Aug 2, 2012
Back in March we wrote “Mario Draghi Is Becoming Germany’s Most Hated Man” for one reason: a few months after the former Goldman appartchik was sworn in to replace Trichet with promises he would not “print” Draghi did just that in a covert way via $1.3 trillion in LTROs, that immediately hit the economy and sent inflation across Europe soaring. We said that: “Slowly but surely the realization is dawning on Germany that while it was sleeping, perfectly confused by lies spoken in a soothing Italian accent that the ECB will not print, not only did Draghi reflate the ECB’s balance sheet by an unprecedented amount in a very short time, in the process not only sending Brent in Euros to all time highs (wink, wink, inflation, as today’s European CPI confirmed coming in at 2.7% or higher than estimated) but also putting the BUBA in jeopardy with nearly half a trillion in Eurosystem”receivables” which it will most likely never collect.”
It now appears that the simmering hatred between the two is about to upshift to a whole new level, with the threat of open escalation finally arriving. Because if Sueddeutsche Zeitung is correct, via Reuters, in precisely 12 hours, Draghi will proceed with a plan that has neither Germany’s nor Buba’s blessing, in the process effectively isolating the only remaining solvent country in Europe, and its de facto paymaster, and forcing Germany to take a long, hard look at the exit sign (which, however, as reported earlier, with each passing day that drags Germany’s economy is becoming less of an unthinkable outcome). To wit: “Draghi is planning concerted action using both the ECB and the future euro European Stability Mechanism (ESM) to purchase sovereign debt from Spain or Italy in order to help push down borrowing rates for those two countries.” There is one problem: “highly doubtful that the German government would agree to Draghi’s approach. The Bundesbank also is likely to reject the idea, the paper added.”
In essence what Draghi will do tomorrow is what Monti did a month ago when together with Rajoy, he presented Germany with one option, and would not back down else risk disintegrating the Eurozone. Merkel then took the diplomatic way out and pretended to agree that the ESM would lose its seniority status, something which as Finland confirmed today, never actually happened after the Nordic country said the ESM still and will always have explicit seniority status. The problem however is that the June summit was political theater. What happens tomorrow will have all too real consequences if and when Monti injects another €1 trillion into the economy. How soon afterward can Germany again expect to once again pay a record amount for a liter of unleaded. And how quick until the latest iteration of attempted inflation fizzles and has to be replicated with a €2 trillion bond monetization episode. Then €4 trillion. Then €8. Etc.
You get the picture.
More from Reuters: which doesn’t tell us anything really new, but merely confirms (allegedly) that Draghi will indeed openly go where so few have gone before – openly against the will of Germany, its Chancellor and banking head, Herr Weidmann:
The ESM would purchase sovereign debt in smaller amounts directly from both countries while the central bank would resume its purchase of debt in the secondary market, the daily wrote in an advance released on Wednesday evening. The Bundesbank has opposed further ECB debt purchases.
The ECB Council will meet on Thursday and the Sueddeutsche Zeitung said it looked like a majority was emerging in favour of the ECB resuming its purchases of sovereign debt. It added there will most likely not be any official decision on such a measure.
The ECB’s role would be a stopgap until the ESM is approved by the German constitutional court. Which it very way may never happen.
There is a greater likelihood that Draghi will spell out in more concrete terms what he said last week – that the ECB will do everything within its mandate to support the euro, the paper said. A final decision is not expected until after Sept. 12, after the German Constitutional Court rules on the ESM.
The daily said Draghi’s plans could lead to the ESM taking part directly in the auctions of state debt by those countries affected, leading to a reduced interest rate for the auction.
The ECB’s task would to be to work before the auctions to push the interest rates down to an acceptable level and to keep them fixed at that lower level for the longer term.
The delusion continues because not only have we shown that the impact of each SMP episode is weaker and weaker, but that absent the ECB officially denouncing its senior status, and thus fears of bondholder subordination, the ECB will achieve absolutely no incremental interest in bond purchases by private investors who are convinced both Spain and Italy will conclude merely as yet another Greece.
Sueddeutsche said it is hoped the plan would restore private investors’
confidence in the bond market. The ESM would probably only have to allot
relatively small sums of money for this or could bow out of bond
auctions at the last minute if the interest rates had fallen to an
Finally and most crucially:
The daily said it was at the same time highly doubtful that the German
government would agree to Draghi’s approach. The Bundesbank also is
likely to reject the idea, the paper added.
And with that the open warfare between the ECB and Germany will begin. The only question remaining is does Draghi, even if he is truly merely a figurehead for Goldman, really want to launch all out war against Germany?
Especially with his office located in downtown Frankfurt.
Oh, and don’t call him Super Mario any more. The proper prefix now is HyperTM.
Then again, just like today’s violent disappointment by the Fed, all of the above could be merely well positioned media propaganda, and the reality is that Draghi will do absolutely nothing.
This article was posted: Thursday, August 2, 2012 at 3:00 am