By Don Quijones | 22 August 2016
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. […]