We have another week where the speeches at a national convention won’t be the most important in the context of the world economy. The European Central Bank meets this week amid high expectations that they will take action to finally arrest the unusually large bond yield price spikes from troubled Eurozone sovereigns like Spain and Italy. Shares in European stock markets drifted higher in anticipation of the announcement of a program to purchase bond debt from those countries and push the yields (costs of borrowing) lower. However, that may not be part of the initial announcement this week:
Europe’s markets have oscillated recently as speculation over whether or not the ECB will go ahead with a bond-buying plan to help struggling economies such as Spain and Italy with their borrowing costs.
Despite ECB president Mario Draghi’s willingness to do “whatever it takes” to save the euro, a growing number of critics have been voicing opposition to bond-buying plans. Over the weekend, Germany’s Economics Minister threw his weight behind Jens Weidmann, the head of the Bundesbank, who has likened bond buying to a drug.
ECB interest rates remain above the zero lower bound, so as a compromise policy, we could merely see a rate cut, with some musing about a bond purchase program down the road. This would likely disappoint financial markets and lead to mass sell-offs.
The problem appears to be the need for ECB President Mario Draghi, seen as committed to the bond purchase, persuading his colleagues at other Eurozone central banks to go along with the idea. Anything that shows wavering on the commitment to keep those bond prices low, any indication that the northern central bankers have the upper hand on Draghi, will send markets in Europe into a tailspin.
Mr. Draghi is thought to have the support of most of the council’s 23 members. But he must contend with stiff and vocal resistance to bond buying from Jens Weidmann, the president of the German Bundesbank.
The Bundesbank declined to comment Friday on a report in Bild, a German newspaper, that Mr. Weidmann had even threatened to resign in protest over the bond buying, a course of action that has become something of a tradition among disgruntled German central bankers [...]
While Mr. Weidmann has been the only member of the governing council to object publicly to bond buying by the central bank, some others are likely to share some of his concerns. That group probably includes Yves Mersch, governor of the Central Bank of Luxembourg, and Erkki Liikanen, governor of the Bank of Finland. Spokesmen for the two men declined to comment.
Already, the dissenters have forced Draghi to potentially scale back the asset purchases and confine them to short-term debt. The result is predictable: 2-year yields in Spain have dropped while the 10-year bond has risen. This creates a ticking clock for countries like Spain to make controversial labor market and fiscal changes. Spanish Prime Minister Mariano Rajoy is being told that he must allow conditions on an ECB rescue. And I don’t think Draghi is necessarily being forced into keeping a stable whip hand. Indeed, Draghi has said that the bond intervention wouldn’t occur for weeks, and that sovereigns desiring the purchases would need to ask the new Eurozone bailout fund for aid. (A German constitutional court must clear the way for that bailout fund, the European Stability Mechanism or ESM, in a ruling on September 12.)
Clearly the need for rescue in Europe remains, despite a quiet summer. Manufacturing continues to plummet, and the economic malaise has started to effect even strong northern countries like Germany. Other institutional actors have begged the ECB to make their move.
So the technical aspects of the deal seem to me less important than whether Draghi will commit the ECB to some action to guard against runaway debt financing. Keep in mind that this is a temporary solution to an embedded trade imbalance topped by an economic crisis. As we have seen in the United States, central bank purchases alone won’t do much for the economy. Credibility and commitment matter more. With Europe’s lack of consensus over that commitment, I imagine they will continue to struggle on the monetary front.
The ECB announcement will come Thursday.




4 Comments

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More ECB or ECB sponsored borrowing by weaker member countries will not solve the problem. After all the problem is too much debt. Now I know it is widely assumed that printing money is costless and that they can print again, and again, and again, to buy more sovereign debt so the countries can keep paying off their old debt, with a sliver left over for actual spending but be honest with yourself. Name on European or Engish speaking nation in the world that has produced growth, of the GDP kind, the last 5 years which was not dependent upon government borrowing and spending. No nation, not a single one is anywhere near the ‘organic’ self reinforcing growth of everyone’s daydreams.
With that record are you willing, with a straight face, to predict such ‘growth’ is right around the corner? Besides which, liberals and progressives used to dismiss most of this ‘growth’. So why now are they all in on ‘growth’. Well to win an election I suppose, but then what. Will the rule of law begin to return? Ha.
This terminology is offensive to me. How can the ECB “rescue” anyone?
The only way any of these corrupt banker puppet states will be “rescued” is if they tell their bond holders to eat it and write off all the debt. Piling more fake, no-collateral debt on to them isn’t going to “rescue” anyone.
Central banks printing money for the political class – ah, so many examples from history to show us how well that works out. The wiser know this is the last stage of an untenable credit bubble.
I don’t really think this is about growth. It’s about financing and trying to keep interest rates in check.