Draghi delivers (never mind the economy)

By Delusional Economics, who is determined to cleanse the daily flow of vested interests propaganda to produce a balanced counterpoint. Cross posted from MacroBusiness.

The SMP is dead! Long live the SMP!

OMT? Surely they could have just called it SMP2

What am I talking about?

Overnight Mario Draghi announced the new emergency program designed to support the ailing Eurozone. Most of the package was leaked out prior to the meeting so it wasn’t too much of a surprise when it was announced.  The “unlimited” scale was, however, certainly an upside surprise.

The new program will be called OMT which means “Outright Monetary Transactions” and is a replacement of the Securities Markets Program (SMP) which the ECB previously used to purchase €209bn of EZ sovereign bonds. The SMP had been dormant for 5 months.

The OMT will have a pre-condition that any country receiving its benefits must already be under a EFSF, ESM,ECCL, or similar  with a binding fiscal adjustment program in place preferably under the guidance of the IMF. The OMT will concentrate on purchasing sovereign bonds with a >3 year maturity in the secondary market and will have an unlimited capacity to do so. There will be no pre-announcement of the scale of any purchases or of any target yields. Importantly the ECB has also removed seniority on the program so that private sector actors in the primary and secondary markets will be on-par with the official sector in the case of default.

The ECB has also announced that it has reversed and removed collateral rules for Eurozone bonds as long as the issuing nation is “compliant” with the terms of an EU program. Basically this means that the ECB will ignore CRA sovereign ratings on EZ paper. All operations are to be sterilised via ECB fine-tuning operations alone the same lines as the SMP and Mr Draghi stated that the program will be  stopped immediately if a country is found to be not complying with its fiscal program. This particular part I find difficult to believe.

Mr Draghi announced there was only one dissenting vote in the Executive Council for this new program, it isn’t hard to guess who that was given this statement from the Bundesbank:

“In the most recent discussions, as before, Bundesbank President Jens Weidmann reiterated his frequently substantiated critical stance towards the purchase of government bonds by the Eurosystem.

He regards such purchases as being tantamount to financing governments by printing banknotes. Monetary policy risks being subjugated to fiscal policy. The intervention purchases must not be permitted to jeopardise the capability of monetary policy to safeguard price stability in the euro area.

If the adopted bond-purchasing programme leads to member states postponing the necessary reforms, this will further undermine confidence in the political leaders’ crisis-resolution capability. This underscores the crucial importance of ensuring both credibility in the promised conditionality and the resolute determination to immediately terminate intervention purchases if the underlying conditionality is no longer assured.

The announced interventions in the government bond market carry the additional danger that the central bank may ultimately redistribute considerable risks among various countries’ taxpayers. Such risk-sharing, however, can be legitimately authorised solely by democratically elected parliaments and governments.”

Given the structure of the program I see no reason why governments won’t now adjust their bond programs down to the short end of the curve in order to come under the ECB umbrella. Mr Draghi was asked about that response and didn’t appear to have an answer as to how he could stop it occurring.

So all up the announcements were quite impressive, in fact under the political circumstances it is difficult to see how Mario Draghi could have delivered any more. That said, the pre-condition for any of this is the binding implementation of the fiscal compact so this program is more about “keeping the lights on” than fixing the broader issues of Europe. We’ve previously seen two similar, but limited, programs from the ECB and in that time the economies of the zone have weakened further, I have no expectation that this program will change that trend. As I’ve said previously these programs are simply the inevitable response to the attempts to implement supra-Eurozone austerity under an incomplete economic framework.

Positively, however, this again shows that when Europe has it’s back to the wall it can deliver and does suggest that there is still some potential for a slow move towards a true economic union in the zone, even if it takes some blackmailing to get there. Obviously I’ll caveat that with the response we get from politicians from both sides of the divide over the coming days, particular from Spain and Germany.

The full press conference is below:

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About Matt Stoller

From 2011-2012, Matt was a fellow at the Roosevelt Institute. He contributed to Politico, Alternet, Salon, The Nation and Reuters, focusing on the intersection of foreclosures, the financial system, and political corruption. In 2012, he starred in “Brand X with Russell Brand” on the FX network, and was a writer and consultant for the show. He has also produced for MSNBC’s The Dylan Ratigan Show. From 2009-2010, he worked as Senior Policy Advisor for Congressman Alan Grayson. You can follow him on Twitter at @matthewstoller.


  1. mcgee

    Continuing to shovel coal into this runaway train is the only action these asshats know how to do…eventually they’ll run out of track.

  2. PeterP

    Every time I read the preamble that this guy is “determined to cleanse the daily flow of vested interests propaganda to produce a balanced counterpoint” I feel like not reading any forther. Let his words and opinions defend themselves, not his flowery self-description. You can be totally wrong on everything despite being “determined to cleanse” this or that.

  3. Jim

    Didn’t Draghi bury German democracy yesterday?

    It’s my opinion that too many “progressives” have more faith in a “small group of far sighted statesmen”, as Soros describes them, in Brussels than in the vote of the German electorate.

    How would these “progressives” would feel about a Romney administration, in concert with the Fed, dictating fiscal policy by decree, because the “country must be saved”?

    Heck, between the two actions (Romney/Fed or Draghi/ECB), Romney would have more of a right to do as he pleases, as he’d do it after an election.

    No one has ever elected Draghi to anything. And there is not US of Europe.

    Something progressives forget, again and again.

    1. BondsOfSteel

      Um. Progressives believe that the government can solve problems. That only the government can solve some problems.

      It’s clear that the government has to solve this problem; the market cannot. So many bank bankruptcys would bring down the markets and the governments.

      That the central bankers are appointed and not elected is irrelevant, since they are appointed by elected officials.

      1. Jim

        BondsOfSteel, if you believe that the ECB hasn’t exceeded its mandate, then the Fed, in concert with an incoming administration, can do as it pleases in order to “save the country from imminent collapse”.

        As to bankruptcies “bringing down governments”, why would a German care if Italians decided to bring back Burlosconi?

        So many “progressives” are so obssessed with this ill-fated construct, the US of Europe, that they’re willing to support it even at the expense of democracy.

        Quite sad, actually.

        1. BondsOfSteel

          Jim, the POTUS, an elected official can remove any of the Federal Reserve Board of Governors for cause.

          I don’t know the specifics of the ECB, but ultimatly, they are accountiable to the electorate though the bodies that appoint them.

          Also, it’s not just the PIIGS govs that would fail. A large amount of the money from the Greek bailout went to French and German banks.

    2. Chauncey Gardiner

      Jim, appreciate your comment this morning regarding the media celebration of the demise of democracy and the central bankers’ control of governments, including the German government.

      As former U.S. President Woodrow Wilson stated, implicitly acknowledging his error in not vetoing the formation of the privately owned Federal Reserve banking system: … “A great industrial nation is controlled by it’s system of credit. Our system of credit is concentrated in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the world — no longer a government of free opinion, no longer a government by conviction and vote of the majority, but a government by the opinion and duress of small groups of dominant men.”

      … “The regional Federal Reserve banks are not government agencies. …but are independent, 
privately owned and locally controlled corporations.” —Lewis vs. United States, 680 F.2d 1239, 
Ninth Circuit, 1982

      Another U.S. President, James Garfield, had earlier observed that … “Whoever controls the volume of money in any country is absolute master of all industry and commerce.”

      And there are many other pertinent quotes:
      … “Give me control of a nation’s money supply, and I care not who makes its laws.” —Banker Mayer Amschel Bauer Rothschild

      … “Some people think the Federal Reserve Banks are the United States government’s institutions. They are not government institutions. They are private credit monopolies which prey upon the people of the United States for the benefit of themselves and their foreign swindlers.” — Congressional Record 12595-12603 — Louis T. McFadden, Chairman of the Committee on Banking and Currency (12 years); June 10, 1932

      … “It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” —Henry Ford

      1. jake chase

        Woodrow Wilson was a stooge of JP Morgan, who insured his election by promoting TR’s third party assaut on Taft. You might as well quote Sandy Weil’s call for the restoration of Glass Steagall from his comfortable private island retirement. Wilson was a faux progressive. He delivered the Federal Reserve, the Income Tax and World War I. He was the first Obama, selling out to the highest bidder and talking bullshit from morning to night. His ‘self determination of peoples’ sowed the seeds of WW II. History is not what they teach in high school.

        1. Chauncey Gardiner

          Thank you, Jake. I appreciate your comments here and in some other instances. I was aware of the history of Wilson’s action re the Fed, which I mentioned, but felt this quote to be reflective of substantive underlying truth. Truth, reality and understanding as a basis for action – not diversion and obfuscation – are what I am seeking, as I am sure you are as well.

    3. JTFaraday

      I tend to agree. I think that progressives have been lead by technocratic commentators who profess (I emphasize profess) to disavow austerity into effectively backing the equivalent of the US Fed in Europe– in the name of being anti-austerity– while failing to recognize that the Fed in US offers no cure for austerity in the US, and that actions of the Fed likely has quite a bit to do with the current condition of both the US and Europe.

      I have a hard time seeing how this is any different from all the other claims about how we kept the same people in power in the US who caused the problems in the first place.

    4. BertS

      Zee financial stabilitee
      vill trump zee democracee
      for as far as zee eye can see
      und zat ist goot for me
      but not for zee!

    5. Richard Kline

      So DE, let’s call SMP the Sump Pump, what it is figuratively in plain English. The basement got flooded, and all is rot until the dreck is flushed. The real argument has been whether to go slow by a hand-crank [insert remarks there per your perspective] or hook up a turbine engine to do the job. The real problem is not, nor has it ever been, actual sovereign default but how to fend off speculative shorts with massive dark pools of money. They have been in an excellent position to drive down the bonds of the weak peripherals, in turn driving up rates on continued funding for those political entities and pushing runs on their localized banking systems. Draghi has said, “Full throttle,” without of course really meaning it. Push will come to shove, though, so he’ll have to put pixels where his mouth is come the day ere long.

      So Jim, there is a profound flaw in your ‘death of German democracy’ premise. Deutschland is part of a larger political entity. Decisions for that larger entity _aren’t made by or at the level of Germany_, they are made by the designees of the whole. One could say that Germany was—quite rightly—out-voted, if there had been a public vote. The German public has held it’s breath until they’re all blue while refusing to do the right thing, but the larger polity has simply moved on. It isn’t for the executive of Deutschland, nor the German public, to decide a policy which affects the other 280M in the EU and Eurozone. And never was. The Bundesbank is really quite irrelevant since the ECB was established, and now we see where the power lies.

      Are the ECB, the EU, and the EC ‘anti-democratic’ as presently constituted. Well . . . yes. That was, however, by design, not least because parochial political entities wanted to preserve the illusion of complete autonomy while enjoying the benefits of integrated economy. A fraud perpetrated upon themselves, more or less. There should be a more directive democratic component at the EU level. But pretending that the German public, or any public, has a liberium veto over policy for the whole is delusional.

      And jake chase, completely agreed, to all. Woodrow Wilson was and remains an unlovely figure; Bill Clinton with balls for more than clay pigeons, as an analogy perhaps. Sovereign politics, a foetid business on its best day . . . .

      1. Jim

        Richard Kline, the flaw in your reasoning is that you refuse to appreciate the limits of the ECB mandate. The Germans can be outvoted when it comes to setting the short term rate – that I concede.

        But the ECB can’t unilaterally begin to monetize debt – in effect, transfer wealth from the North to the South. The ECB explicilty told German voters that was beyond its mandate, and that it would never engage in such an operation.

        To believe that the ECB has the right to do as it pleases to save the ill-defined EZ is to believe that the Fed (or any Central Bank) in the US also has a right to do as it pleases to preserve the USA, even if it means Bernanke setting fiscal policy at the FED, “because Congress can’t get its act together”. I can envision Republicans using the same arguments you use, Richard Kline, to defend the ECB, to support the Fed as it slashes entitlements.

        Finally, what is it about certain progressives (I’m assuming you are one) and the EuroZone? Why are some so enamored of an artificial construct that its purported constituents don’t want? I ask you, during the Olympics or the World Cup, do you yearn to cheer for a team from the US of Europe?

        If you’re a citizen of the USA, would you rather cheer for a team representing North America, comprised of citizens from the states of US, El Salvador, Mexico and Canada? Or if you’re a citizen of Brazil, would you rather cheer for a team in the upcoming World Cup from South American, integrated by members of Brazil, Chile and Argentina?

        What is it that so many progressives have against the nation state?

        This I will say, Richard. Twenty years from now, there will be more countries represented in the United Nation than there are today.

        1. Lafayette

          The ECB explicilty told German voters that was beyond its mandate, and that it would never engage in such an operation.

          When the Euro was conceived and implemented by means of the Maastricht Treaty, it did not contain any “lender of last resort” functionality. Many experts had complained this was a grave mistake.

          To obviate its necessity, the Germans insisted upon and obtained a rule that national debt should never exceed in any given year 3% of GDP. That rule was first broken by (are you ready for this?) the Germans.

          Once the Germans themselves broke the rule, nobody in the Brussels Commission dared make the rule apply to any other country.

          With the Euro being loaned cheaply, it was just too easy for national leaders to kick-the-can-down-the-road and roll-over the debt. They never assumed, which was gross negligence on their part, that one helluva an economic recession would put the countries into a position of debt-produced insolvency. (Aka “financial near death”.)

          They had assumed foolishly that economic growth would continue and that they would have no problem rolling over their debt. Until, of course, the Greeks started hiding theirs off the books – which coincided with a generalized recession.

          And the fit hit the shan throughout the EU.

          All of the above scenario was foreseeable. But Brussels was discomforted by any naysayers and there were no whistle-blowers.

          Almost by design, because the EU jobs are very, very comfortable sinecures. Why blow whistles?

        2. Richard Kline

          So Jim in the event that you look back and read this: you believe, passionately by your remarks, that most individuals in Europe ‘do not want the EU,’ and that therefore it will disintegrate. You are mistaken wholly in both conclusions, and therein lies our divergence of analysis. Yes, most folks in Europe will tell you that ‘they don’t like the Union’—while clinging mightily to integrated borders, lack of wars, the utility of a common currency, etc. The mouths say what you like to hear, Jim, but the deeds trend elsewhere. This is what we not see with the concession of Germany’s _political leaders_ to a bailout mechanism., for example.

          Whether I, personally, am enamored of the EU or the euro is beside the point: the historical trends reinforcing both are a) fully evident, b) not disrupted by any counter-trend or plan, and c) quite functional for the communities involved _regardless of putative popularity. JIm, buddy, I call what I see, and what I see is the EU getting closer even while everybody badmouths that and opines ‘how good things were when Polity X called its own shots.’ Which in fact things _weren’t_. I’ll believe that the EU will break up and the euro will be ditched when I see any significant activity that has the means and intent to accomplish either. As of now, or the foreseeable future for that matter, there ain’t no such animal. Wishes that the EU will go away are just that, the stuff of the dreams of some.

          For the record, I’m supportive of ‘a more perfect union.’ What exits now is the kind of half-assed, part-built, yes undemocratic bureaucracy without the participatory component. And as long as folks keep pretending that the formerly autonomous regions of Europe are independent, the work won’t get done on making the larger whole work. That’s very reassuring to parochial irredentists who hole that at the eleventh hour the whole thing will be junked. But there is zero, (0) reason to believe that it WILL be junked. Ergo, better to make it work than to keep suffering its imperfections. The German Constitutional Court is irrelevant on this subject, facts on the ground have moved past their purview. Now matter what they rule, a way will be found around that—and should. Why? Because Germany needs to start cooperating rather than hogging the benefits of union, that’s why. Yes, other parties are culpable in the present mess; they have their own faults. Germany has benefited enormously from Union, and needs to get off the pot for the good of all. And above all, to quit pretending that they, the Germans, don’t have a responsibility to heir partners. I might add that the UK is as egregious in its selfishness in this regard also, and its day will come.

          You want the EU to sink? That’s your choice, Jim. But history and the facts on the ground are against your. What are you going to do about them? Other than announcing your hopes time and again? Oh, and more countries? Most unlikely buddy. Whether we should have more and in what configuration is surely debatable. But the evidence is for consolidation. Little Nationers are getting swamped, and that will only continue.

    1. BertS

      Except that the real story was that the bride was sleeping around with every country-bank that set foot in Greece.

      So the “evil producer-vendor financer” is something
      of a fiction created to satisfy a certain simplistic view of who is at “fault” in the fall of the eurozone concept.

      The other thing no one mentions is Germany was trying to be competitive with the ROW outside the EU. They were the only one with an external surplus from the EU to the ROW and the magnitude of that surplus offset the deficit from the rest of the EU.

      In other words they offset Europe energy imports among everything else.

      So little broader view of what the problems are would be in order. Like living above your means is still living above your means.

      And of course it’s governments and corporations doing this – the citizens are just along for the ride – whether they are in greece or germany.

  4. Susan the other

    The Fed went to ZIRP/NIRP without hesitation. And the ECB knows that its actions will reduce interest rates all across the EU. Otherwise Draghi would have commented.

  5. MyLessThanPrimeBeef

    The Spaniards are so grateful, they will, instead of hola, greet each other with ‘Draghi-la!’

  6. William Neil

    I think the target purchase bonds are those with less than 3 years maturities – between one and three year, specifically. The intent is to keep the governments under renewed pressure of the agreements’ conditions – this according to the NY Time’s account this morning.

  7. sadness

    the problem with this post from MB is that you can’t shut Draghi up – he will not stop talking…..bring on Weildmann please…..at lest he’s nice to look at and won’t speak until asked

  8. goat_farmers_of_the_CIA

    “…that when Europe has it’s back to the wall it can deliver and does suggest that there is still some potential for a slow move towards a true economic union in the zone, even if it takes some blackmailing to get there.”

    As if that economic union were good in itself, specially considering the neo-feudal, pro-bank austerity being promoted by Berlin and the ECB. Like another commentator, I really wonder if the author of the post is a real progressive, or just another proud member of the nominal left responsible for the current situation in the EU and US.

  9. Lafayette


    The OMT will have a pre-condition that any country receiving its benefits must already be under a EFSF, ESM,ECCL, or similar with a binding fiscal adjustment program in place preferably under the guidance of the IMF.

    Bind what and how?

    The Golden Rule has been passed in most EZ countries. That should limit debt excesses in the future, which is a sine qua non for assuring that “kicking the can down the road” is no longer the prefered “fiscal policy”. Debt must be contained to the Golden Rule guidelines.

    And by whom? The IMF can’t do that, so its the ECB’s lot in life to get on with. Meaning far more scrutiny of EU budgets, which is a power that has been granted to the wonks in the Brussels EU Commission.

    As I’ve said previously these programs are simply the inevitable response to the attempts to implement supra-Eurozone austerity under an incomplete economic framework.

    Yes, but what more do you want? The EU now has a lender-of-last-resort. (Whether the krauts want it or not.)

    Harping about austerity gets hysterical when the obvious panacea, Stimulus Spending, can only come from more debt.

    When a money gets so indebted, unless it is the dollar and has a China to keep buying T-Notes, then it is subject to market rules keeping borrowing costs low. Which the EU does not have.

    Markets can be very fickle indeed when indebted countries ask for more debt in order spend it on stimulus-projects. Banks are not philanthropies.

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