ECB’s Coming QE: ABCP, Interest Rate Cut or Negative Deposit Rates?

The latest melt-UP phase (record run) in mostly developed economy stocks has mostly been prompted by the the European Central Bank’s recent signaling of fresh easing measures which may be announced this June 5.

Here is another sign of financial schadenfreude: the ECB’s Mario Draghi’s induced dilemma for the euro (the euro has been plunging since late April) has extrapolated to a booming Stoxx 50 and the US S&P.

David Stockman at his Contra Corner website explains the possibility of the revival of asset-backed commercial paper (ABCP) as the focal point of ECB’s easing this week. (bold original)

You can smell this one coming a mile away:

The European Central Bank and Bank of England on Friday outlined options to reinvigorate the market for bundled bank loans, which was “tarnished” by the global financial crisis, saying a better-functioning market for asset-backed securities can help boost lending to the private sector, particularly small businesses.

Yes, the ECB is now energetically trying to revive the a market for asset-backed commercial paper (ABCP)—-the very kind of “toxic-waste” that allegedly nearly took down the financial system during the panic of September 2008. The ECB would have you believe that getting more “liquidity” into the bank loan market for such things as credit card advances, auto paper and small business loans will somehow cause Europe’s debt-besotted businesses and consumers to start borrowing again—- thereby reversing the mild (and constructive) trend toward debt reduction that has caused euro area bank loans to decline by about 3% over the past year. 

What they are really up to, however, is money-printing and snookering the German sound money camp. That is, the ECB is getting set to launch QE in financial drag by purchasing or discounting ABCP while loudly proclaiming that it’s not “monetizing” any stinking sovereign debt!…

So in clearing the way to “monetization” of ABCP, the ECB is simply heading down the path of Bernanke/Yellen style quantitative easing though a transparent gimmick that may or may not bamboozle the Germans. But it most certainly will succeed in snookering the financial press as the post below from the ever gullible Brian Blackstone of the WSJ clearly conveys.

But here’s the thing. The ABCP market is not a place where hard-pressed business borrowers or consumer’s can find a new source of credit outside the banking system. Instead, it is a financial engineering arena in which banks will have a chance to mint phony overnight profits through an accounting expedient known as “gain-on-sale”. 

What that means is that when credit card receivables or small business loans are “bundled” by their commercial bank issuers and sold into an off-balance conduit which issues ABCP against these “assets”, the life-time profits of these loans can be booked instantly. Indeed, modern technology allows the credit card swipe to be booked as a profit nearly the same nanosecond as it happens, and accounting convention allows the profits from a 7-year car loan issued at 110% of the vehicle’s value to be recorded virtually at the time it rolls off the dealer lot.

Aside from the ABCP, many have been speculating too that the ECB may engage in either interest rate cuts or even adapting a Negative Deposit Rate. At any rate, it’s all about promoting bank credit expansion.

Some charts that has prompted the ECB’s likely actions:

Bank lending remains in doldrums

Eurozone’s disinflation amidst skyrocketing debt levels

The decline in loans has been manifest in money supply growth (left). Unfortunately lower interest rates hasn’t translated to credit expansion

But despite the lackluster bank lending growth, Europe’s leverage loans and corporate debt department continues to sizzle, which has been an important influence to sky bound stock markets.

This comes as Stoxx 600 earnings continue to be dismal.

So again, who says stock markets are about the economy and earnings?

Bottom line:  the du jour central bank policies today, has been to solve existing DEBT problem by promoting even more DEBT.  This is like solving alcoholism by prescribing even MORE intake of alcohol!

Current policies that promote more debt build-up, which have been meant to buy time, will translate to even greater systemic risk that is bound for implosion. 

Of course, the main beneficiaries here are no less than the governments (see huge debt levels above) via interest rates (financial repression) subsidies, the Wall Streets of major economies via inflated balance sheets that keeps their debt burdened banking system afloat and the political economic elites whom are further enriched by inflated asset markets that comes at the expense of society.

Aldous Huxley once warned that “That men do not learn very much from the lessons of history is the most important of all the lessons that history has to teach.” Central banking policies simply highlight on this.