The ECB has been running its printing presses overtime, and it now looks like the presses are going to be running 24/7. The debt of Europe is now being monetized, which basically means that if a country can't pay what it owes - viola! The ECB will just print more.
Europe's commercial banks have been able to take the Greek bonds it buys to the ECB and swap them for cash that the ECB prints. This is the indirect monetization system - literally the printing of new money to pay old debts. Before, the ECB's policy was to accept Greek bonds as collateral for cash as long as at least one credit rating agency maintained an investment grade rating on Greece.
Some thought that the ECB would actually toughen their collateral rules in the wake of the debt crisis and make it more difficult (and expensive) for the banks to trade their bonds. But then came last week's downgrade of Greek government debt to junk status by Standard & Poors. The ECB's response? It actually relaxed its collateral rules and will now accept Greek debt no matter how low Greece's credit rating goes.
No one knows exactly how much Greek debt has been bought by Europe's commercial banks, because the numbers are not made public. Also unknown what would happen with this bond-for-cash- swaps should Greece ever default on its obligations. For example, can the ECB hold the banks accountable and force them to reverse these swaps (i.e. return the cash received from the ECB for Greek debt)?
Of course, the situation goes way beyond Greece because the implication that is that any country (Portugal, Spain, etc.) that finds it too difficult and expensive to sell bonds into the market will also have its debt monetized by the ECB. In other words, the ECB, with its relaxation of collateral rules, has basically announced that it will print as much money as necessary, or, as much as it can before people decide they’ve had enough and abandon the euro altogether.
We’re actually starting to see this already because the euro is declining not only against other paper currencies but against gold as well. In fact, all paper currencies have been, and will continue to, devalue relative gold.
I said last week that the euro is a doomed currency and that I expected to see it decline to the lower 1.20’s as the year progresses. With the ECB now on a dedicated mission to monetize the debt of Europe, what’s likely to happen is that my downward target will need to be adjusted
