Yves here. The excuse for the ECB buying corporate debt is that it is running out of Euro-demonimated government debt to purchase for its QE program. However, one thing to add to the picture that Don Quijones presents is that European public companies are much less “public” than their American counterparts. They tend to have a much lower proportion of shares in public hands and are thinly traded. As a result, insiders wield even more influence than here. And that thus reinforces the obvious concern: that the ECB, which is even less accountable to citizens than the Fed, is not just (predictably) serving the interest of elites, but is also in a position to act as power broker among them.
By Don Quijones of Spain & Mexico, editor at Wolf Street. Originally published at Wolf Street
In June, the ECB began buying the bonds of some of the most powerful companies in Europe as well as the European subsidiaries of foreign multinationals. This pushed the average yield on euro investment-grade corporate debt to 0.65%. Large quantities of highly rated corporate debt with shorter maturities are trading at negative yields, where brainwashed investors engage in the absurdity of paying for the privilege of lending money to corporations. By August 12, the ECB had handed out over €16 billion in freshly printed money in exchange for corporate bonds.
Throughout, the public was given to understand that the ECB was buying already-issued bonds trading in secondary markets. But the public has been fooled.
Now it has been revealed by The Wall Street Journal that the ECB has also secretly been buying bonds directly from companies, thus handing them directly its freshly printed money.
It has been doing so via “private placements.” These debt sales are not open to the broader market. There’s no need for a prospectus. Only a small number of institutional investors participate. It allows companies to raise cash quickly, without jumping through the normal hoops. Private placements are not unusual. What’s new is that the ECB used them to buy bonds.
There have been two of these secretive private placements. And Morgan Stanley arranged them. The Wall Street Journal determined this by analyzing data from Dealogic and national central banks.
The two companies involved were the Spanish energy giants Repsol and Iberdrola. The Bank of Spain, now no more than a local branch of the ECB, was among the select buyers of a €500 million bond issued by Repsol. It is also the owner of part of a €200 million bond issued by Iberdrola. Among the advantages of issuing debt in a private placement is that it allows companies to raise cash quickly. According to Apostolos Gkoutzinis, head of European capital markets at law firm Shearman & Sterling, cited by The Wall Street Journal: because there is no prospectus or the other formalities required in a normal bond offering, “there won’t be any transparency, there won’t be a press release. It’s all done discreetly.”
Discretion is something at which the ECB excels. It’s how its most important constituent, the world´s biggest banks and hedge funds, have been able to book vast, risk-free profits by front-running the ECB’s future actions. A decision is made in secret to buy a certain type of asset or to lower interest rates. That decision is then communicated in secret meetings to hedge funds and certain other market participants so that they can buy into those positions and start pushing up prices (and pushing down yields). The ECB already got into hot water over this when it first came out.
The central bank is able to operate this way for two reasons: first, the general lack of public awareness and interest in what it does; and second, the blanket immunity it and its employees enjoy from virtually all forms of legal redress. As we recently reported, the ECB and all of its affiliated national central banks are, by law, above the law of national jurisdictions and answerable only to the European Court of Justice, provided they are fulfilling the functions and responsibilities assigned to them by EU law.
Since the crisis, those functions have mushroomed beyond anything imaginable during the days of the ECB’s creation, in the early 90s, to the extent that the central bank is now arguably the EU’s most powerful institution. The bank’s latest move, to participate in these discreet private placements, was only confirmed when it quietly admitted as much on its website.
Now, the race is on for eligible companies to wet their beaks in this new, much more discreet free-money fountain, while so-called “investors” scramble to divine what the biggest fish in the pond is about to buy next. If they’re lucky they may even get a heads-up straight from the horse’s mouth.The ECB’s favorite banks will also get juicy fees underwriting the deals. The Journal reported that Credit Suisse has already “reshuffled its coverage of national central banks” in an attempt to tap into the new market.
The ECB’s new role as “debt-buyer of first resort” raises a whole litany of concerns. Perhaps worst of all, it grants the ECB an almost god-like grip over Europe’s financial markets: According to The Journal, Citigroup figured “that bonds eligible for ECB purchases have already outperformed ineligible bonds by roughly 30% since the bond-buying program was announced in March.”
It’s Financial Darwinism writ on a heretofore unimaginable scale. Thanks to ECB intervention, Europe’s biggest companies with the strongest finances — including some that are majority state-owned such as French energy giant EDF — are gaining access to funds (many of them public) quicker, more easily, and at cheaper rates than anyone else in the market. From now on, they may even get the money in secret.
It’s an artificial competitive advantage that most companies could only dream of, and which will almost certainly serve to accentuate the concentration and consolidation of Europe’s markets.
All the while, the EU continues to publicly pride itself on the robustness of its competition policy. Just last month, the Commission issued its biggest-ever antitrust fine to great public fanfare, hitting four truck manufacturers with a total penalty of €2.93 billion for illegal collusion. Meanwhile, it turns a blind eye to the role of its partner institution, the ECB, in massively skewing Europe’s corporate debt market even more in the favor of the biggest and strongest. By Don Quijones, Raging Bull-Shit.
The Italian Banking Crisis would complete Europe’s “Doom Loop.” Read… The Impossible Italian Job
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Should anyone be surprised by this? And btw: since when is the FED accountable to the American people?
Being from a fiscally responsible country (yes yes I know, current account surplus and low unemployment, only because we’re stealing from the poor southerners), this ECB policy is just a spit in the face. Then again, what could anyone expect from the current makeup of the ECB leadership?
The anti-EU populists will (and definitely should) use the ECB autocratic nepotism in their platforms. In the Netherlands and Germany there is definitely electoral gain to be had from the ECB directly sponsoring (state-owned, southern) corporates.
Because it’s so obvious that corporate borrowing costs are TOO HIGH, that’s what’s hampering growth.
Do these functionaries ever peak their heads out of their model universe, and say, look at a real cloud, or a real person? I suppose not. It must be so comfortable inside with all their simulated silicon certainties.
They’re not concerned with growth, as in a generally-growing economy. They’re only interested in the growth of profits for those who don’t need any more money.
. . . According to The Journal, Citigroup figured “that bonds eligible for ECB purchases have already outperformed ineligible bonds by roughly 30% since the bond-buying program was announced in March.”. . .
This relative out performance of eligible bonds comes from what? Is it due to buying an insider’s bond at .7% interest before the ECB buys them and drives interest rates lower to for example, .4% causing a capital gain?
This economic system needs a new name. Capitalism has no meaning anymore, but perhaps corruptionism more accurately reflects reality?
Doesn’t this violate EU rules against state support of private companies? Can the ECB not be taken to the European courts for this?
Besides antitrust and market manipulation issues, seems to me that with the Bank of Japan’s purchases of corporate stocks and bonds, and the ECB’s bond purchases and private debt placements with money that both central banks create out of thin air, central bankers are with this nexus well down the road to eventual ownership and control of corporations. Noteworthy is that the corporations themselves have been granted treatment as “persons” under the law. Further, under the Investor-State Dispute Settlement mechanisms and other provisions of the proposed TPP, TTIP and TiSA international agreements, these large banks and corporations would have priority over and immunity from nation’s laws… i.e., “One ring to rule them all.”
So who owns these central banks that can create money at will to invest in these corporations? Or in the case of the ECB, who owns the stock of and controls the various national central banks that in turn own the stock of the ECB? And how did the ECB’s “most important constituent, the world’s biggest banks and hedge funds”, come to enjoy their opaque and privileged positions that enable them to discreetly front-run ECB decisions?
It’s far past time to revise our election laws to limit the power and influence of central bankers and large transnational banks and corporations over our legislators and executive branch.
Begs the question of whether monetarist economic theory is now just another canard to facilitate looting and political control.
Never underestimate the lengths that those in power and control will go to in order to keep that power and control. If the GFC didn’t teach us that lesson, nothing will.
What happens when the bonds are not repaid? Rolled over to new bonds ad perpetuam, or the shareholders take the hit?
Apart from anything else, this sounds like a perfect recipe for future economic blackmail – ‘we can’t pay back on those bonds unless you buy more at a particularly favourable rate to us’. The companies have just been given a permanent exemption from ever going bust, no matter what they do.
So the EU has finally learned how to step up its stealth industrial policy game (the US is the master at this) for the banks and selected corporates.
So this is what you need an “””independent””” CB for, so it can independently provide corporate and elite welfare and citizens not being able to do shit about it.
The EU is ground zero for a failing ideology where the problems of Neo-Liberalism are most acute because the EU was designed to its ideology.
It’s fairly obvious that the system broke in 2008 and no one seems to know how to fix it.
Quietly, and in the background, global elites have been putting in place a Pol Pot year zero type scheme wiping away all other ways of thinking apart from Neo-Liberalism and its underlying neoclassical economics.
Pol Pot wiped out the Bourgeoisie and the globalization project aims to wipe out trade unions and any collective worker organizations.
Neoclassical economics is the only economics now taught in Universities around the world. All mainstream economists and everyone in positions of influence around the world believes in Neo-Liberalism and neoclassical economics.
When it stopped working there was no one at the top who could think in any other way to come up with solutions.
Neo-Liberalism is also brutal and it was felt the only place it could be tested was in a military dictatorship where any opposition could be ruthlessly quashed. Chile was the testing ground for today’s ideas.
Thatcher and Reagan started to roll out these ideas in the early 1980s and the fall of the Berlin Wall and collapse of the old Soviet Union seemed like the perfect time to declare year zero, Francis Fukuyama said “It was the end of history”. Liberal Democracy was the only system to stand the test of time.
He didn’t mention a new, raw capitalism would come in that wasn’t very liberal at all and wasn’t well tested, but they all believed it would provide the best results for the majority as Pol Pot had before them.
In Russia and Iraq they believed if they dismantled the old system, a new market democracy would spontaneously rise up from the ashes. Both countries just plunged into chaos and a new market democracy didn’t spontaneously come into being.
In Iraq a bloody civil war still rages today. In Russia, the “freedom to spend your money as you choose” was soon found to mean “no money, no freedom” as the majority who had nothing often couldn’t even afford to eat. The oligarchs strode the land and chaos reigned, eventually Putin bought order to the chaos.
Like Pol Pot’s ideologues, a few minor set backs weren’t to stand in the way of the Neo-Liberal ideologues.
The EU was another testing ground for the Neo-Liberal dream and unelected technocrats would make all the decisions. A sham, elected parliament exists but can make no policy decisions. The illusion of democracy was to be maintained. This was to be the front runner for the next stage, global government.
The Euro was to be the front runner for a global currency and was designed with the Neo-Liberal ideology in mind to strip Governments of economic decision making.
The UK’s continued membership of the EU was essential and every global figurehead predicted disaster if we left. Unfortunately, greed always gets in the way, and George Soros had made it easy for the UK to leave by getting us kicked out of the ERM for personal gain. George Soros kept us out of the Euro and paved the way for Brexit.
The ideology and economics is now failing all around us but no one at the top has anyway of thinking apart from the failed ways. The unelected technocrats of the EU just push ahead with their failed ideology unable to think in any other way. The Euro-zone has been consistently the worst performing area since 2008.
A plan as foolish and idealistic as Pol Pot’s in Cambodia is now in its “End of Days” and it seems only to be the older generation, that have knowledge of the way things used to be and can be, that have any answers at all.
The younger generation have been programmed with a nonsense economics that allows them to only see the world through an upside-down and back-to-front lens that ensures they have no chance of coming up with any solutions.
Lets’ hope there is still enough of the old thinking left to get us out and, as nothing from the new thinking appears to be working, good old fiscal (Keynesian) stimulus is being put forward.
The tried and tested “New Deal” solution for a world laid low by unfettered capitalism and a Wall Street crash.