Friday 27 July 2012

Mr Draghi, are you wearing any clothes?

Markets have recovered off the back of ECB President Mario Draghi saying he will do everything to defend the Euro.

The thing is:

1) The ECB can't do much more without further agreement from Germany
2) Germany is on holiday
3) The problems in Spain and Greece can only really be fixed by a massive devaluation via Quantitative Easing - Germany will not agree to this.

So..what exactly is Mr Draghi going to do - what is his bazooka in the modern finance parlance? It is not QE or use of the ESM monies to buy bonds because he is not allowed to do this.

perhaps it is more Bond buying, this in the medium term is nuts. The ECB is going to own all this peripheral debt when the balloon goes up and be seriously bust as a consequence. Who can bail out the ECB when it has already called on all the funds of the Eurozone?

I think this statement yesterday, as much as it rallied the markets, sounds like the last throw of the dice to buy some time over the summer. I wrote earlier this week that August will be critical, its still looking that way.


Barnacle Bill said...

Don't worry Cast Iron & Boy George have a cunning plan to save Draghi's and the ECB's arses.

Get the BoE to lend the ECB all our gold.

Gordon Brown said...

I already sold that useless gold and bought euros with it.

John Parker-Starney said...

Even if you tried every monetary bazooka possible it won't fix that much, you need to accompany this with deep structural reforms. And that ain't gonna happen.

Draghi is having to shout loud because he's got nothing to say.

Blue Eyes said...

Agree with JPS. Draghi's comments got coverage because the markets and media need something for the narrative/feeding frenzy.

He said nothing new. The ECB has no power now that it didn't have before. It can't do what is needed to paper over the cracks.

That the "markets" went nuts for his comments shows how totally shallow they are and/or how desperate people are to bid stuff up quickly and then presumably try to get out of dodge.

hatfield girl said...

German vetoes on what can be done by the ECB are much weaker than they like to pretend.

The ESM can become a "credit institution" if Draghi chooses. Yes Germany rejects such an idea, with reference to both ESM and EFSF. But it turns out that this is a matter of ECB policy, not subject to a German veto: the ESCB [European System of Central Banks] and ECB Statutes, Art. 18 on Open Market and Credit Operations, make this clear.

Also the ECB has off-balance-sheet resources of the order of at least €3.5 trillion being the estimated present value of its seigniorage.

And the ECB could buy government bonds in the same proportions as countries hold shares in the ECB, buy bonds of all countries that is, and nobody - including the Germans - would have any reason to complain, nor Treaty change be required. This was all written up in the Corriere della Sera by Federico Fubini on 24 July.

So there's leverage, QE,and vast funds available to Draghi as and when he chooses to use them. very powerful chap, Draghi.

Steven_L said...

I kind agree with HG (although admittedly she seems to have kept up with this euro thing more than I).

Even France are onside with letting the numbers on the banknotes get bigger - and the value of German deposits get smaller - now.

Only trade unions are so weak that any price inflation will not feed into wage inflation.

So it's 'austerity' (or reality?) all round huh?

James Higham said...

I wrote earlier this week that August will be critical, its still looking that way.

I wrote that after those five U.S. banks defaulted in January. It always seemed that it would be post-Olympics, post-summer.

Which one will go first?

Steven_L said...

Or we could always gang together in the 'developed' world and bom....

No I won't say it.

Electro-Kevin said...

Steven L - If by 'developed' world you mean the USA too then I don't think they intend to pay what they owe meekly.

I did post this on my blog on Obama's inauguration.

Their carriers are on exercise in the South China Sea at this very moment.

Budgie said...

It is not so much whether the Germans (who they?) will put up with backstopping the euro, but whether countries with 25% unemployment can survive for long enough.

Actually I believe Merkel is pulling the wool over the eyes of ordinary Germans, so Germany will probably still end up being the main financier of last resort.

HG makes a valuable point about the powers of the ECB. But there are ways round even the ostensible rules for the powerful in the EU, due to the nature of the EU - the rules are what they say they are.

rs2sale said...
This comment has been removed by a blog administrator.
CityUnslicker said...

August is this week. I don;t think the politico's get how bad this is..or if they do, they are spending time squirelling away their own assets.

So many, many people are telling me that the rich are doing scroeched earth with their money it is starting to worry me that the consiprasists are right...

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