On Mario’s Shock and Awe
Courtesy of Bruce Krasting
Mario Draghi has achieved the impossible. A recap of yesterday’s momentous developments:
– Mario was able to maintain “Radio-Silence” on the key elements of the plan he unfolded. As a result, he achieved tactical advantage when he unveiled his bold proposals. The global capital markets were both shocked and awed, and responded with unbridled enthusiasm.
– Draghi has presented a well thought out proposal. It addressed all of the issues that the markets and politicians were worrying about:
A) To appease the concerns of the citizens of Germany, Netherlands, Finland etc. the ECB support plan has stiff conditionality. This important step will, no doubt, assuage any concerns those citizens may have that their tax dollars might be at risk.
B) Mario was decisive. He did not fire a bazooka, he did not fire a howitzer. He fired the most powerful weapon known to a Central Banker. He said the “U” word. Unlimited market intervention was promised. With this one word, Draghi has eliminated any uncertainty on the outcome of the Euro and the EU.
C) Draghi boldly addressed the issue of subordination that has vexed the EU bond markets. The issue no longer exists. All sovereign bonds outstanding will now be treated the same in the event of default. There will be no “preference” provided to the bonds Draghi will buy in the market. Clearly, Mr. Draghi’s prior experience with Goldman Sachs has paid off. His knowledge of the capital markets, and the “creativity” that comes from being an ex. Goldman banker, has given him the insight needed to eliminate the subordination issue.
D) Mario changed collateral requirements that will unglue the EU funding markets.
E) In a brilliant move, Draghi placated those old curmudgeons at the Bundesbank who have expressed concern on the inflationary front. Any bond purchases that the ECB makes, will be immediately sterilized. This single step eliminates the possibility of any inflationary consequences.
F) Taken together, the measures initiated by Draghi will allow the ECB to fulfill its promise of eliminating any impediments for monetary policy to be successfully “transmitted” to both Italy and Spain. The low interest rates in Germany will now be available to the citizens of the EU southern countries. The cheap money will fuel a broad based economic recovery.
So, do you like that rundown? That is the way the Draghi presentation is being spun by the media. More importantly, that is the way the market is “reading” the ECB actions. I think it is a complete crock-of-shit.
