EU CRISIS: DRAGHI FACING HEAVY FRANCO-AMERICAN PRESSURE

Cannons to the right of ‘im, cannons to the left of ‘im

Washington and Paris determined to twist ECB boss’s arm

The war of words over the role of the ECB is reaching fever pitch. But The Slog has learned that behind the scenes, the US is pushing hard for the ECB to take a much broader role.

Mario Draghi, boss of the  European Central Bank (ECB) came out fighting this morning in his first major interview since he took over from Jean-Claude Trichet. Bluntly observing that quantitative easing and huge ECB purchases of bonds were not appropriate, he took a position near to the German one, albeit holding out hope for wider bond purchasing “when the EFSF comes onstream next year”. Notable was his use of Berlinesque ‘morality’ issues:

“….this crisis and this loss of confidence started from budgets that had got completely out of control….we have to restore fiscal discipline in the euro area, and this is in a sense what last week’s EU summit started, with the redesign of the fiscal compact.”

Privately, Draghi accepts that the ‘compact’ is too vague and its timeline to set-up too long. Also, since the Brussels Summit several of those States who ‘signed up’ even to the compact’s principle have been back-tracking. But at present, the main pressure on the ECB boss is Franco-American. A Washington source confirms:

“Geithner left Europe [the week before last] smiling in public and spitting blood in private. He knows the other EU States aren’t up for it, and there has already been friendly pressure applied in Berlin. Merkel batted that straight back, so now the emphasis is on working with others to put pressure on the ECB. France is playing the lead role in this.”

Prominent German bankers such as Jurgen Stark and Lens Weidmann have been putting the other view in high-profile interviews of late. But in a further development during the last hour, the Slog’s Bankfurt Maulwurf offers further colouring in.

“As I told you,” he began, “Everyone in the banking sector will keep Merkel and Schauble on a short leash. But the French have some serious problems. A delayed bond-buying extension means that one ClubMed State could very likely collapse early in the new year. If that were to be Greece or Italy, the French banking system would be blown away.

“We should all remember that these confident numbers bandied about by the likes of Christine Lagarde take no account whatsoever of banking dishonesty and mutual insurance arrangements. I suspect the Americans understand this perfectly well. They would like nothing better than for Signor Draghi to throw money everywhere, but he cannot do that legally, and once you start on that line it becomes an unstoppable train. I have read the [FT] interview with Mario Draghi and I think he seems sound on such matters.”

All this is not, of course, playing well in the markets. A senior Spain-based credit manager told me yesterday evening, “If Draghi holds out, then it’s all over for the lenders. If he doesn’t hold out, then it’s all over for the single currency. It beats me how the senior players in this farce can’t seem to grasp those certainties.”

One man who certainly has is Nicolas Sarkozy. The French President has been made brutally aware of just how precarious the French banking position is. As part of the Brussels compact, more cash for the IMF and long-term liquidity to banks will be confirmed this week, but Fitch in particular declared itself unconvinced by promises to ‘speed up the move towards tighter fiscal rules’. It seems highly likely that S&P will give France another credit downgrade to match that of Fitch – if not by a further notch.

Nothing is giving, but something has to give. Treaties and constitutional changes will take a year or more at least to come into effect, but the markets want reassurance right now that money invested in eurozone debt is safe. Nicolas Sarkozy needs them to somehow get that reassurance. He and Geithner will keep the pressure up on Mario Draghi. As of course will Bankfurt and Berlin.

 

CRASH 2: G20 Rescue plan runs into its first wall: Germany’s central bank.

Head of the Bundesbank, Jens Weidmann

The Slog has learned from Washington sources that German central bank President Jens Weidmann ‘will do everything in his power’ to stop any Bundesbank funds being used to create more ‘firepower’ in the fight to stop massive banking failures as and when Greece defaults.

For those who’ve been following Weidmann’s history, and his recent statements at the G20, his implacable opposition to the Geithner recapitalisation plan (as currently outlined) will come as no surprise.

“Stimulus financed by increasing the budget deficit in Germany is not appropriate,” Weidmann told reporters in Washington last Friday, “The  capital situation among German banks is better than it was in 2008 during the financial crisis, and undifferentiated calls for more bank capital are not helpful. Germany’s banks are in an orderly state, and we have lower risks after creating firewalls and effecting restructuring after 2008″.

This was an obvious swipe at Christine Lagarde (for whom Weidmann has no time) but was of course referring to QE-style economic stimulation rather than recapitalisation. However, I’m led to understand that, having held some Washington discussions in the meantime about the Tim Geithner-backed plan to ‘leverage’ EFSF funds, Herr Weidmann thinks the fundamental thinking behind the plan is fatally flawed.

“The word is that he finds the idea of borrowing to create more failsafes against debt default just more can-kicking,” said The Slog’s most favoured source. “Weidmann has opposed the ECB’s bond-buying programme all the way. He’s already a thorn in Merkel’s side. There’s no way he’d acquiesce in a scheme to raise more money. He’s of the [Jurgen] Stark school: no more bailouts.”

Weidmann has an unusually high profile in Germany for a banker. He has come to assume the mantle of the last staunch defender of monetary stability – views shared by his predecessor, Axel Weber, and the ECB’s former chief economist, Jürgen Stark, both of whom stepped down from their positions because it was getting too lonely on their side of the ECB table.

But Weidmann is no quitter: he plans to fight any and all future attempts to reward fiscal indiscipline, and he has a talent for courting publicity. He gives speeches and interviews, telling Der Spiegel in a splashed interview last week that “if monetary policy intervenes in the markets, the pressure on the affected governments to introduce the necessary reforms is reduced. It is both wrong and highly dangerous to create the impression that the ECB is the only player capable of taking action in the crisis. Fiscal policymakers are fundamentally capable of taking action.”

The Geithner plan as currently constituted involves a central role for the ECB’s firepower. This is something with which Jens Weidmann cannot live. He ridiculed some of the statements made by Europe’s finance ministers in Wroclaw, and continues to have serious talks with the members of the budget sub-committee of the Bundestag. Although outnumbered, Weidmann is trying to rally a majority of ECB council members to re-adopt the “monetary-policy principles that Germany believes in”. So too does Angela Merkel (for whom Weidmann used to work) but her bending to further bond purchases has caused him to attack her too.

As a hardline fiscal disciplinarian, Weidmann personifies the split between the can-kicking Trichet way of doing things, and the reality-facing ‘take the hit and learn from it’ approach more common in Anglo-Saxon States. In private, the Bundesbank chief reviles both EU bureaucrats and their political fellow-travellers, and at times it’s easy to see why. ‘We need to find a mechanism where we can turn one euro in the EFSF into five, but there is no decision on how we could do that yet,” one senior European official told Reuters at the IMF junket yesterday.

Angela Merkel is relaxed about the fact that Weidmann’s new job makes him the champion of the Bundesbank’s traditional positions. But that doesn’t mean she has to be loyal to his stance: despite a hard-faced public attitude to ‘good money after bad’, Merkel supported the recent bond purchases because, like Wolfgang Schauble, she believes a Greece remaining solvent and in the eurozone will buy time for the EU authorities to strengthen the major eurobanks.

On this lastest G20 plan, however, she has remained silent. It could be that she no longer feels strong enough domestically to take on a charismatic and patriotic central banker rapidly turning into some sort of quasi-political pop star.

Stay tuned.