No Functional Miracle Weapons To Fight The Debt Crisis

Wolf Richter's picture

Wolf Richter

It must be infuriating for Mario Draghi, the hapless President of the European Central Bank, to see how masterfully the Fed and the Bank of Japan control their respective credit markets, how they manipulate them for the benefit of financial institutions, and how they’re allowing their governments to run up huge deficits—huge by European debt-crisis standards—and fund them at near zero cost, or below cost when adjusted for inflation. And that at the expense of entire classes of investors, savers, and people who are struggling to make ends meet. Financial repression is the term. But Draghi just doesn’t seem to be able to wrap his arms around it.

In his bailiwick, sovereign bond yields are negative at one end of the spectrum and junk-bond high at the other. Some countries, such as Greece, lost access to the markets; risk premiums had gotten too high. But the markets turned out to be correct: Greece defaulted and left behind balance-sheet wreckage across much of Europe.

By contrast, the Fed’s manipulation of the credit markets has extended thousands of miles across the country as far as California, which, like Greece, ran out of money. But instead of defaulting, it printed $2.6 billion in nice-looking IOUs in 2009 and sent them out as payment. The Fed flooded the markets with more money, which had to go somewhere, and some of it went west, so that even California was able to borrow itself out of its budget-deficit hole. That’s how a real central bank manipulates even the nether regions of its credit empire.

Draghi is livid. Certain areas of the Eurozone credit markets have escaped his control and have returned to the primordial state of a free market where participants, not central planners, negotiate prices and yields based on perceived risks. Which, as cynical tongues might say, is the definition of a sovereign debt crisis.

So on Thursday, Draghi will make another effort to gain control over uppity sections of the Eurozone credit markets. Expectations are enormous that he’d yank out a miracle weapon to fight the debt crisis; after all, he’d promised to “do whatever it takes to preserve the euro.” And he does have some weapons in his armory.

He could pull out another Long Term Refinancing Operation (LTRO), similar to the ones late last year and earlier this year, when the ECB had handed €1 trillion in ultra-cheap three-year loans to the banks, which then bought Spanish and Italian government bonds that are now decomposing on their balance sheets. Unlikely that this will be tried again anytime soon.

He could lower the quality of assets the ECB accepts as collateral. But it’s practically accepting old bicycles already, though it finally stopped accepting Greek debt, which is worth even less than old bicycles.

He could lower various rates, but they’re already near zero, or at zero, and lowering them will have minimal impact other than disrupting money markets even further.

He could print money and buy sovereign bonds in the secondary markets, similar to the program last year that left €211 billion of bonds to rot on the ECB’s balance sheet, a practice it abandoned in March after stiff German (and other) opposition; it violated the treaties that prevent the ECB, in theory, from funding government deficits.

Or he could promote a banking license for the bailout fund ESM. Ah-ha! A way around the pesky treaties. A panacea.

A banking license would allow the ESM to borrow unlimited amounts from the ECB and then use that money to buy sovereign bonds of debt-sinner countries. A perfect fig leaf for the ECB. It wouldn’t fund governments directly, but via an intermediary. Another trick in a long series to finagle a way around the treaties that form the foundation of the EU. The cost would be inflation and devaluation, not from one day to the next, but insidiously, quietly, year after year. Yet, a banking license would be “whatever it takes to save the euro.”

“‘Whatever’ means ‘whatever is authorized,’” said Chancellor Angela Merkel’s spokesman Geörg Streiter. And “a banking license for the ESM is absolutely not part of our projects.” While Merkel stated repeatedly that she’d do “everything” to protect the Eurozone, she didn’t offer a list of what “everything” would include. But it won’t include a banking license. Finance Minister Wolfgang Schäuble brushed it off. And Vice-Chancellor and Economy Minister Philipp Rösler summarized it: “The Chancellor, the Finance Minister, and I agree that a so-called banking license for the ESM cannot be our way.” Germany, he said, wouldn’t “want to take the road to an inflation union.”

So Draghi won’t have a functional miracle weapon. He’ll have to make do with words, and they will be designed to manipulate the markets, and they will be full of promise and stimulate phantasies, as if words could solve a debt crisis, or the birth defects of the Eurozone.

Nevertheless, hope persists that Germany would not only tolerate the Fed-ization of the ECB but also bail out Spain and the rest of the Eurozone. Yet, Deutsche Bank, Germany’s de-facto vice-ministry of finance whose CEO serves as éminence grise behind elected officials, well, that venerable institution at the core of Germany Inc. appears to be closing the book on Spain. Read.... Is Germany Preparing for a Spanish Default?

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Nachdenken's picture

There is always a hidden agenda, and here Draghi is probably acting for and behalf of  the old Goldman network. Draghi is the pawn drawing the other pieces into play.

engineertheeconomy's picture

Bullets, Beer and sexy ass Bitches

El's picture do these folks sleep at night. Are the money and power such a draw that they would willingly give up peace of mind, or do they simply not care what happens? Who would even want their jobs?

disabledvet's picture

great on. "one big happy family"...or at least the EZ will try and appear as such. tomorrow will be a truly fascinating day....and perhaps momentous for a multitude as well. "something happens" whether or not "something get's done." i understand the offense at "Central Bankers everywhere going limit down on the debt markets." It is their job however...and no they are not working for their toadies on Wall Street. They have never worked for their respective governments more now than ever...insofar as the USA and Japan are concerned. "Europe" is a tough nut to crack. Simply don't understand what the German hubbub is about. Greece going bankrupt is the WORST POSSIBLE OUTCOME. Look at how much money a Government wastes to begin with! "Your best business partner ever is now no more" Germany!

lasvegaspersona's picture

While many may pity Draghi for his inability to mimic the Bernack there have to be some who are pleased with his limited reach. Savers for instance. those who would like the currency to be stable and to maintain price stability. Also maybe a few countries considering which currency they might best hold their oil wealth in.

The Euro sure is better behaved than the dollar and I'm guessing that unless the Saudis go all in for gold that in the long term the Euro will edge out the dollar for what goes into their piggybank.

Stuck on Zero's picture

My plan is for the ECB and the Fed to pay off the small savers, take over the banks, and hit reset.  All done.  No more money for the governments.


Wave-Tech's picture

Wouldn’t it be nice if we could round up all the criminals, toss them in jail, and throw away the keys?

Nage42's picture

There's a book called Brutal Orbits, which was based on the theme of criminal expulsion, where ultimately rehabilitation and reintigration is the only solution, so I side more with the idea of full retroactive claw-back and permajob at civic duty or some other McJob.


LowProfile's picture

I vote for McJob.

24/7/365/rest of their natural life.

LawsofPhysics's picture

Default already. None of the debt is going to be repaid, especially since fraud is the status quo.

q99x2's picture

It is high time Germany establishes its own army or at least a Departement of Fatherland Security to round up the banksters.

engineertheeconomy's picture

I like the Icelandic model, however the Iranian model might actually be superior

FieldingMellish's picture

Merkel is not in control. The control lies with the banking cartel. Anything else is an illusion for the masses.

lewy14's picture

A banking license for the ESM must be denied until the ESM is made operational and funded.

Then and only then will it get the banking license - as a crisis response, of course.

Dip and rip. 

Jefferson's picture

There is no way Germany will agree to anything approaching a full transfer union until such time as all of the PIIGS have agreed in writing to hand over total sovereignty over fiscal matters to the bureaucrats in Brussels. That is the price of admission.


disabledvet's picture

they're crazy not to. hell they "threatened invasion if borders were closed"!

Peter Pan's picture

The only functional weapon to fight the debt crisis is for Europe to pool its 11,000 tonnes of gold holdings and substantially revalue them by perhaps six-fold. This will enable write-offs to be taken and recapitalisation of banks to proceed. Ownership of the banks must however revert to the nation.


Patriot Eke's picture

Ownership of the banks must however revert to the nation?  That wouldn't change anything.  It's a cartel and globally controlled whether the illusion is given that the nation state controls it or not.  Unless you mean like Andrew Jackson killing the banks, changing ownership will not help.

LawsofPhysics's picture

Well then, let's hope it is the "killing the banks" option.

LowProfile's picture


The only functional weapon to fight the debt crisis is for Europe to pool its 11,000 tonnes of gold holdings and substantially revalue them by perhaps thirty six-fold.

Fixed it.

Although fifty-fold would be more decisive.

GeezerGeek's picture

If only we could convince Europe to do this today. I was just about to go outside to fix my 14-yr-old car. I'd much rather go buy a new S-class Mercedes for pocket change.

Ghordius's picture

peter pan, lowprofile, the ECB does not have this prerogative. you are talking about what the global reserve currency could do, and the ECB then mirror. we are not there, yet, and it might take much longer than expected to reach that moment...

as a rule, a central bank supports it's fiat with gold only when no other option is left for it's trade flows to continue

LawsofPhysics's picture

We are getting close.  Moreover, OIL is the other reserve currency.  Has been for quite some time now.

Peter Pan's picture

Gold can wait for its revaluation. But can the world's economic system and the people who rely on it for survival wait forever for this to happen?

AldoHux_IV's picture

Shifting the risk from one rug to another works... until it doesn't as sooner or later you can't sweep any more crap under the rug.

imbrbing's picture

They will just make US buy a bigger rug for them.