Monetary Rug-Pull? December dump in the markets anything to do with global QT?
By Wolf Richter for WOLF STREET.
Total assets on the ECB’s balance sheet, released today, plunged by €492 billion from the prior week, to €7.98 trillion, the lowest since July 2021, and are now down by €850 billion from the peak in June.
The ECB had two major types of QE: It handed cash to banks via free-money loans, and it handed cash to the bond market by purchasing bonds. Those were the good times, RIP. All this has stopped. And now the ECB is unwinding this stuff.
At its October meeting, the ECB announced Step 1 of QT: Unwinding the loans. At its December meeting, it announced Step 2 of QT: shedding bonds it had purchased. What we’re primarily seeing here on its balance sheet today is the effect of Step 1 of QT – the first big batches of loans got paid back. This looks like a monetary rug-pull:
The loan QT: massive.
During the pandemic, as part of flooding everything with liquidity, the ECB lent cash to the banks – the Targeted Longer-Term Refinancing Operations (TLTRO III) – which the banks would then spread around. From the beginning of the pandemic through July 2021, the ECB handed out €1.6 trillion of those loans.
These loans came with complex incentives to encourage banks to lend them out to businesses and households, which banks would do, and thereby replace other funding, that they then could use elsewhere, such as to buy other stuff with, such as securities. That’s how these loans enabled banks to buy stuff in the markets globally – which helped inflate asset prices. And when they pay back those loans, they have to shed some of this stuff…. we’ll get to that now.
At its October meeting, the ECB announced Step 1 of QT to “help address unexpected and extraordinary inflation increases,” as it said. To do so, it made the terms of these loans unattractive for the banks, which would induce the banks to pay them back.
The loans have dates at which they can be paid back. The first payback date was in July, when €74 billion in loans were paid back; the second was in November, when €296 billion were paid back.
The third payback date was in mid-December. At the time, the ECB announced that €447 billion in loans would be paid back. Today, it booked €498 billion in loan paybacks on its balance sheet. The total balance of Long-Term Refinancing Loans has now plunged by €896 billion from the peak in June 2021 (€2.22 trillion) to €1.32 trillion today.
This is a huge amount of liquidity that vanished since mid-November, €743 billion in two moves, which could have well helped incite the dump in the markets globally since then:
The bond QT: not yet, but coming.
At its December meeting, the ECB announced Step 2 of QT: It would start shedding its bond holdings in March 2023, initially at a rate of €15 billion a month. Details will be announced after the February meeting, it said. The pace of subsequent declines “will be determined over time,” it said. Since then, there have already been comments by ECB heads about accelerating the bond QT.
The ECB ended QE in June 2022, and “securities held for monetary policy purposes” have remained roughly stable since then. On today’s balance sheet, the securities amounted to €4.94 trillion, down by €20 billion from the peak in June:
When the ECB received the €895 billion from the loan payoffs, it destroyed the money, just like it created the money when it originally made the loans. This is a massive amount of liquidity that came out of the financial system over about the past six weeks. Everything in the financial markets is global. And QT is global. And it’s not just the Fed. And it’s just the beginning.
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.