Draghi Continues Handwaving as EuroCrisis Worsens

Despite the high expectations, nay, demands of the Bond Gods, ECB chief Mario Draghi, who had promised to part the seas and deliver investors to a promised land of Eurotranquility, which these days means at least a few weeks of relief, instead resorted to more brave-sounding talk. Today his message was he and his fellow Eurocrats were still working on a plan to do something really big, not to worry. Markets “recoiled,” in the words of the Financial Times. Spain’s 10 year bond yields rose to over 7%; the increase in short-term yields, which had been particularly alarming prior to Draghi’s bazooka talk of last week, didn’t blow out as badly due to his contention that buying short-term debt would be part of “classical monetary policy,” meaning the Bundesbank couldn’t throw a hissy fit over that. The Spanish stock index fell over 5% and the Italian, 4.6%.

From Draghi’s statement, one can infer what the plan is likely to look like. The ECB will not buy bonds in isolation, save maybe on the short end, and even then, one suspects not too much. However, it will buy bonds alongside the EFSF/ESM facilities (something Ambrose Evans-Pritchard has suggested might happen for some time). This is the operative section:

As implementation takes time and financial markets often only adjust once success becomes clearly visible, governments must stand ready to activate the EFSF/ESM in the bond market when exceptional financial market circumstances and risks to financial stability exist – with strict and effective conditionality in line with the established guidelines.

The adherence of governments to their commitments and the fulfillment by the EFSF/ESM of their role are necessary conditions – not sufficient, necessary conditions. The Governing Council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective.

In this context, the concerns of private investors about seniority will be addressed. Furthermore, the Governing Council may consider undertaking further non-standard monetary policy measures according to what is required to repair monetary policy transmission. Over the coming weeks, we will design the appropriate modalities for such policy measures.

The problem is that Draghi has to keep the markets appeased until September 12, when the German Constitutional Court will presumably lift the injunction against having the German president sign the treaty that creates the permanent rescue fund, the ESM (my connected German buddies believe the judges are just about certain to lift the injuction, even if it were to take some tortured reasoning to get there). The second obstacle that has to be overcome is that Spain and Italy have to ask for aid. Why is that necessary? Because formal aid comes with strings attached. The about-to-become subject nation signs a Memorandum of Understanding and gives up fiscal sovereignity to get the dough. As Ed Harrison pointed out via e-mail, Germany wants to see the periphery countries capitulate and slash pensions, cut wages, and gut social programs. Spain’s Rajoy and Italy’s Monti are neoliberals and believe in this sort of thing. The odds favor that they’ll put up a show of holding out for a bit and then relent. But as Ambrose Evans-Pritchard describes, they are putting up a good show for now:

The eurozone is now in limbo, with intense pressure building on Spain’s premier, Mariano Rajoy, to fall on his sword and request the EFSF package needed to set the Draghi plan in motion. Mr Rajoy said the proposals had “positive aspects” but deflected further questions.

Italy’s leader, Mario Monti – forging a Rome/Madrid axis as part of his efforts to give the Latin bloc a full voice in the eurozone drama – said the two leaders “will have to study” whether or not to activate the mechanism.

Hours earlier he warned that Italy could not wait forever for Europe to put real muscle behind its rhetoric. “I can assure you that if the bond spreads stay at these levels for some time, you are going to see a eurosceptic government take power in Italy.”

But even if the Germans prevail, their diktat is no solution. This is the path of at best bringing deflation to the northern countries, and Japan style outcomes, and the worst is a full bore Depression.

And the severity of the stress is not well recognized in the US. There is an accelerating bank run underway now, as lenders and investors that fear suffering losses if the Eurozone breaks up and they are left with deposits in countries that redenominate them in a new, lower value currency, move their money to banks in the core. As Marshall Auerback has stressed, interventions now have such a short half life that it is unlikely anything will arrest the bank run until the Eurozone has deposit insurance. So his challenge is not how to patch things up until September 12, but until a deposit insurance scheme is in place. Whether he can do so is very much an open question.

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  1. Hilary Barnes

    Draghi was never going to act now. He has told governments what his plan for ECB action is. The governments, more especially Germany, have a choice between agreeing or watching the euro fall apart. The poor reaction by the markets only strenthens his hand.

  2. JGordon

    No, he can’t hold the system together. At best he can stave off the collapse for a month or two.

    And the neoliberal ideology is a logical extension of neoclassical economic ideology. I find it kind of difficult to reconcile how someone could have faith in neoclassical models yet disparage neoliberalism.

    I think a more realistic outlook is to just assume that this pig is going down and nothing will save it. Once that fact is accepted, progress is possible.

    1. Austin F

      You’re right. The ‘pig’s’ going down. Fast. The only question for the bears is when. The Euro was always a banker’s scam, butressed by the ‘useful idiots’ of neo-classical orthodoxy, amd deployed as a weapon against organised labour and its hard won social rights.

      The final nail in the coffin is the fact that no European nation will ever accept any kind of growth or stability ‘pact’ that involves real controls on capital and doesn’t put intense, downward pressure on wages. So it’s auf wedershen der Eurokrapp.

      1. JGordon

        Personally, I believe that what the bears should really consider is “what use are casino chips when the casino is closed?”.

        If they were really smart, the money men would be cashing out of fake fiat “wealth” denominated in Euros and dollars and would use the liquidity to buy a farm, get some solar panels, and start raising chickens. But noooo. They’d rather have a bunch of digital ones and zeroes in their accounts that aren’t even worth the paper they’re not printed on… It’s madness–as well as a buying oppurtunity. Get your farm solar panels while the idiots are still out there chasing paper. They’ll be trying to cash out into real assets real soon. And that will be the end of the game.

        “The problem with people who understand finance is that they don’t understand reality.”
        -Dimitry Orlov

  3. Hubert

    This is not a sprint but a marathon.
    The Euro can only explode once but it can hold for many, many times.
    It is an economic miscreant that spreads discord in the Zone and even endangers the EU.
    Still, the political elite have invested in it and the one country well advised to leave, Germany, will not, mainly for historical and ideological reasons.
    Sep12 will just be another episode. The COurt is a political institution. They will render something which Merkel can then interpret in nearly any way she wants.
    Draghi (and others) slowly and slyly draws the Germans into comittments they cannot reverse. “Souvereignity” is a relative and reversible concept, already here and now in the EU. Italy and Spain will lose some sovereignity on paper and get real money for it. Both countries always have a Plan B, now and later. They can just leave (but better get the money first ….)

    1. SidFinster

      It’s not just Germany; throughout the EZ, the leadership and official ideology of just about every mainstream political party ranges from “fanatically pro-Brussels” to ” hysterically pro-Brussels”.

      What’s more, all the public voices of the 1% have been lockstepped on the EU, so quick to shout down any dissent and cast heretics into outer darkness and also expel them from the party, that to backtrack now would cost Euroleaders enormous credibility.

      The best analogy I can come up is if the Catholic Church were to abandon priestly celibacy or similar. They’ve been fighting a losing battle so hard and so long that any retreat now would kill the Church’s credibility with both traditionalists and modernists at once.

  4. craazyman

    I don’t know much about Europe except that its where they had World War II and where Rembrandt lived, but I pay attention to what informed people think.

    So it was interesting to see Jim Rickards, some big shot at Tangent Capital with Christopher Whalen (I think), co-hosting Capital Account with “the ultra hot Lauren Lyster” the other day.

    He seems certain the Euro will hold together. He seems like a smart and well-informed dude. Maybe he’d be willing to do a NC post, articulating his thesis.

    It would be nice to hear the other side. So much Euro-doom around here. It may be that’s what will happen, but maybe not. Personally, I think they’ll muddle through somehow, for reasons that go into group psychology and the analysis of the ego. Haven’t figured out the math on this one yet, but it gets into intersecting probability spheres. Which are like auras that you can add together and achieve phase state transitions.

    1. William C

      Paul Mortimer-Lee (BNP Paribas Senior Economist) had an interesting take on the BBC radio the other day. He said that Anglo-centric discussion on the euro centres on the idea that it is a story with a likely dramatic outcome in the near future – either success in solving the problems or disaster. He argued that the English-speaking world misunderstands the situation which is a much more drawn out, long term process whereby over a long period of time the situation will probably be solved (I paraphrase and am working from memory so may have got some of this wrong). Much, I thought, like Munchau who recently said this crisis could go on for twenty years.

      I worked with Paul twenty years ago and know that his views are to be taken seriously.

      1. ScottS

        I suppose I’m just another native anglophone who doesn’t get it, but “muddling through” would seem to be the worst case scenario. People are giving away their children in Greece for fear of not being able to feed them. Diseases unheard of in the first world for decades are returning due to poor sanitation.

        The entire United States of Europe project was meant to tame nationalism and prevent war. But Europe has traded nonstop war between nations for nonstop war between classes. The raison d’être of the Euro is in question.

  5. jake chase

    Nice clear conventional thinking and like all conventional thinking most likely to be respectably wrong. My guess is that the Euro will be held together by smoke and mirrors and central bank slight of hand, and all those shorts are likely to find themselves in the same boat as Knight Capital, although they may have the illusion of making money for a month or so. In a war between the bond traders and the industrialists whose looting power depends upon preserving the Euro I would not bet heavily on the traders, who tend to go up like rockets and down like meteors. As for the periphery populations, they will get screwed regardless.

  6. Fiver

    The “Market” has for some time been paying especial attention to Eurozone political “deadlines” and “headlines” around which large sums of gambles money have suddenly changed owners. Slowly but surely, the ECB and Germany are coming around. They could not possibly win this in any satisfactory way, which I’m sure they’ve known from Day 1 – the choices presented are not great, but they’ll adjust, at least for now. In the meantime, every time Draghi or Merkel or some other major player in this crisis makes some routinely unconvincing remarks we’d not pay attention to in the US coming from politicians, but if emanating from Europe’s top guns are given far too much weight.

    The marvel that is the God’s Work involved in building a one-stop power shop for European elites will simply take an alternative route. The carrots are coming soon enough, after the US election. In the meantime, a sizable number of very rich people are gaming every one of these “pronouncements”.

    ECB will act in the end. The “market”‘s owners will insist.

    1. Fiver

      Addendum to comment:

      For anyone interested, today’s “surprise” US jobs number is instructive re my comment above on Draghi.

      The “surprise beat” on jobs ought not to have been a “surprise” to anyone – it certainly was not to me. That metric can be off by well over a hundred thousand in any given report even without the magic of “seasonal adjustment”, but with the latter the jobs data release is a very lucrative tool for market management. Similarly, GDP can readily be pumped or trimmed by well over 1% in any given report, or short series of reports, and with repeated revisions even over longer periods – depending on what is desired in terms of market and/or policy response.

      These putrid slicks now work the same racket (worth tens of billions per year) around all high-level pronouncements (often timed perfectly), “summit” deadlines and the rest.

      They are very, very good at his. You have to give the bastards that.

  7. vlade


    I disagree. Draghi actually did quite a bit, but in a different place then people expected. For one, he fairly explicitly singled out Germans as being the obstacle (usually ECB minutes are published with almost two decade delay, and the reason for that is “to respect sovereign confidentiality” and “avoid perception of splits”).

    Draghi made a significant push towards pointing a finger at Germany in the sense “if EUR falls apart, here’s the cultprit”.

    This is more important than quite a few people realise, as for better or worse German are still suffering from the collective guilt for 20th century (when European Soccer Championship was in Germany, flag waving was very uncertain, and was just about the first time in 60 years when Germans flag-waved). To be the ones who split the europe again is not a small bit for them.

    Don’t take me wrong – they would love EUR to fall apart. But that doesn’t mean they can force themselves to be the first movers. An ideal situation for them would be Greece exiting as then they could say “well, we tried, but it didn’t work” (and you can see it in how hard they push on Greece).

    In ECB, Budesbank cannot out-vote the rest of the board. It can try (and it certainly did its best on that) to bully its way around, but from a procedural perspective it’s not even first among equals, it’s just “equal”. They cannot sanction Draghi in any way – short of exiting EUR.

    Of course, the main problem (and question) remains – is it possible to turn EUR into a workable currency union (which won’t work without some political engagement)?

    I doubt it, but Draghi’s most certainly doing his best on forcing politicians (and non-politicians) hand.

  8. F. Beard

    There is an accelerating bank run underway now, as lenders and investors that fear suffering losses if the Eurozone breaks up and they are left with deposits in countries that redenominate them in a new, lower value currency , move their money to banks in the core. Yves Smith [emphasis added]

    I don’t see why it would be necessary to redominate private debts. Why couldn’t the Euro remain as a purely private currency within the countries that readopt sovereign currencies?

      1. F. Beard

        Now that you mention it, Steve Keen’s universal bailout would enable those private Euro debts to be paid and perhaps a good chunk of government Euro debts too due to a revived economy.

  9. Peripheral Visionary

    “The problem is that Draghi has to keep the markets appeased until September 12, when the German Constitutional Court will presumably lift the injunction against having the German president sign the treaty that creates the permanent rescue fund, the ESM . . . “

    My theory is a bit more simple: Draghi has to keep the markets appeased until the Olympics are over and European bureaucrats come back from holiday to actually get something done. The halls of government here in the U.S. are empty enough in August, I suspect that is even more the case in Europe.

    I dub August of 2012 the month of the ill-advised vacation.

  10. Brizie

    Has the game changed from Kick The Can to… Don’t Blame Us?

    German leaders continue to strongly resist both of the key steps needed to save the euro, deposit insurance and monetization of sovereign debts. Germany’s unwillingness to work toward those key steps suggests they really don’t want the euro to survive or, at least, they don’t want to be part of it.

    If Germany wants out of the euro, would its leaders say that? Or would they rather have another country be seen as responsible for the demise of the euro? Some posts in NC about the beginning of the euro made the argument Germany was the main architect of the euro but let other countries appear to be the main proponents. German intransigence could be a stall strategy waiting for another country, or outside event, be blamed as the spark that set off the explosion. Let others be blamed.

    The IMF bailed with a report that essentially said, we told you so, don’t blame us.

    Monti essentially is pointing the finger of blame at Germany saying if you don’t let the ECB drive Italy’s bond rates down, that most likely will force Italy out of the euro by way of an election of anti-euro leaders. Don’t blame Italy if you Germans don’t let the ECB act.

    The German Supreme Court is going through gyrations many commentators describe as trying to avoid blame.

    Draghi is proposing measures that are aggressive given the constraints he’s working under. He’s positioned the ECB where it can’t be blamed.

    Is it crazy to think the eurozone leaders now clearly understand Germany will not let the euro survive with Germany in it? If they know the ship is going down, wouldn’t they want to make sure they aren’t blamed?

    1. Mark P.

      ‘Germany’s unwillingness to work toward those key steps suggests they really don’t want the euro to survive or, at least, they don’t want to be part of it.’

      Come on. The Germans fairly obviously want what have been the good parts of the euro (for them), but not the bad. They want to have their cake and eat it too.

      Of course, what benefits German businesses and elites hasn’t so much benefited the average German, so the latter tends to have a more acerbic outlook.

      Anyway, good luck with all that for the Germans as a whole. They are heading for a bigger economic fall than they fancy, however the specifics play out.

  11. rafael bolero

    Most of my middle-class German friends, who admittedly are bit left, want nothing to do with the ESM, want out of the Euro, and want DM back. My lower-class or unemployed German friends care less about money and more about food and shelter. I don’t have any rich German friends. Haha.

  12. MarcoPolo

    Ben: “Mario, it’s on you”.
    Mario: “Buba, it’s on you”.
    Buba: “Eff you all”.

  13. Hugh

    Some general observations on Europe and reality:

    Never bet against the math

    Debts that can’t be repaid won’t be

    Europe has half a dozen core problems, none of which are being addressed by anything Draghi, the ECB, the Germans, and the peripheral governments are doing:

    Lack of a democratic fiscal and debt union
    An insolvent predatory banking system
    A weak, ineffective central bank
    Mercantilist trading patterns within Europe
    Corrupt political classes
    A ruling class of rich kleptocrats

    Where’s the money? Not this fall, not next month, but now.

    Depression breeds revolution

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