by Tyler Durden
August 01, 2012
Back in March we wrote "Mario Draghi Is Becoming
Germany's Most Hated Man" for one reason:
a few months after the former Goldman
appartchik was sworn in to replace Trichet with promises he would not
"print" Draghi did just that in a covert way via $1.3 trillion in LTROs,
that immediately hit the economy and sent inflation across Europe
We said that:
"Slowly but surely the realization is
dawning on Germany that while it was sleeping, perfectly confused by
lies spoken in a soothing Italian accent that the ECB will not print,
not only did Draghi reflate the ECB's balance sheet by an unprecedented
amount in a very short time, in the process not only sending Brent in
Euros to all time highs (wink, wink, inflation, as today's European CPI
confirmed coming in at 2.7% or higher than estimated) but also putting
the BUBA in jeopardy with nearly half a trillion in
Eurosystem "receivables" which it will most likely never collect."
It now appears that the simmering hatred between
the two is about to upshift to a whole new level, with the threat of open
escalation finally arriving.
Because if Sueddeutsche Zeitung is correct, via
Reuters, in precisely 12 hours, Draghi will proceed with a plan that has
neither Germany's nor Buba's blessing, in the process effectively isolating
the only remaining solvent country in Europe, and its de facto paymaster,
and forcing Germany to take a long, hard look at the exit sign (which,
however, as reported earlier, with each passing day that drags Germany's
economy is becoming less of an unthinkable outcome).
"Draghi is planning concerted action using
both the ECB and the future euro European Stability Mechanism (ESM) to
purchase sovereign debt from Spain or Italy in order to help push down
borrowing rates for those two countries."
There is one problem:
"highly doubtful that the German government
would agree to Draghi's approach. The Bundesbank also is likely to
reject the idea, the paper added."
In essence what Draghi will do tomorrow is what
Monti did a month ago when together with Rajoy, he presented Germany with
one option, and would not back down else risk disintegrating the Eurozone.
Merkel then took the diplomatic way out and
pretended to agree that the ESM would lose its seniority status, something
which as Finland confirmed today, never actually happened after the Nordic
country said the ESM still and will always have explicit seniority status.
The problem however is that the June summit was political theater.
What happens tomorrow will have all too real
consequences if and when Monti injects another €1 trillion into the economy.
How soon afterward can Germany again expect to
once again pay a record amount for a liter of unleaded. And how quick until
the latest iteration of attempted inflation fizzles and has to be replicated
with a €2 trillion bond monetization episode. Then €4 trillion. Then €8.
You get the picture.
More from Reuters:
which doesn't tell us anything really new, but merely
confirms (allegedly) that Draghi will indeed openly go where so few have
gone before - openly against the will of Germany, its Chancellor and banking
head, Herr Weidmann:
The ESM would purchase sovereign debt in
smaller amounts directly from both countries while the central bank
would resume its purchase of debt in the secondary market, the daily
wrote in an advance released on Wednesday evening. The Bundesbank has
opposed further ECB debt purchases.
The ECB Council will meet on Thursday and the Sueddeutsche Zeitung said
it looked like a majority was emerging in favor of the ECB resuming its
purchases of sovereign debt. It added there will most likely not be any
official decision on such a measure.
The ECB's role would be a stopgap until the ESM
is approved by the German constitutional court. Which it very way may never
There is a greater likelihood that Draghi
will spell out in more concrete terms what he said last week - that the
ECB will do everything within its mandate to support the euro, the paper
said. A final decision is not expected until after Sept. 12, after the
German Constitutional Court rules on the ESM.
The daily said Draghi's plans could lead to the ESM taking part directly
in the auctions of state debt by those countries affected, leading to a
reduced interest rate for the auction.
The ECB's task would to be to work before the auctions to push the
interest rates down to an acceptable level and to keep them fixed at
that lower level for the longer term.
The delusion continues because not only have we
shown that the impact of
each SMP episode is weaker and weaker, but that
absent the ECB officially denouncing its senior status, and thus fears of
bondholder subordination, the ECB will achieve absolutely no incremental
interest in bond purchases by private investors who are convinced both Spain
and Italy will conclude merely as yet another Greece.
Sueddeutsche said it is hoped the plan would
restore private investors' confidence in the bond market. The ESM would
probably only have to allot
relatively small sums of money for this or could bow out of bond
auctions at the last minute if the interest rates had fallen to an
Finally and most crucially:
The daily said it was at the same time
highly doubtful that the German government would agree to Draghi's
approach. The Bundesbank also is likely to reject the idea, the paper
And with that the open warfare between the ECB
and Germany will begin. The only question remaining is does Draghi, even if
he is truly merely a figurehead for Goldman, really want to launch all out
war against Germany?
Especially with his office located in downtown Frankfurt.
Oh, and don't call him Super Mario any more. The proper prefix now is
Then again, just like today's violent disappointment by the Fed, all of the
above could be merely well positioned media propaganda, and the reality is
that Draghi will do absolutely nothing.