The European Central Bank (ECB) announced that it has partially lost its last operation of “sterilization”. The intervention deadline is not frightening. It is actually far less scientific than it looks. Explanation: to acquire secondary market debt in the eurozone in trouble – what it does since May 2010 – the ECB is forced to create money. Running the printing presses will somehow get the funds for the purchase of sovereign debt. The money created out of thin air is then injected into the financial system. The long-term risk is the generation of inflation or – at least – bubbles on certain activities. But, as its mandate expressly forbade it to carry out any policy likely to cause inflationary pressures, the practice of the ECB is to sterilize their purchases. In particular, it allows banks to deposit the money in its coffers by issuing commercial paper at attractive rates. For example, a bank that X has sold bonds to the ECB against a sum Y, has found a strong incentive to return to the ECB this amount Y in exchange for commercial paper, a letter of credit. X is of no benefit to the bank as it becomes a claim against a state and a claim on the ECB (absolutely sure) at a great price. The ECB, ends up forced to pay dearly for this, but in return you remove the Y-sum market. Sterilization can, ultimately, not increase the money supply in circulation, thus theoretically ensuring that the political support of the ECB on government bond markets does not generate inflation.
Problem: While the ECB has proposed to sterilize 203.000.000.000 € (the total amount of debt acquired during the last eighteen months), the banks have delivered 194 – 200 000 000 – are they serious? Yes and no. With regards to the economic stability of the euro, it is not dramatic to have 9 billion more pumped into the system. Inflation should not be jumping constantly! However, this underperformance of the ECB is worrying in the context of the current crisis. It shows that private banks prefer to keep money safe in their own response to the failure to place cash pretty by the ECB. Therefore, there will be a greater level of timidity with regards to future purchases of government bonds. Those who expected a bazooka-like action to resolve the crisis will be disappointed. The “$ 2 trillion” that the Fed has created since 2008 were circulated a bit and then were quickly “sterilized” in the pockets of multi-millionaires who do not eat enough to spend their billions! The multi-billionaire Israeli-American bankers quickly built up in the pockets of the 13,000 billion that had been used to adorn the banks into bankruptcy in 2008, and banks are now bankrupt at the end of 2011! And central banks requinquent in 2011! And multi-millionaires do not even have to pay taxes on their yacht.
Source: Le Figaro