ECB’s Balance Sheet Plunges by €492 billion in One Week and by €850 Billion from Peak

Monetary Rug-Pull? December loss in the markets anything to do with the international QT?

By Wolf Richter of WOLF STREET.

Total assets on the ECB’s website, released today, have fallen by €492 billion since last week, to €7.98 trillion, the lowest since July 2021, and are now down €850 billion from their peak in June.

The ECB had two main types of QE: It gave money to banks through free loans, and it gave money to the bond market by buying bonds. Those were good times, RIP. All this has stopped. And now the ECB is releasing these things.

At its October meeting, the ECB announced Phase 1 of the QT: Debt Relief. At its December meeting, it announced Phase 2 of QT: the liquidation bonds it bought. What we see here on its pages today is the result of Phase 1 of QT – the initial large loans have been repaid. This looks like an attractive price:

Credit QT: large.

During the pandemic, as part of the general flood of assets, the ECB lent money to banks – Targeted Long-Term Refinancing Operations (TLTRO III) – in which the banks spread. From the start of the pandemic until July 2021, the ECB issued loans of €1.6 trillion.

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These loans came with complex incentives to encourage banks to lend to businesses and households, which the banks could do, and convert other funds, which they could use elsewhere, such as buying other assets, such as securities. This is how these loans enabled banks to buy products in markets around the world – which helped to raise commodity prices. And when they repay the loans, they have to lose some of these things…. we’ll get to that now.

At its October meeting, the ECB announced Phase 1 of the QT to “help combat the unexpected and surprising increase in inflation,” as it said. In order to do so, it made the loan unattractive to the banks, which would cause the banks to default.

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Loans have repayment dates. The first repayment date was in July, when loans of €74 billion were repaid; the second was in November, when €296 billion was repaid.

The third return date was mid-December. At the time, the ECB announced that €447 billion in loans would be repaid. Today, it has €498 billion in debt on its balance sheet. The total amount of Long Term Refinancing Loans has now decreased by €896 billion from the peak in June 2021 (€2.22 trillion) to €1.32 trillion today.

This is the largest amount of money that has disappeared since mid-November, €743 billion in two movements, which would have helped fuel the losses in markets around the world since then:

QT link: not yet, but coming.

At its December meeting, the ECB announced Phase 2 of QT: It will begin to sell its bonds in March 2023, starting at a rate of €15 billion per month. More details will be announced after the February meeting, it said. The speed of the next drop “will be determined over time,” it said. Since then, there have been comments by ECB leaders about accelerating the QT deal.

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The ECB ended QE in June 2022, and “securities held for monetary purposes” have remained stable ever since. On today’s page, securities reached 4.94 trillion, down by €20 billion from the peak in June:

When the ECB received €895 billion in debt, it spent the money, just as it created money when it created the debt. This is the most money that has come out in the last six weeks. Everything in the financial markets is global. And QT is universal. And it’s not just the Fed. And that’s just the beginning.

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