Super Mario’s Big Bluff
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The financial world has entered a new state of mania with the announcement by the ECB that it will engage in “unlimited” bond buying to maintain lower interest rates for trouble EU sovereigns.
As you no doubt know, our firm’s forecast was that the ECB would not engage in any large-scale bond purchasing programs. We maintain this view today regardless of the ECB’s announcement.
The ECB stated very clearly that new bond purchases would only be made under strict conditions. Those conditions involve:
- Applying for a bailout from the EFSF
- Meeting fiscal budget requirements
- Implementing major spending cuts and various other austerity measures
If this list sounds rather familiar, it’s the exact formula the ECB has used on Greece with absolutely abysmal results. And now the ECB is going to apply this failed approach to the EU as a whole?
Let’s cut through the BS here. The use of the word “conditions” completely negates the word “unlimited.” Saying that you’ll buying “unlimited” bonds as long as EU sovereigns meet certain “conditions” actually means nothing. Greece has received over €200 billion in bailouts under “conditions.” How did that work out?
So the ECB is not actually announcing a massive new bond-buying program. Instead it’s just announced that it’s willing to provide more money as long as EU nations hand over their fiscal sovereignty and implement austerity measures.
This is nothing new. In fact, this has been the exact same program that the ECB’s had in place ever since the EU Crisis began in 2010. The fact that it has changed the wording around a bit changes nothing from a fundamental standpoint. Indeed, the program the ECB “announced” is, if anything, the last thing Spain or Italy actually wants.
Spain already has an economy that is bordering on a Greece-like disaster. And this is before implementing any real austerity measures of note. So the likelihood that Spain will actually go for any of the ECB’s “conditions” is remote. Indeed, Spanish politicians have shown that they want their funding “unconditional.”
Spanish PM Rajoy challenges the European central bank and Germany
Spain will consider seeking extra aid from Europe on top of a 100 billion Euro rescue of its financial sector but does not see any need for new conditions, Prime Minister Mariano Rajoy said in an interview published in European newspapers.
That one paragraph says it all: give me more money with no conditions.
This is coming from a man who demands €100 billion in bailout funds, threatens to blow up the EU, and then goes to watch a soccer match once he’s got the money.
This attitude as it appears to be endemic for Spanish politicians:
Catalonia asks for €5bn bailout from Spain
Spain's north-eastern region of Catalonia, which represents around a fifth of the country's economic output, will tap a state liquidity facility for just over €5bn, a spokeswoman for the region's economy head has said.
We will not accept political conditions for the aid," she added. Of Spain's 17 regions, Valencia and Murcia have also said they would need recourse to the fund.
Again, give “me more money with no conditions.”
In closing, the new ECB program will ultimately prove to be Mario Draghi’s big bluff. By presenting an old, failed program as something “new” and “unlimited” in scope, the ECB has actually shown that it’s essentially out of firepower.
Indeed, consider the following…
The ECB says it will buy EU sovereign bonds if EU nations apply for bailouts from the EFSF. Spain and Italy (the very countries that need bailouts) are meant to supply 30% of the EFSF’s funding.
So this new program involves Spain and Italy bailing themselves out, while simultaneously implementing austerity measures so the ECB will buy their sovereign bonds?!?!
Oh, and by the way, the EFSF only has €65 billion in funding left. That will definitely be enough to bailout Spain and Italy, seeing as Greece has received over €200 billion in bailouts is still imploding.
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