ECB has refused to reveal details, divulging only the International Securities Identification Number (ISIN) of the bonds, but not the amounts.

When the ECB buys these bonds, it inflates the bond prices and pushes their yields down, which is the purpose, and it thus lowers the cost of capital for these companies even further. Yet according to the EU’s Competition Commission, none of this constitutes unfair competition.

The European Parliament is not so sure. A cross-party group of members recently wrote to Draghi, asking for company-by-company disclosure of the securities being bought and the size of each holding, so that it can dispel any concerns that the purchases may be benefiting a small group of favored companies. As the FT reports, the letter warns that since its implementation the QE program has “spurred a certain level of concern, since it can be perceived as a disguised subsidy to certain companies.”

Its not just the opacity, arbitrariness, or the potential for conflicts of interest that are worrisome about the ECB’s QE program; so, too, is the level of dependence it has spawned among national governments and corporations for virtually free money. As much as Draghi may want to further taper the ECB’s monthly purchases of bonds after reducing them from €80 to €60 billion earlier this year, many of the program’s beneficiaries are quite simply no longer ready to go it alone. Draghi’s home country of Italy, in particular, cannot afford the higher interest rates that would result from reduced bond purchases. Higher rates would bankrupt the country. In that respect, Italians see Draghi as their guardian angel at the ECB.

Likewise, many of the companies that have benefited from the ECB’s lavish support over the last 16 months may find life somewhat tougher once the punch bowl is taken away and the price of borrowing from the market returns to some semblance of reality. Until that happens, those companies will continue to wet their beak in the fountain of virtually free money, while the ECB’s balance sheet grows bigger and uglier by the month. By Don Quijones.

What will Draghi do? Read…  Fears of “Doom Loop” in Italy Resurface

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  28 comments for “The ECB Morphs into the Mother of All “Bad Banks”

  1. Gershon says:

    Even in 1912, cartoonists saw what a rapacious swindle was being foisted onto the American people with the establishment of the Federal Reserve.

    • nick kelly says:

      Sounds like the Fed isn’t the worst act in town.

      • Frederick says:

        I truly fail to see where either is better or worse They are two sides of the same criminal coin and need shutting down asap Actually Draghi and Mr Yellen make a nice couple Maybe they could hook up and we could save money on a cell

    • robt says:

      Forget 1912. In 1792, immediately after Alexander Hamilton ushered in the creation of the first Bank of America, i.e. central bank, the stock scrip bubbled and crashed and the Bank of New York had to be induced to support the stock, then another bubble and crash within a year that had to be bailed out. Speculation mania had taken hold, and set the pattern for central banking and speculative debt creation.
      One difference: the former Assistant Secretary of the Treasury ended up in debtor’s prison.

  2. Spanky Bernanke says:

    Isn’t this normalization? Sounds to me like Draghi is spreading his bets. And, it’s NOT FAIR to just bonds of corporations that don’t need rates to drop lower; what would they do with all that money that would normally go to paying interest? Share buybacks, maybe…hmmm?

  3. Jim C says:

    Never mind the blowing up the entire, basic income for banking elite and kleptocrats is more important to ECB. If one is not in the club, he is paying for their basic income.

  4. nick kelly says:

    ‘Wet their beak’ ! :)

  5. George McDuffee says:

    Its a dirty job, but someone has to do it. ;-(

    On a more practical level, it would appear that if the money had been injected by the purchase of common voting stock rather than bonds, the ECB would be in a position at most of the companies to force forensic audits, restructuring, and normalization of operations by board vote, to be followed by civil suits to recapture the fraudulently granted bonuses, stock-options, other diverted assets., etc.

    Termination of employment FOR CAUSE of the accountable officers, directors, and executives should of course immediately follow, which in most cases voids their golden parachute contracts and pensions.

  6. milking institute says:

    We are truly living in a perverted world,where these policies by the three major CBs are allowed to go on unquestioned and sold as “normal”. the fact that the public (tax payers) are obligated to subsidize corporations and multinationals is so fundamentally wrong,fiscally, morally and democratically,one can only call it corruption on a epic and global scale. THIS HAS NOTHING TO DO WITH CAPITALISM,this is the ultimate and final meshing of big crony government and corporations hurtling towards a bad ending as the financial media mariachi band plays on. hedge accordingly.

    • Frederick says:

      So it’s fascism at it worst YUP They all need to be locked up along with the grifter Clintoon bunch Looks like we won’t have to worry about Johnny Wetstart much longer

      • Eric says:

        Frederick, you name it. Most of the people don’t understand that this system is the equivalent to Mussolinis fascism. It’s the perfect symbiosis of big government and big companies, Mussolinis wet dream. 100 years later the Central banks of the world were finally able to implement it and no one gets it.

  7. Gershon says:

    The Keynesian fraudsters at the central bank all claim to be “waiting on inflation.” I don’t know what planet they live on. Housing costs have soared. Medical insurance and costs have soared. Car insurance has soared. Trips to the grocery store are painful. Yet they continue with their deranged money printing and destruction of our purchasing power, so their oligarch pals can buy up the distressed assets of the increasingly pauperized middle and working classes with free “stimulus” FedBux.

    • Frederick says:

      In all fairness housing is just back to the 2006 highs in many locations, and way below those highs and falling in others Look at places like Hartford and New London Conn and Wilmington Del I’m not convinced of the so-called housing recovery at all I’m feeling a big downdraft is coming especially in commercial properties and older homes in weaker dollars no less

  8. Gershon says:

    With Yellen and her fellow Keynesian fraudsters at the central banks intent on printing away all government and Wall Street debts and obligations, buying and holding physical precious metals is a no-brainer to hedge against what’s coming.

  9. michael w Earussi says:

    Draghi and other central bankers seem intent on destroying the very concept of money. I’m just wondering what they plan on replacing it with?

  10. IdahoPotato says:

    And then there’s the Swiss National Bank, a private cabal of investors who have been buying everything in sight in the U.S. stock market since 2014 to manipulate the Swiss franc.

    They are the real Plunge Protection Team that swoop in to “correct” the U.S. stock markets on almost a daily basis.

    • MD says:

      Yup – Switzerland, a high-wage and high-tax economy which according to neoliberal/globalist dogma shouldn’t work, but in reality has an extremely high standard of living and appears basically recession-proof.

      No wonder we never hear much about them in the MSM!

  11. John Blackwell says:

    Who’s Signature is on the Euro Bills? What …. You don’t get it yet? The next Twenty, Thirty, Forty Years will be an exercise of adding Zeros. Money ceased to exist a long time ago. Don’t sweat it.

  12. Stevedcfc72 says:

    If a lot of the QE the ECB bought is complete junk and they start re-winding the QE programme what physically happens?

  13. Jim Graham says:

    One has to wonder if some of those “junky” bonds are being used for stock buy backs from the “in the know” investors?? Leaving nothing more than a rotting carcass for the average investor???

    How would one bring successful lawsuits against the people that concocted such a swindle??

  14. d says:

    It was obvious from day one that with this opaque program. Draggi intended to buy Club med junk in large quantity’s much of which would later default.

    As he could not get Germany to sign onto Euro bonds Germany would get nothing form but German taxpayers would be liable for.

    This program is nothing but another Mafiosi fraud, this time being perpetrated on the norther taxpayers of Europe by Club med.

  15. Ambrose Bierce says:

    The players are positioning themselves, the fix is in. Ahead of the crash they want to narrow the spread between HY and rated bonds. Better that way. For retail investors better have a portfolio line of credit, and plenty of debit cards. The institutions will not mark your assets to market, the markets will freeze sell orders and (institutional) sellers will be given new lines of liquidity. If you try to sell you will be met with a blank screen if you actually succeed you will have the ultimate remorse. Gold will be cheap, and there will be none to buy. It’s beginning to take shape, rather than lose confidence buyers will see that no matter what happens they will not lose money, and prices will never go down. That is the definition of confidence. Joe BBQ will check his bank balance, see it is still there, and head to Disneyworld, swiping his debit card which will be automatically rolled into an EBT system. Vendors will refuse cash because banks are not accepting deposits. The brave new world of electronic banking arrives.

    • d says:

      The brave new world of electronic banking arrives.

      FIne unill there is a major power or satellite outage.

      O one of those terrible leftist proletariat revolts in Europe, it is rather prone to them.

      The electronic financial utopia will be torn down before it is even completed as there are those Militants, who will seek to tear it down, because they can.

      • Ambrose Bierce says:

        and the Luddites will be packing off to the woods. We have reached a point in global interconnection where such things are at least worth a try, in the event of system collapse. the real danger is when the sound money people get control, then the Luddites win and a new financial dark ages will take hold, brought about admittedly by excesses and rapid development of technology without fully understanding the consequences.

        • John says:

          “leftist proletariat revolts in Europe,” when did they ever happen? Oh sure they were reported the same way as the ‘arab spring’ and the ukrainian western coup … but in reality every ‘uprising’ has been the Bourgeoisie … and the tough time every ‘sound money’ fantasist is having, is with TECHNOLOGY. They had the same tough time with Engines too in the nineteenth century. The sky is not going to fall in, there isn’t going to be any meltdown because the markets haven’t been ‘real’ for a ‘really’ long time. Make money and keep making it, because money that doesn’t keep moving is TOAST in the New Era World.

        • d says:

          “brought about admittedly by excesses and rapid development of technology without fully understanding the consequences.”


          brought about admittedly by excesses and rapid Implementation of technology, without fully understanding the consequences. With the intent of controlling the population mass and transferring any wealth saved or held by them upwards.

          Electronic money is usefull.

          Making it the only source of money is Asking for huge troublem.

          So the Luddite analogy is grossly incorrect.

          The Luddites were Completely against the new Way.

          As opposed to others who were willing to, and wanted to, use both.

          Banks are not giving me a real return on my Liquid capital held by them, therefore they shall not have it.

          Your Electronic only system takes away, My ability to simply do that. As it also put my ability to simply store some cash beyond the Electronic reach of the state. This in itself will ferment revolt in the masses.

          This is why china keeps on printing those chairman maos, by the train load.

          They are worthless, but keep the population CALM.

          As if they wish, they have, something, they can HOLD.

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