Yesterday I noted what a consequential week this would be for the European economy, as the European Central Bank prepared to make its decision on how to deal with soaring bond yields in Italy and Spain. ECB President Mario Draghi let some of the cat out of the bag yesterday, hinting that the central bank would purchase short-dated sovereign debt instruments from those nations.
European Central Bank President Mario Draghi told lawmakers he would be comfortable buying bonds with maturities of up to about three years, said Jean-Paul Gauzes, a member of the European Parliament.
Purchasing short-dated bonds doesn’t constitute state financing, Draghi said during a closed-door parliamentary session in Brussels today, Gauzes told reporters afterwards. “He thinks it’s not a violation of the treaty and you can do it under the current legal framework,” said Gauzes, a French Christian Democrat. “He said for example three years is ok, 15 years no.”
The euro rose against the dollar after the comments, which indicate Draghi may be in a position to announce details of the ECB’s new bond-purchase program after policy makers meet on Sept. 6. The European currency jumped more than a quarter of a cent to $1.2611 and traded at $1.2599 at 7:27 p.m. in Brussels, up 0.2 percent on the day.
Draghi said on Aug. 2 that the ECB was working on a bond-buying program to lower yields in countries such as Italy and Spain as long as they also ask Europe’s rescue fund to buy their debt. Germany’s Bundesbank opposes government bond purchases and the country’s constitutional court won’t rule on the legality of the permanent fund, the European Stability Mechanism, until Sept. 12.
This is all coming together. Agreeing to purchase bonds of any maturity is a step beyond what the ECB has allowed themselves previously. Even at three years, it will help finance the state. So Draghi finding a loophole, saying that buying the assets constitutes “ensuring the transmission of monetary policy,” means that the bond-buying is likely to take place after the September ruling in Germany on the ESM.
However, Spain and Italy will have to beg the ECB for the privilege. Or, maybe not. Maybe just the indication that the ECB will act is enough to keep those short-term debt yields very low. In fact, the yields have been dropping dramatically ever since the news of the bond-buying program leaked out. Draghi may not have to buy anything at all; he may just do enough by indicating his commitment to the purchases. That would probably be his preference, if he didn’t also want to pull off a fiscal policy coup by forcing Spain and Italy into the euphemistically titled “labor market reforms” that would crush their unions and probably reduce wages. So intention without action isn’t only the best case for reducing risk on the ECB’s balance sheet, it’s the best case for Spanish and Italian workers.
Draghi has to iron out a few details, like whether he will insist on a cap on the spread between the rate of yields on Spanish or Italian debt relative to more stable German debt. But he’s clearly going to signal a willingness to act. Since we can expect a lag time before buying of a few months, this is actually a pretty decent test case as to whether it only takes communication to have a functioning monetary policy.




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Purchase that short term debt, securitize it. Rate it “Triple AAA,” then sell it to the world? Dumb……
Why not just cancel the debt all together. Here in American we can cancel Egypt’s debt to America for political purposes while we slice dice and rape Americans seeking an education, via student loans, while corporations bankrupt themselves to negate pensions and benefits contractually obligated to pay as: compensation for work, then send jobs to China????
This is not Capitalism. Its entitled “Corporate Sodomy 101.” Why not enable the money addicted corporate fascists here and abroad more?
Jefferson vomits on this rancid lot of human excrement….
Wouldn’t the ESM have to be in place in order to secure the bonds? Maybe Draghi figures (already knows?) the German court will relent on 9/12.
If they don’t relent, Draghi could say he had just been “poised” and get back to his knitting. We’ve heard such before.
Won’t be good enough. Real problems cannot be solved by threatening to solve them in the homes that people will take you seriously.
If they do this, they’re just kicking the problem down the road.
Now, if they remove the short term limitations and make a move large enough to hurt the speculators there might be some hope.
Boxturtle (Paging The Confidence Fairy! Please pick up the white courtesy phone!!)
I bet Bernanke wishes he had such power.
correct.
Draghi must no longer be welcome in his own nation. Italy has one of the largest caches of gold in the world, and could easily back their new Lira with substance instead of raping eveyone in their nation by following along with the eurodeath spiral. All the money they take from the people goes to finance broken banks. None comes back for the populace. Greece is worse off. They spent all their money on arms for their less than enlightened military.
This is not sustainable. Berlusconi will be back shortly and tell Europe to screw off. Italy doesn’t need them and can be a major success going their own way.
cogitate this; Club Med provides the food for the nordic nations that have need for vitamin C and fresh food that grows in dirt. All northern dirt is frozen and you can’t grow the things modern nations consider breakfast. If food suddenly goes up another 50% like it has in the last couple years, the Club Med is going to make northern Europe pay through their nose in retribution for the humiliation and destruction of entire nation states that were supposed to be allies.
War is going to be hard to avoid with the bad blood of having an american financial organization controlling most of the countries with technocratic/oligarchic appointed rulers. Goldman did not ride to the rescue. They rode in with Gucci carpetbags.
We need only wait to see what elements make up the fuse and which the spark.
Here is a blog by Patrice Ayme at
http://patriceayme.wordpress.com/2012/08/24/currency-crisis-in-a-nutshell/
In the comments Patrice says;
FIAT currency is all about military power, and the willingness and capability to use it decisively INSIDE out. That’s why France, Germany and the USA have negative or very low interest rates. Nobody doubt that, if push comes to shove, these countries will use military force to set things financial right.(Or at least France and the USA will, and the German dobberman will follow…)
T bill investors trust that there will a USA or French money tomorrow, come what may… That’s what is meant by the safest…
Between the lines in what I said about Rome, was the fact, that Rome was incapable to use military force against her own plutocrats. Why?(my computer is refusing to type the interrogation sign… I am waiting for windows 8 to buy a new one…)
Because starting when Tiberius allowed plutocrats to default and then replenished them (just as ‘we’ did in 2008), the plutocrats were really in command. The emperor was really ‘first’ among plutocrats.
The Franks had no such qualms. Per the nature of the Imperium Francorum, new men (or women!) were coming to the fore, all the time, and thanks to military prowess, not fortune. So Charles Martel nationalized the numero uno plutocratic organization, the catholic church… To pay a vast army for the destruction of the Muslims invaders, something that Rome/Constantinople had proven unable to do…
When the Frankish government was saying such and such a coin was worth such and such, so it was. And only the government created money. Others who tried were, by law, boiled. ALIVE. So they could meditate upon the error of their ways, and beg for mercy.
HMMM… Maybe such is the solution of the banksters’problem: boiling…. That would be more constructive than steaming with rage…
Inflation is confined to financial derivatives and the like. And the more those inflate, the more the rest of the economy deflates… even Krugman has no understood that one… Or maybe does not want to… Lest he thinks lowly of his Pluto friends…
PA