The central bank is trying to ease funding pressures on banks, many of which have been locked out by their peers in recent weeks. Now he’s on the inside looking out, it has become clear to Mario Draghi that the EU credit crunch is much worse than he’d been led to believe. In the last three weeks, the new ECB director has upped the bank-liquidity operation considerably – to the point where, in real terms, it is thinly disguised QE. Not in the sense of increasing the bank’s ownership of junk sovereign debt…but certainly in terms of massively increasing its risk exposure. I understand that Signor Draghi now realises that he can’t satisfy both the markets and Berlin – the former of whom want him to try everything be it legal or otherwise, and the latter who insist he should do the bare minimum.
Draghi is a shrewd, Goldman-trained consensus manager with a fine head for politics. The three new members of the ECB Board to join since he came on board have been French, German and Belgian. He has thus replaced two German resignees with one – while the other two do not suffer from the inflation phobia driving events in the Merkel Government.
By far the most important of these moves was the replacement of hawk German Jurgen Stark yesterday with Belgian dove Peter Praet. It was also very surprising for most observers….and irritated several senior players in Berlin. In particular, I’m indebted to a Slogger handily placed in Germany who point out an article in Deutsche Mittelstands Nachrichten on the subject of Praet’s appointment as Chief Economist at the central bank. If you read German, the vituperative nature of most comments will tell you what most thinking Germans believe: that they have been stitched up the the Gallic-Latin alliance. And they’re right.
Merkel and Wolfgang Schauble wanted (and expected) German Jörg Asmussen to get the job, but the French intervened first to block him, and then to suggest another candidate in turn…..who just happened to be French – Benoit Coeur. I understand that Draghi has tried to position these as ‘neutral’ appointments, but Berlin isn’t buying it. For one thing, they know perfectly well that Mario Monti in Italy supported Praet’s candidature, because he is a dove on junk bond-buying – and without that support being upped dramatically, Italy is dead in the water. As DMN put it yesterday, ‘…now, the decisions made by the ECB’s Board will be influenced by those countries who are dependent on money. Germany, in contrast, as the most potent paymaster, has lost a massive amount of influence.’ Yah-boo-sucks, and s’not fair.
I spoke last night with two closely involved observers of the eurozone/EU debacle. One, a Madrid based senior credit manager, told The Slog, “You don’t have to be a genius to work out what happens next. Draghi will now push through a cleverly disguised but massively supported programme of sovereign bond purchases, using every scrap of evidence he can find that, without it, ClubMed will sink without trace.”
Angela Merkel, of course, doesn’t see it that way. To be more precise, she doesn’t see that at all. She sees only loyal eurozone partners doing their duty and paying the monies back in full: she’s just a little hazy on how their economies can rebuild (and social welfare remain in place) while they’re doing this. But equally, Mario Draghi – for all his well-documented skills – doesn’t have an answer as yet to how long the ECB can keep throwing money at banks and bad debt before compromising itself irreparably…or itself going under. The obvious answer – simply print more money – would work for a year or two, and then quite quickly destroy Europe’s social fabric. But then, Signor Draghi is a banker – and banks come before anyone and everyone in the queue for salvation.
Nicolas Sarkozy is, I’m told, ecstatic at the news of Praet’s appointment. I’m not surprised….it will potentially reopen his desired route to the ESM – and then the ECB itself – in order to bail out French banks. But in the meantime here’s something not many people know: of the €489bn in three-year loans offered to banks in December at 1.75% a high rate for the eurozone – fully €446.3bn been parked back at the ECB in its “deposit facility”. This tells us two things: first, hardly any cash has been lent to other banks or to the real economy. And second, as the banks can’t re-lend at a profit, they must be seriously desperate….and/or hugely fearful of lending to those other banks.
So not only is the marginal lending scheme seen to be having a near-zero effect on businesses starved of capital; it is also revealed as a bank-saviour, pure and simple….but a lifeline that it clearly needed. Like I said, banks come first. And the large multinationals are never far behind: being cash rich anyway thanks to Quantitative Bernankering, they’re happy to sit out the crisis…..and then start walking around with carpet bags once the euro-companies go belly-up.
Everything is thus going according to plan – but not for us. And not for Berlin. Despite being riddled with inappropriately inflexible morality on the debt issue, it is pretty clear now that Germany remains the country most on the citizen’s side. This could be more exactly put as being on the German citizen’s side….but let’s face it, national selfishness never really died: that’s the long-term flaw in the idea of political unification. We’re all looking after ourselves now – hence my piece yesterday about there being no practical difference between ‘EU’ and ‘eurozone’. The casualty in the medium term will be the EU as we know it, not the eurozone.
But talking of morality, at least the Germans are displaying some. This is more than could be said for Barcap over the years. For those who just returned to the office today, this Slog piece from last week shows that Bob Diamond may well be sinking into some rather smelly quicksand shortly.
Global crisis: that American ‘recovery’ in full.