6th Sep - ECB Watch

ECB's plan - all material collected to one place. I will update this post continuously and latest additions are at the bottom of the post, as usual. Last update: 19-Sep 23:00 GMT. See 30th Jul - Special: ECB WATCH (last update 7-Aug) for even more ”believe me”-material.

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8-Aug

Blogs review: the ECB’s new doctrine of explicit policy conditionality – bruegel

a precise idea about what commentators had previously referred as “a grand master plan” or “the two-pronged approach” where ECB intervention on the secondary market would be conditioned on countries making first a request to the EFSF and accepting the strict conditions and supervision attached to it.

Indicators of market segmentation – ECB (pdf)

media request following the ECB press conference on 2 August 2012 (4 pages)

Market has Now Fully Priced In Another 1 Trillion LTRO – ZH

it appears inflation expectations have now priced in another EUR1 trillion worth of LTRO.

9-Aug

Draghi’s plan – The Economist

A lot of things have to go right for the ECB’s bond-buying plan to succeed

10-Aug

Venetian cunning of Draghi-Monti masterplan may save euro for now – The Telegraph

Ambrose Evans-Pritchard: So we enter the treacherous market month of August with Europe in limbo. The actors wait upon each other. World finance held hostage to a fiendishly complicated game of diplomatic chess.

Draghi breaks the ultimate euro taboo – Gavyn Davies / FT

Mr Draghi could simply have repeated the old line that the operation of the Target 2 system is enough to ensure that the euro can never fall apart. By admitting the reality that the system is no longer 100 per cent credible in the eyes of the market, the ECB president has invited investors to ask whether his proposed interventions are powerful enough to deal with problem he has raised.

Mario Draghi Cannot Save the Euro – View / BB
 A broader question is what, if anything, Draghi might achieve with a looser monetary policy. The euro area has many problems, including a lack of competitiveness in the periphery, chronically poor growth in countries such as Portugal and Italy, deeply damaged public finances in Greece and Spain, and a labor force that’s not mobile enough to go where the jobs are. Which of these could be resolved by reducing interest rates across the board?

Analysis of the recent ECB press conference – Kiron Sarkar / The Big Picture

The above measures if implemented (likely), as proposed by Draghi, are bullish. Yes, there are risks, but…Indeed, I could argue that Draghi’s plan is even more important that his previous LTRO programme on behalf of European banks.

Draghi’s plan – The Economist

A lot of things have to go right for the ECB’s bond-buying plan to succeed

12-Aug

This will not be enough, Mr Draghi – Sebastian Mallaby / FT

In sum, the ECB has not quite shaken off its longstanding schizophrenia: it is bold when providing crisis loans to banks, less so when supporting sovereigns. This double standard makes no sense. Europe’s banks own sovereign bonds and its sovereigns are on the hook to save the banks, so the two cannot logically be separated.

The ‘Maturity Crunch’ – Acting Man

Central Bank Policy Implementation and the ECB's Plan * The Rollover Problem

Belgian bank governor: ECB buying Spanish and Italian debt 'makes no sense' – The Telegraph

The ECB should not buy Spanish and Italian debt because it "makes no sense" and will take away the pressure on politicians to act, Belgium's central bank governor has said.

Super Mario hopes for gold from Angela Merkel – The Telegraph

Over the past week, ECB president Mario Draghi has come as close as possible to announcing a barrage of virtually-printed money, without actually announcing it. While wanting to soothe market nerves, so allowing Europe's ruling classes to remain relaxed on their summer sunbeds, Draghi is also petrified of pushing Berlin too far and provoking an explicit Nein.

Draghi engineers August lull, but wait for September – MacroScope / Reuters

A deteriorating economy and dissipating inflation pressures may well make the ECB feel more comfortable about acting on the premise that its loose monetary policy is not feeding through to all corners of the euro zone, namely those countries whose borrowing costs remain sky high .. But not before September.

The ECB Can Save the Euro – But It Has To Change Its Business Model – INET

The ECB is the only institution that can prevent panic in sovereign bond markets from pushing countries into a bad equilibrium, because as a money-creating institution it has an infinite capacity to buy government bonds. Its infinite resources are key to being able to stabilize bond rates. This is the only way to gain credibility in the market.

13-Aug

ECB conditionality exceeds their mandate – mainly macro

to embark on unconditional and selective QE in the current situation is within the price stability mandate of the ECB. To impose conditionality in the way it is doing is not within its mandate. Unfortunately, as Carl Whelan points out, this is not the first time the ECB has exceeded its mandate. As he also says, if the Fed or Bank of England made QE conditional on their governments undertaking certain ‘structural reforms’ or fiscal actions, there would be outrage. So why do so many people write as if it acceptable for the ECB to do this?

14-Aug

ECB: No free lunch – voxeu.org

While markets have been cheered by recent ECB announcements on sovereign debt, some still question the Bank’s ability to save the euro. This column argues that the ECB is a lot stronger than many think. Linking ECB sovereign bond purchases to policy conditionality will ensure that reform efforts are sustained. The free lunch option has been ruled out – and that is a good thing.

15-Aug

The ECB's end of the bargain – Free exchange / The Economist

The inflation obsession is leaving the central bank more involved in the economy and more politically overextended than it would be if it focused on maintaining stable growth in demand.

Against Quantitative Easing by the ECB – CFA Institute

the central bank’s traditional function as lender of last resort to the banking system is meant to support banks that are illiquid, not those that are insolvent. Presumably, the ECB would likewise be a lender of last resort to governments that are illiquid—for example, because adverse market conditions prevent them from refinancing upcoming debt maturities, which is a routine procedure under more normal market conditions. The intent is presumably not for the ECB to act as a lender of last resort to governments that are insolvent

Spanish banks increasingly dependent on ECB drip – alphaville / FT

Early Retirement for the Eurozone? – Project Syndicate

Nouriel Roubini: Germany and the ECB are now relying on the hope that large-scale liquidity will buy time to allow the adjustments needed to restore growth and debt sustainability in the eurozone periphery. But, if a eurozone breakup can only be postponed, delaying the inevitable would merely make the endgame worse – much worse.

16-Aug

Charts: Europe Since LTRO2 - A Little Context – ZH

20-21 Aug

Latest ECB rumor:

ECB's Latest Deja Vu Bluff: Rate Caps On Sovereign Bonds – ZH

ECB Considers Interest Rate Caps; Can Such a Scheme Possibly Work? – Mish’s

ECB Capping Rates on PIIGS? Wait Till Traders Call Its Bluff – EconMatters

Analysts Respond To "Unsourced" Reports Of Open-Ended ECB Monetization – ZH

Bundesbank Reiterates Objection As German FinMin Refutes Spiegel Report – ZH

ECB Crushes Spiegel's "Absolutely Misleading" Monetization Report – ZH

Is the ECB Really Ready to Put on the Spread Cap? – MarketBeat / WSJ

The ECB’s interest rate threshold: sovereign bond ceiling caps – Credit Writedowns

More thoughts on yield ceilings on euro zone sovereign debt – Credit Writedowns

Bundesbank Criticizes, ECB Denies Discussion "Yet" – Mish’s

Spiegel, Buba, the ECB and a rather predictable back and forth – alphaville / FT
Capping Yields a Major Threat to Germany – MarketBeat / WSJ

Germany and ECB respond to Der Spiegel story – The Big Picture

21-Aug

The ECB to potentially target periphery yields via unlimited buying – Sober Look
Knowing that the central bank will support their nation's bonds in an unlimited fashion, periphery politicians will no longer be under pressure to implement austerity measures in a timely manner. The fiscal consolidation work will be put on a southern European timeline and the can will be kicked further down the road.

Germany backs Draghi bond plan against Bundesbank – The Telegraph

Germany’s director at the European Central Bank has thrown his weight behind mass purchases of Spanish and Italian debt to prevent the disintegration of the euro, marking a crucial turning point in the eurozone debt crisis.

Asmussen backs Draghi (updated) – alphaville / FT
As so too is this very public backing of Draghi’s putative bond buying plan: Spain managed to sell €4.5bn of 12 and 18 month paper on Tuesday — the top of the indicated range and at substantially lower yields.

The Spain – ECB Vaudeville Show – Acting Man

nice overview and good charts

22-Aug

Draghi does his best – Macrobusiness

ECB will avoid explicit yield caps, says Goldman Sachs – ASA

23-Aug

An ECB “CGBPP” – alphaville / FT

This one’s from Citi’s Global Economic Outlook for August, which dubs the expected ECB operation the “Conditional Government Bond Purchase Programme” (snappy!). Citi forecasts that  the ‘CGBPP’ will concentrate on buying T-bills. These are usually protected from losses during a sovereign debt restructuring

Studies in pre-commitmentphobia: The case of the ECB – alphaville / FT

What this meatless announcement also did was give every analyst (and ahem… blogger) something to write/speculate about in an otherwise quiet month.

ECB "May" Set "Secret" Bond Caps, Bild Says Without Citing Anyone – ZH

What it really is, is merely a last step desperation attempt by Mario to keep on talking down bond yields, since a month into his "believe me" speech, the ECB has yet to do anything, let alone secret or not so secret yield caps, let alone Spain demanding a bailout, let alone the ECB even reaching a consensus with Germany and Bundesbank both opposing any incremental money printing.

Moral Hazard? Better Than No Euro – WSJ

The ECB could well decide that it’s safer to keep Greece in the euro than use it as an example. But if Greece continues to be rescued, that will almost certainly create moral hazard.

ECB publishes consolidated banking data for 2011 – ECB

December-2011 Consolidated Banking Data (CBD), a data set that provides various indicators about the EU banking system on a consolidated basis. It includes indicators on all 27 EU Member States and the EU as a whole. The CBD are separately reported for three sizes of domestic banks or banking groups

Goldman’s Ex-ECB economist predicts euro bank bailout via unlimited ECB short-dated intervention – Credit Writedowns

26-Aug

The "revised" Eurozone chain of events – Sober Look

How many times have we seen this scenario play out? The Eurozone leadership declares that it has the ultimate solution that ends up failing at the implementation stage. This certainly feels like one of those situations. Here is the "revised" chain of Eurozone events

In ECB-time, “the coming weeks” might be more than 4 – alphaville / FT

Draghi may wait until Germany’s Constitutional Court rules on the legality of Europe’s permanent bailout fund before unveiling full details of his plan to buy government bonds, two central bank officials said. D’oh! With the court set to rule on Sept. 12, investors looking for Draghi to announce a definitive purchase program at his Sept. 6 press conference might be disappointed,

What Today's Real ECB News Really Means – ZH

The “excuse” of the ruling on September 12 only has any substance to the extent that (b) is true – that work on the design of the plan is incomplete. The idea that work “is not complete” may also be a euphemism for the fact agreement on the contours of the policy is proving elusive.

When ECB bond-buying meets collateral – alphaville / FT

Chart via Nomura’s rates strategists. It’s their version of what the plumbing of the European Central Bank’s rejigged bond purchases should look like

Interest Rate Caps vs. Bands: Can "Secret Sauce" Make a Difference? – Mish’s

Neither bands nor caps will work in practice. However, if the upper range is high enough where genuine buyers would step in on their own accord, then a cap or a band could conceivably appear to work.

27-Aug

Bundesbank's Weidmann Warns: Debt Monetization Is An Addictive Drug – ZH

Bundesbank President Jens Weidmann has strongly criticized of the plans of the European Central Bank to launch a new program to purchase government bonds. “Such a policy is for me too reminiscent of public funding via printing”

With Vacation Over, Europe Is Back To Square Minus One: Merkel Backs Weidmann, Demands Federalist State – ZH

"I think it is good that Jens Weidmann warns the politicians again and again," Merkel said. "I support Jens Weidmann, and believe it is a good thing that he, as the head of the German Bundesbank, has much influence in the ECB."

The ECB must still do its bit to help solve the crisis – Wolfgan Münchau / FT

The eurozone crisis may look less acute once the bond purchases start but we have been through phases in the past where the crisis appeared to be receding, only to come back a few weeks later. Unless the programme is accompanied by a swift move towards banking and fiscal union, it will not make a difference. And that means it probably won’t.

Merkel tries to calm storms over Greece, ECB policy – Reuters

Angela Merkel tried to calm a growing storm over euro zone crisis strategy on Sunday after the Bundesbank likened ECB bond-buying plans to a dangerous drug and a conservative ally of the German leader said Greece should leave the currency bloc by next year.

Draghi: Call Me Maybe – Marc to Market

While Spanish and Italian bonds remain firm, though without any more upside momentum, we note that the price of insurance is beginning to rise.  The 5-year credit-default swap in Spain is just below 500 bp and is at its highest level in two weeks.  Italy's 5-year CDS is near 455 bp, which is approaching a 3-week high. 

German Central Bank Opposes Euro Strategy – Spiegel

The ECB plans to resume buying the bonds of crisis-hit countries on a large scale. Jens Weidmann, head of the German central bank, is firmly opposed to the idea, arguing that it will lead to inflation and lessen pressure on governments to carry out reforms. But he is becoming increasingly isolated within the ECB and in the political world.

28-Aug

ECB's bond purchases should start with Portugal – Sober Look

JP Morgan: It really can't do too much with Greece at this point, but the central bank could focus on Portugal first. Portugal is supposedly on track with its fiscal plan (at least they have satisfied the Troika requirements). Yet the low rate policy transmission is broken, as short-term rates (as well as effective household borrowing rates) remain stubbornly high.

Lending to euro zone households dips in July: ECB – Reuters

Loans to households in the euro zone fell in July, reflecting weak domestic demand, while loans to companies ticked up only slightly, suggesting a credit squeeze persists despite ECB efforts to provide liquidity, data showed on Tuesday.

Flash comment: M3 growth could be ECB's next problem – Danske Bank (pdf)

ECB Said to Urge Weaker Basel Liquidity Rule on Crisis Risks – BB

Draghi To Miss Jackson Hole Forum; All Rumors Now To Focus On Sep 6 Meeting – ZH

Why an ECB interest rate target (or band) is not the answer – Daiwa

…with or without an interest rate target, the success and the sustainability of any future ECB interventions will ultimately depend on the peripheral governments’ ability to meet the conditionality required. The long-term future of the euro, meanwhile, will depend on the willingness of all euro area governments to embrace much closer fiscal and economic integration.

29-Aug

Germany faces some tough decisions on the ECB – Open Europe

Buba Strikes Back To Draghi OpEd With Weidmann Interview – ZH

Weidmann: The Fed is not bailing out a cash-strapped country. It's also not distributing risks among the taxpayers of individual countries. It's purchasing bonds issued by a central government with an excellent credit rating. It doesn't touch Californian bonds or bonds from other US states. That's completely different from what we have in Europe.

Policy of targeting "monetary transmission" by the ECB looks good in theory, but questions about independence remain – Sober Look

Will The ECB Buy Bonds? No Says Germany – The Big Picture

5 press article summaries with links

30-Aug

Draghi’s Master Plan Matrix – ZH

Morgan Stanley’s thoughts with charts

Draghi's incomplete vision for the future – Open Europe

Ultimately, Draghi's unwillingness to put a price tag on any of his suggestions or explain how they can be delivered in a democratic manner makes them hard to believe. The German public deserve better 'solutions' than this.

BuBa President on ECB Bond Purchases 'Too Close to State Financing Via the Money Press' – Spiegel

Jens Weidmann, the 44-year-old head of Germany's central bank, has made a name for himself by championing price stability and opposing bond purchases by the European Central Bank. In a SPIEGEL interview, he criticizes the ECB's latest plans and insists he only wants to secure the euro's long-term future.

Goldman Sachs: Three Rationales For Sovereign Debt Purchases – ZH

As a flexible and immediately available source of sovereign funding, central bank financing is a powerful tool to deal with crisis situations. But it lacks political legitimacy and can blunt the incentives for more fundamental consolidation and reform to take place, helping to transform a crisis into a chronic problem.

High gloom – The Economist

Don’t expect the ECB single-handedly to save the euro

31-Aug

The Dragometer – alphaville / FT

The game theory literature tells us that one of the ways to solve the prisoner’s dilemma is to have a credible threat in place, especially as the ECB and politicians will be playing this game an unknown number of times. But the problem for the ECB is that the threat of not intervening if the conditionality isn’t met is not credible.

Bundesbank's Weidmann Wanted To Resign Last Week, Bild Reports; Is Goldman's "Ambassador" To Germany In Play? – ZH

Bundesbank chief Jens Weidmann 'considered resigning over ECB bond buying' – The Telegraph

…considered resigning several times because of his opposition to a new bond-buying plan by the ECB but was persuaded by the German government to stay, according to reports.

2-Sep

Credit Suisse: Analysing the ECB scenarios – ZH

Our central scenario is the Compromise Scenario where the ECB cuts the Repo Rate to 50bp, keeps the Deposit Rate at 0% and revises the collateral framework. We expect little new material information on the front end SMP bond buying program. To us, this will underwhelm market expectations and will lead to a modest rally in core markets.

3-Sep

Should we worry about Target2 imbalances? Why Central Bank negative equity does and doesn’t matter – bruegel

Thus, if central bankers believe, or the public believes that central bankers believe, that a negative equity position of the central bank leads to a change in monetary policy, real consequences materialize and central bank equity matters. In that sense, Sinn has a point in claiming that Target2 assets and liabilities will lead to losses in case of a break-up. But this is more complex than simply taking the Target 2 imbalances and equating those to a loss.

ECB under pressure on bond-buying – euobserver

ECB Focus: Mandate change plus German ESM and bill issues support – Saxo Bank

European Safe Havens Bid As Big Three Questions Remain – ZH

SocGen answers: How will the ECB address seniority? When will Spain request assistance? Is the German Constitutional court ruling only preliminary?

Carpe Diem, Quam Minimum Credula Postero – ZH

The outcomes prayed for are a demand for money and a resistance to those demands.  The pleas of Spain are about to be answered; first from the ECB and then from Germany’s acceptance or rejection of the Draghi plan. The “Game of Muddle” will be ended and real answers to real insistences will be given.

A Pivotal Week for Europe's Central Bank Leader – DealBook / NYT

"Moral hazard 101" with professor Draghi – Sober Look

Traders will buy bonds just outside the three year range and wait for them to roll down the curve. They are going to capture the relatively high income as well as the capital appreciation from the rapidly declining yield as the maturity shortens with time. And once the bonds are within the range, there is a "free put option" from the ECB who will not permit yields from rising above a certain levels.

Can Draghi Be Believed? – Project Syndicate

The ECB’s latest program of bond purchases will be big enough to ensure that Draghi does not lose face. But it will not be big enough to dispel convertibility risk and hence demonstrate the ECB’s credibility as a lender of last resort. And it is the ECB’s credibility problem, not that of member states, that is the principal reason for unsustainably high borrowing costs in Italy, Spain, and other distressed eurozone countries.

4-Sep

Mildly disappointing ECB on Thursday – Nordea

“Disappoint” because details of the new intervention programme are likely to be scarce, and “mildly” because the expected disappointment seems to have become the consensus call over the past weeks.

Euroisation and de-euroisation in one handy chart – alphaville / FT
JP Morgan’s Flows & Liquidity team have compiled a composite Eurozone disintegration measure:

Financial fragmentation in many parts – alphaville / FT

the above with country-specific data, again from JPM

Restoring confidence in the euro area – qfinance

The only magic wand that anyone could wave over the current mess would be a sudden pledge from the ECB to buy as much sovereign debt as was needed to calm markets. This wouldn't cure anything, but it would "restore confidence", at least for a while. If it was allied to a sudden urge by all members of the eurozone to meld together into a fiscal union, then the magic trick would be complete. However this latter point is right up there with "pigs might fly".

The Battle Begins – Mark Grant / ZH

The rumor is that Mr. Draghi is going to propose a plan to buy short sovereign debt (0-3 years) without limit if a nation fills out the requisite form and officially asks for aid with conditionality.

Mario Draghi Reprises Hank Paulson: Demands Full Monetization Authority Or Else Threatens With End Of Euro – ZH

Mounting his strongest case yet for ECB bond purchases, Draghi told lawmakers in a closed-door session at the European Parliament in Brussels yesterday that the bank has lost control of borrowing costs in the 17-nation monetary union.

Reasons Are Justified for ECB But Will It Be Enough? – Bondsquawk

Goldman Sachs’ Huw Pill lists reasons for the ECB’s buying-spree initiative.

What Happens Once Mario Draghi Unleashes The European Creosote Bank – ZH

Eventually, however, the ECB might have to engineer a massive “Paris Club” debt renegotiation, which is how governments forgive and restructure debt owed by developing countries.

What’s Next for the ECB? – PIIE

This will be a critically important week for both the ECB and the euro area as a whole, even if there won’t be many details or explicit targets provided.

5-Sep

Bank of Spain providing emergency loans to Spanish banks; pressure mounts on the ECB – Sober Look

6-Sep

Goldman Sachs, ECB preview: Spelling out the detail – ZH

GS: We therefore foresee a “compromise” in the form of a statement that the ECB will intervene, unlimited if needed, in markets in order to keep yields in a range that is deemed as consistent with fundamentals

Devil in the details – Nordea

basically you cannot squeeze peripheral yields without raising the yields in the core markets. So THAT is how the ECB will achieve the “recoupling” of peripheral spreads with the “core”?!

ECB Preview: Draghi plan leaked – Danske Bank (pdf)

More questions pre-Draghi – alphaville / FT

The ECB’s possible Portugese gambit – alphaville / FT

JPM’s Malcom Barr is of the opinion that the ECB might just kick off its move by purchasing short-dated Portuguese sovereign debt.

Draghi, Spanish banks, and revisiting the collateral issue – alphaville / FT

Nomura: Spain is in a category of its own. While there are some outflows in countries like Portugal and Italy, the size of these outflows is not nearly as large as in Spain. On a 3-month rolling basis, Italy’s outflows represent about 15% of GDP currently, while they represent about 50% of GDP for Spain.

Financial fragmentation across the Eurozone can not be ended by extending ECB credit to periphery governments – Sober Look

Why The Market Expects The ECB To Soak Up All Remaining 2012 Issuance – ZH

It appears the S&P 500 is pricing in an increase of around USD300bn in the short-term. This USD 300bn amounts to EUR 240bn - a very special and rather too coincidental number. Based on expectations of supply, the EMU16 nations have EUR 245bn issuance remaining for the rest of 2012.

Draghi’s date with destiny – MacroScope / Reuters

Eurozone D-Day: Central bank to announce bond-buying scheme – euobserver

Biggest analyst split on ECB rate decision since euro launch – MacroScope / Reuters

ECB Today: Awaiting a hand grenade...not the Bazooka – Saxo Bank

Pre-Draghi red herrings and guesses – alphaville / FT

Viewers’ Guide to the ECB Presser – MarketBeat / WSJ

Previewing Today's Main Event And Overnight Summary – ZH

The T Report: Complaining About Free Beer – TF Market Advisors

Will Draghi Deliver or More about Modalities? – Marc to Market

ANNOUNCEMENT

ECB Leaves Rate Unchanged At 0.75% Despite Expectations Of A Rate Cut – ECB

At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.75%, 1.50% and 0.00% respectively.

Combination of US Jobs and Draghi's Broad Strokes Helps USD – Marc to Market 

OMT! – alphaville / FT

Here are the full ‘technical features’, which Mario Draghi read out at Thursday’s press conference. But three big things stick out

Draghi Says Officials Agree on ECB Unlimited Bond-Buying – BB

ECB agrees new bond-buying plan: Draghi – Reuters

The ECB agreed a new bond-buying program on Thursday to lower struggling euro zone countries' borrowing costs which would serve as a "fully effective backstop", ECB President Mario Draghi said on Thursday.

Introductory statement to the press conference – ECB

Press release Technical features of Outright Monetary Transactions – ECB

Press release Measures to preserve collateral availability – ECB 

First reaction: The ECB’s OMT monetisation is for banks as much as sovereigns – Credit Writedowns

That’s very euro bank bullish. Not for Spanish and Italian banks, mind you, because their domestic economies are in a world of hurt. But German, French and Dutch banks just got a Draghi put on their sovereign bond assets – and that’s bullish.

ECB creates a new acronym: OMTs (Outright Monetary Transactions) – ASA
besides the name, the actual plan appears to be pretty much exactly the same one as leaked.

Draghing the Devil from the Detail – MacroMan

odd differentiation of the seniority of SMP holdings and those that will be held by the new ECB bond purchase facility, the OMT… the main difference between the SMP and OMT are that the former holds a fair whack of Portuguese and Irish paper, while the latter is clearly designed primarily for Spain and Italy… ECB knows something about a potential upcoming PSI in Portugal?

ECB Press Conference – First Thoughts – TF Market Advisors

What I liked Most: Actionable * What I liked Least: Multiple Party Involvement * Pari Passu: Don’t Believe It * Conditionality: More Bark than Bite * Maturity: Typical Old School Banker * An A for Effort, a C for Execution

Draghi says nothing new – The Big Picture

Mario Draghi unveils ECB plan to save the euro – Live Blog – The Telegraph 

Draghi confirms ECB will conditionally buy bonds – Saxo Bank

Market largely got what it expected with the Draghi press conference today – but market limbo may continue after today’s response to the ECB news as biggest event risks don’t arrive until next week.

After Draghi Speaks, Euro Bears Win – MarketBeat / WSJ
With the euro now trading below where it was before it jumped on the announcement that the ECB kept its rates steady, the market is weighing what it didn't know versus what it did.

Draghi Market Response: EUR Down, Gold Down, EU Bond Yields Down, EU Stocks Down, US Stocks Surge – ZH

Wall Street Analysts Respond To Mario Draghi – ZH

Desperate Maladies Require Desperate Measures – Mark Grant / ZH 

Draghi Isn’t Winning Over Skeptics – MarketBeat / WSJ

ECB Unveils Bond-buying Program to Fight Crisis – TIME

Not too little, possibly too late – Free exchange / The Economist

If only to avoid making Germany and Mr Weidmann even more unhappy, the ECB will not aim to give peripheral countries the same borrowing rates as the northerners. As a result, its actions as lender of last resort will not miraculously restore the potency of its monetary policy.

Draghi reinforces negative correlation between convertibility risk and Rally Monkey sightings – alphaville / FT
Market reaction charts

Bundesbank Replies To The ECB – ZH

by doing everything in its power to keep yields artificially low and markets artificially high, the ECB is removing any urgency by Spain, Italy, Greece, actually scratch Greece, and all other countries with unsustainable primary and other deficits, to fix their problems.

Is the ECB bond buying a turning point in the eurozone crisis? – Open Europe

likely to prompt a positive market reaction. However, on the downside, it transfers far more risks from struggling banks and governments onto the ECB’s balance sheet, without providing any fundamental solution to the crisis. It will also be virtually impossible for the ECB to impose effective conditionality on debtor countries, meaning that the ECB can only hope that a series of unpredictable political decisions in member states will go in its favour. If not, this action could actually prove to be a disincentive for Spain, Italy and others to reform, making the crisis worse in the long-term.

ECB meeting: ECB is now waiting for Spain – Danske Bank (pdf)

EURphoria (market reaction charts) – ZH

Seniority, the SMP, and the OMT – alphaville / FT

Maybe we’re looking a gift horse in the mouth here; the OMT’s commitment to pari passu status looks pretty strong – enshrined in the legal act setting up the new bond purchases. Above all there seems to be no complicated trickery here: no use of the bailout funds to indemnify the ECB balance sheet, no restriction of buying to T-bills.

‘Super Mario’ Rides to the Euro’s Rescue – TIME

ECB plan to buy sovereign bonds of euro nations under market attack marks significant shift in policy

The ECB Hasn’t Done as Much as the Market Thinks – MarketBeat / WSJ

Critics aren't so sure unlimited bond buying is the appropriate answer to address Europe's woes. Capital Economics also doesn't think the ECB's announcements will achieve nearly as much as the Bank is getting credit for.

Markets Hub: ECB’s Draghi Unveils ‘Whatever It Takes’ – MarketBeat / WSJ

4 minute video segment

Santelli And Grant Explain The ECB Reality – ZH

pickings, a chart and CNBC video segment

Peterson’s Kirkegaard Says ECB Must Push Spain, Italy (Audio 9min) – BB (mp3)

Independent Central Banks? R.I.P. – Marc to Market

The One Chart To Explain Why Draghi's Blunt Tool Can't Fix Europe – ZH

Unemployment rates demonstrate the divergence of the region’s economies…Those economic divergences appear to have led depositors to question the sustainability of the monetary union in the absence of large-scale fiscal transfers to cushion the weakness in certain countries.

The SMP is dead. Long live the OMT – bruegel

The only question for now is whether Spain and its euro area partners will go for a full macro-adjustment or a precautionary EFSF/ESM programme. The next question will be whether Italy can do without the ECB’s OMT and its conditionality. A happy outcome for Spain would certainly be good news for Italy as well.

A Gentle Reminder Of The Effectiveness Of Prior ECB Bond Buying – ZH

Recap – Global Macro Trading

Europe looks likely to go through another ‘lost’ 5 years during which it will need to rebalance competitiveness internally. Germany’s upcoming recession appears predominantly driven by weak exports, not only to other EU countries but also to Asia. However, the low interest rates and generous social programs prevailing in Germany are likely to absorb most of the blow, so the recession will probably be shallow, similar to the US recession following the internet bubble. The recession in the periphery, however, can only get more drawn out.

Goldman's Definitive Post-Mortem On Europe' Third Bond Buying Attempt – ZH

Central Bank to Snap Up Debt, Saying, ‘Euro Is Irreversible’ – NYT

Draghi Speaks, Markets Go Berserk – Global Macro Monitor

The ECB announcement is only anesthesia, in our opinion,  but we know that markets can run and remain comfortably numb longer than you think.   We think earnings disappointments will now be the next big hurdle for equities. The big question is can the market see through them?

7-Sep
Markets Applaud Draghi’s New, Improved Kick the Can Down the Road Strategy – naked capitalism

while Draghi may have achieved what many commentators see as a firm defense, what he has constructed is the economic equivalent of a Maginot line. While it could be an effective bulwark against financial market attacks, it remains vulnerable to political and legal outflanking.

Draghi Acts: Is It Inflationary? – The Daily Capitalist

Why do they do this? Monetary inflation is the last resort of governments who are over their heads in debt. Instead of going bankrupt (there is no way we or the overindebted Eurozone countries can repay the debt) they make the debt cheaper to pay off by inflating the money supply. It’s an age-old last resort of incompetent rulers.

What’s up with the new Draghi plan? – marginal revolution

The danger is that quasi-solutions will appease all countries in the short run, not really solve the core problems, and thereby walk the eurozone further down the plank of doom.  This is the outcome I have been predicting, though it is not necessary in any logical sense.

Rally Monkey still perched on Spanish yields (market reactions) – alphaville / FT

Draghi – Krugman / NYT

So, a step in the right direction, probably enough to buy a significant amount of time, but not enough unless more follows.

Counterparties: Draghi makes his move – Felix Salmon / Reuters

OMT will work if it lower borrowing costs long enough for Italy and Spain to regain their footing.  If it doesn’t, then the risk, and losses, will have been shifted to the ECB’s balance sheet.

Is unlimited limited after all? – Nordea Bank

In conclusion then, the likely amounts involved in the ECB’s OMT programme are unlikely to be huge. Actually, the smaller they are, the better, if that means other buyers will be encouraged to build positions in bonds of the countries involved. However, it usually takes some time to win confidence back, meaning also the ECB will have to put some money behind its words.

The morning after the night before – MacroScope / Reuters

Despite all the risks, Draghi has potentially bought the euro zone a considerable period of time. If the LTRO money printing exercise delivered three months of calm at the beginning of the year, this unlimited programme could presumably buy a lot more. Governments now have to use it.

The ECB May Yet Save Europe! – Project Syndicate

ex-Moody's vice chairman: As long as the ECB continues to deliver zero growth, nothing can save the periphery because only growth can grow government revenue and shrink relative debt. The ideal policy would be unlimited spending in support of across-the-board yield ceilings, no austerity, and massive monetary stimulus in order to achieve 5-6% nominal growth. We are nowhere near that plan, which is why I am not yet converted to the bull case for Europe.

Draghi Lured by Fractious EU Leaders to Build Euro 2.0 – BB

Monti Says ECB Plan Reduces Stigma as Rajoy Stalls on Aid – BB

 

Asmussen: "hard reforms" a condition for ECB bond buys – Reuters

The ECB will only buy a euro zone country's sovereign bonds if it commits to "hard reforms", ECB policymaker Joerg Asmussen said on Friday, seeking to soothe German concerns that the central bank is embarking on a risky new strategy.

German media warns unlimited ECB aid could ruin euro – Reuters

Germany's conservative newspapers on Friday accused Draghi of writing a "blank cheque" to troubled euro zone states that could put the entire currency at risk, with top-selling Bild warning his policies could make the euro "kaputt".

Analysis: ECB sets stage for euro rescue but will Spain jump? – Reuters

Draghi has delivered a roadmap for rescuing the euro zone from potential meltdown but the onus is now on Spain to swallow its pride and apply for help to bring down crippling borrowing costs.

The weakest will win in the euro battle – FT

In the age-old battle between creditors and debtors, weak sovereign borrowers and overstretched banks more often than not triumph over financially strong creditors. Look no further than the unfolding eurozone saga for confirmation of this rule. Indeed the latest ECB initiative to buy distressed eurozone sovereign debt through so-called outright monetary transactions perfectly illustrates how the illusion of creditor power is progressively being stripped away.

Cheap ECB cash could prove to be the worst form of bailout – Open Europe

As the ECB itself knows, it’s very difficult to counter these risks. Once the ECB taps are opened, it’s incredibly hard to turn them off without causing huge market distortions and creating an even graver crisis than the one that the original intervention was meant to stave off.

Has Draghi really saved the universe? – Open Europe

(market reaction) Draghi Surge Rolls On – MarketBeat / WSJ

The ECB and OMT: OTT, OMG or WTF? – Buttonwood’s / The Economist

But we have seen in the past that the market reaction can quickly reverse. And the programme raises a number of questions.

ECB bond buying plan: S.M.P to O.M.T... easy as 1.2.3 – Saxo Bank

A Long-Term View Of Spanish Bonds – ZH

 

Teutonically unlimited – Free exchange / The Economist

Will it be enough to solve the multiple equilibria problem? Probably. Self-fulfilling defaults can only occur under this scheme if countries do not follow the reform programmes. If they do, markets can be sure that they can sell their bond holdings to the ECB. The only self-fulfilling problem left today is if markets believe that in a number of countries the reforms themselves will economically fail, and that the programme has to be abandoned because the credit risk for the ECB is too high.

On Mario’s Shock and Awe – Bruce Krasting

What Draghi did is buy some time. The only question is, “How much time?” My guess is that it will take three months before we are back in crisis mode.

From Merkozy to Draghi – Le Monde / presseurop

Draghi saves the single currency – El País / presseurop

In announcing that the ECB will buy up the debt of countries in distress, Mario Draghi is compensating yet again for the inaction of European leaders. And he is standing up again as the one who is changing the rules of the game – exactly what we needed

The independent ECB is dead – Die Welt / presseurop

The debt buyback programme announced by Mario Draghi is a sign of the European Central Bank's subjection to political power, laments the German press, which is alarmed by this new shift in European monetary policy.

When Unlimited Has Limits – Mark Grant / ZH

The World from Berlin: 'The ECB Is Doing Governments' Dirty Work' – Spiegel

The ECB's announcement on Thursday that it is prepared to make unlimited bond purchases in order to lower borrowing costs for countries in crisis could mark a turning point in the euro crisis. German commentators, however, criticize the bank for becoming a hostage to politics.

No Limits: ECB President Draghi Reaches for the Bazooka – Spiegel

Draghi has taken a bold step this week to contain the euro crisis. The ECB is now planning unlimited bond purchases in order to prevent an escalation of the euro's woes. The step marks a fundamental shift in efforts to save the common currency -- and comes with plenty of risks.

8-Sep

ECB, OMT: Nuances and Fireflies – David Kotok / The Big Picture

The newest ECB program is another “can kick.” It may buy some time. It uses monetary policy to address fiscal problems. It may delude markets, as it did in the short-covering rally. The OMT lacks headlights that could be turned on to achieve clarity. That is revealed on close examination of the nuances. Jens Weidmann is correct.

Suddenly, Nobody In Europe Wants The ECB Bailout – ZH

9-Sep

The Eurozone designs a halfway house – A Fistful of Euros

One implication is that Ireland and Portugal can’t look forward with too much certainty to full programme exit even if they perform exactly as envisaged under their programmes. Another is that the Eurozone could be running a fairly large after-care facility long after the peak of the crisis has passed.

No One Happy Except Stock Market; Discord Emerges in Spain, Italy, Germany to ECB Announcement – Mish’s

What if Spain refuses to play Mario Draghi’s game? – The Telegraph

So “Super Mario” did it. The European Central Bank president on Thursday announced “unlimited bond buying” to tame profligate eurozone members’ borrowing costs.

ECB Market Intervention– A Preliminary Assessment – Place du Luxembourg

The ECB has simply delineated the framework for crisis intervention. If it it is to activate its own lever, it will no longer do so alone. The ball is now in the camp of Member States who must request and approve assistance from and to each other. With 17 veto players and increasing mistrust and stereotyping, this will surely prove to be an arduous task. The crisis is certainly not yet over.

Bad but no bank – Fintag’s Newsletter

A short term fudge and a long term nightmare.

 

10-Sep 
Things That Make You Go Hmmm – Grant Williams / ZH

The latest edition of the newsletter comments the ECB: Draghi has temporarily released the pressure on Europe’s peripherals, but he has had to go beyond to the very edge of his mandate. What happens next is open to debate but the Eurocrats are bound to find a way to ensure we have no more than a few days of relative calm ahead of us.

A sterile landscape… – View from the Bridge

So this is just another short term breathing space to allow the PIIGS to refinance their maturing debt at less penal rates, but does absolutely nothing to solve the longer term problems of creating growth in economies stifled by ECB “conditionality”; a very sterile landscape indeed.

Super Mario’s Big Bluff – Gains & Pains

The fact that it has changed the wording around a bit changes nothing from a fundamental standpoint. Indeed, the program the ECB “announced” is, if anything, the last thing Spain or Italy actually wants.

OECD’s Gurria on the ECB’s OMT – Global Macro Monitor 

Spain and Italy mustn’t blow ECB plan – Hugo Dixon / Reuters

For now, Draghi can withstand the criticism, as long as Angela Merkel keeps backing him. But if Rajoy and Monti don’t move fast, the ECB’s magic will wear off. And if its medicine then fails, it will be hard to conjure up the political will for an even more powerful concoction.

ECB death pact good for risk (6-Sep) – James Saft / Reuters

Becoming a lender of last resort then ultimately means that the ECB enters into a death pact, a sort of mutually assured destruction, with the states it rescues, as each can bring the other down. That may make Bundesbank fears of inflation and debasement correct, even if it doesn’t make their preferred course of policy wise. For investors it comes to the same thing; for now be more comfortable with a bit more risk but be prepared for that to change. Your main insurer is committed and owns a printing press, but death pacts can and do end badly. 

Sterilisation (or not) in Brazil – alphaville / FT

The idea that the consequences of sterilisation aren’t always straightforward is well worth making and has obvious resonance in Europe right now.

New Twists in the Plot (German Court and Greece) – Marc to Market

It is difficult to imagine that German Constitutional Court would rule that the ECB's OMT violates the German constitution…decide whether to grant an injection delaying the formal establishment of the ESM and the fiscal compact, while they decide the legality of it at a future date.

Actual Constitutional Case Against OST and ESM; Why Bond Buying Undermines Democracy; Is Draghi Above The Law? – Mish’s

How Draghi opened the door to hyperinflation and denied the Fed an exit strategy – A View From The Trenches

The ECB Thumbs Its Nose At The Law – Fibs and Waves

Actual Constitutional Case Against OST and ESM; Why Bond Buying Undermines Democracy; Is Draghi Above The Law? – Mish’s

  

11-Sep

Why the ECB’s Latest Plan Will Fail – PragCap

This plan still fails to address the primary issue which is the lack of a rebalancing mechanism.   The austerity is the antithesis of rebalancing.  So while the solvency issue is being addressed by bringing private bidders back to bond markets it is almost guaranteed to be offset by the fact that these countries still aren’t going to experience growth that makes their debts sustainable.  So this crisis will flare up again at some point if a permanent fix isn’t implemented.  This latest “fix” buys them some time, but is really nothing more than a kick of the can.

Volatility and the OMT – alphaville / FT

Will the ECB support price levels from the LTRO? Also, Draghi said volatility is one factor they watch

12-Sep

Eurozone building blocks are falling into place – Gavyn Davies / FT

The ESM and the fiscal compact can now be safely launched, and any immediate obstacle to Mario Draghi’s bond buying plan at the ECB has disappeared…there may be limits to the willingness of the German political system to make the cross-border transfers which are inherent in the ESM/ECB support operations, especially if the troubled economies, following the example of Greece, fail to stick to the necessary policy conditions

13-Sep

Goldman On Spain's Tension-Inducing Arrogance – ZH

The opposition seen in Germany in response to Mr Draghi’s preparedness to buy sovereign debt implies that current posturing in Spain will not wear well with the politics of signing a Memorandum of Understanding in Germany. The more the Spanish administration indulges domestic political interests and is perceived to be taking undue advantage of external support, the more explicit conditionality is likely to be demanded.

German Constitutional Court tightens the noose yet further – The Telegraph

"An acquisition of government bonds on the secondary market by the European Central Bank aiming at financing the Members’ budgets independently of the capital markets is prohibited as well, as it would circumvent the prohibition of monetary financing."

Mr. Draghi, Mr. Arnault, and Europe’s Gordian Knot – EconoMonitor

This Gordian knot is, in turn, the consequence of two forces at the heart of the EU’s functioning—or rather, its epic dysfunctions: a creditor protection dogma and a fiscal black hole.

BofAML: The ECB OMT: End game or (some) more trouble? – ZH

The ECB has offered a seatbelt to a driver with a bad driving record, which will only work if the driver agrees to a strict monitoring of his driving. So, will the driver accept the offer in the first place? Will he change his behaviour afterwards? And if not in the latter case, is the threat of removing the seatbelt credible?

The OMT, and the plumbing – alphaville / FT

Charts on a certain broken transmission mechanism are popping up everywhere.

14-Sep

The ECB’s bond-buying plan – The Economist

Has Mario Draghi done what it takes to save the euro?

16-Sep

Has ‘Super Mario’ Really Saved the Euro? – New Economic Perspectives

So yes, the Eurozone could go on for a long time in a kind of underemployment “equilibrium” as long as the ECB continues to buy national government securities. The problem is that, while this is possible, politically the optics of this are such that the ECB cannot go on forever doing this in such an ad hoc fashion, with the ECB putting out the fires wherever there is need for increased liquidity, unless these countries trade balances reverse themselves.

Has Mario Draghi done what it takes to save the euro? – The Economist

Mario Draghi seems more sorcerer than central banker. Since the boss of the European Central Bank (ECB) said in late July that he would do “whatever it takes” to save the euro, Spanish two-year bond yields have fallen from 7% to 3%.

One-Size-Fits-All Monetary Policy: Europe and the U.S. – FED

The ongoing euro-area crisis is seen by many as vindication of skeptics who said that a monetary union encompassing a disparate group of countries is doomed to fail because the countries do not constitute what economists call an optimum currency area. Thus, they argued, a one-size-fits-all monetary policy that goes with participation in an alliance such as the European Economic and Monetary Union (EMU) creates strains that ultimately prove insurmountable.

The bond market consequences of Mr Draghi – bruegel

Draghi’s announcement of new OMT has impacted the pattern of yield curves substantially, with a downward shift for both short-term and long-term maturities, particularly marked for Spain.

17-Sep

Finance Industry Warns of ‘Cliff Effect’ in ECB’s Bond Plan – BB

Discussion of 2011 Review of Conditionality – IMF

2011 Review of Conditionality - Overview Paper – IMF

Why did I include these? Conditionality will be the key to Spanish aid (of course it will end up like Greece, with constant games of chicken, but at least in the beginning this is the playbook).

18-Sep

The OMT and ‘limits’ – alphaville / FT

“We will only buy the debt with the remaining maturity of three years and part of the conditionality will be that the maturity structure of the debt may not change so that they (governments) cannot put all the new debt in the short end of the market,”

QE3 and OMT: No panacea but window of opportunity! – Saxo Bank

Three big open issues: Fiscal cliff, US financial regulation, Eurozone

When Money Dies – ZH

Bob Janjuah / RBS: The Fed and the ECB are directing and attempting to orchestrate the grossest misallocation and mispricing of capital in the history of mankind.

Draghi Euro Humbles Thought Leaders Seeing End of Union – BB

Longer feature article – ok outline of the game.

19-Sep

Central bank action is work of the devil, says Germany's Jens Weidmann – The Telegraph

The head of Germany’s Bundesbank has raised eyebrows across Europe after he appeared to compare Mario Draghi’s bond buying programme with the "devil’s work".

Faust and the German aversion to debt – alphaville / FT

Weidmann didn’t directly discuss the ECB or the OMT during his speech on Tuesday — but the message seemed pretty clear.

The Five Key Differences Between The ECB's OMT And The Fed's QEternity – ZH

Morgan Stanley: Fed’s program already running, different instruments, ECB sterilized, conditionality, ECB violating its mandate.

Why Spain Will Seek Help—and Why the ECB Retains Its Leverage – PIIE

First, recall that the ECB was more than willing in November 2011 to cut Prime Minister Silvio Berlusconi of Italy loose and deny him securities market program (SMP) support because of insufficient progress on reforms. Its action set a precedent for even large euro area member state governments. Second, unlike the case of Lehman Brothers and other systemic banks, large industrial countries do not go bankrupt overnight. Rather they run the risk of sliding into it over time.

 

 

 

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