Draghi Knows Narratives Are No Longer Enough, But "There Are No Easy Choices Here"

Tyler Durden's picture

Submitted by Ben Hunt of Salient Partners Epsilon Theory blog,

"He's dreaming now," said Tweedledee, "and what do you think he's dreaming about?"
Alice said, "Nobody can guess that."

"Why, about you!" Tweedledee exclaimed, clapping his hands triumphantly. "And if he left off dreaming about you, where do you suppose you'd be?"

"Where I am now, of course," said Alice.

"Not you!" Tweedledee retorted contemptuously. "You'd be nowhere. Why, you're only a sort of thing in his dream!"

"If that there King was to wake," added Tweedledum, "you'd go out — bang! — just like a candle!"

Lewis Carroll, “Through the Looking Glass” (1871)

Never trust the storyteller. Only trust the story.
Neil Gaiman, “The Sandman, Vol. 6: Fables and Reflections” (1994)

He felt that his whole life was some kind of dream, and he sometimes wondered whose it was and whether they were enjoying it.
Douglas Adams “The Hitchhiker’s Guide to the Galaxy” (1979)

In dreams begin responsibilities.
W.B. Yeats “Responsibilities” (1914)

What happens to a dream deferred?

Does it dry up
like a raisin in the sun?
Or fester like a sore --
And then run?
Does it stink like rotten meat?
Or crust and sugar over --
like a syrupy sweet?

Maybe it just sags
like a heavy load.

Or does it explode?
Langston Hughes, “Dream Deferred” (1951)

We’re all familiar with the Queen of Hearts from Alice in Wonderland, less so with the Red King. He’s sleeping all the while, and when Alice goes to wake him up she’s warned off by Tweedledee and Tweedledum, who tell her that everything in Wonderland – including Alice herself – is perhaps just the dream of the Red King. Wake him up and maybe, just maybe, everything goes … poof!

Europe is once again nearing a potential Red King moment, something last seen in the summer of 2012. Then the wake-up call was a series of national elections, particularly in Greece. Today it’s a restructuring of the European financial system, a process started in 2012 with the recapitalization of Spanish banks, continued with the depositor bail-in of Cypriot banks, and now at a tipping point with the imminent ECB regulatory control over all large EU banks.

Mario Draghi is Alice, and the dream is a unified European identity triumphant over individual national identities, symbolized and crystalized in a single currency, the Euro.

The Red King? Well, that’s us.

A quick recap of our story so far. The European sovereign debt crisis of both the summer of 2011 and the summer of 2012 was also a banking system crisis. In fact, you really can’t separate the two. European sovereigns in the South and the periphery are, as a general rule, poorly capitalized and highly levered, and so are their banks. The massive spike in sovereign rates we all witnessed in countries like Portugal, Spain, Italy, and Greece was exactly like a run on the bank, just on a national scale. It’s a collapse in confidence in the solvency of the sovereign, manifested as a liquidity crisis. This is the Red King having a nightmare.

Front and center in this nightmare are the actual banks in countries like Portugal, Spain, Italy, and Greece, which suffer actual runs and massive deposit outflows. These banks must be recapitalized to survive, but who exactly should be on the hook for this recapitalization if it ultimately fails? It’s all well and good to say that Europe as a whole should create a common fund to accomplish these recapitalizations, but is it really fair for German taxpayers to pay the price for a Spanish bank’s insolvency, particularly when those taxpayers (or their representatives) have zero insight into how bad the mess really is and zero oversight over efforts to get out of the mess? But if you make the Spanish government a guarantor of the Spanish bank’s recapitalization, all you’re doing is adding to the debt burden of the Spanish sovereign, which just makes the nightmare worse.

Everyone agrees on the best recapitalization solution – an EU banking union, where all the big banks, regardless of nationality, are guaranteed by the entire EU – but you can’t just go straight to a banking union in one fell swoop. First you need an EU banking regulator, someone who the German taxpayer trusts to take a hard look at the Spanish bank’s books, to force changes in the Spanish bank’s management and balance sheet if warranted, and to watch the Spanish bank like a hawk to make sure that this new German money doesn’t fall into the old Spanish rat hole of bad loans and highly questionable banking practices. This super-regulator is the ECB, or at least that’s what Draghi promised as part of his “whatever it takes” pledge in 2012, and now here we are, two years later, and it’s time for Draghi to make good on that promise.

So what makes the summer of 2014 different from the summer of 2012? If Draghi sang a lullaby to the fitful Red King two years ago with his “whatever it takes” pledge, why won’t he do the same today by following through with a no-muss-no-fuss ECB regulatory take-over of major EU banks?

Odds are he will. But what’s different today is that it’s his own institution on the line. What’s different today is that a heartfelt speech and a mythical OMT program – pure Narratives, in other words – are not sufficient. The ECB actually has to assume responsibility for these banks if Draghi is to move forward with the next step of the Grand Plan, and there’s nothing intangible or mythic about that.

I think that the best way to understand the recent spate of write-downs and default notifications from European banks (Erste Bank on July 4th, Espirito Santo on July 10th) is in the context of this regulatory unification of big EU banks. For the first time in decades these banks are being examined for real. No more patsy national regulators with their revolving doors and inherited culpability, but a highly professional independent banking bureaucracy looking carefully at every bottle and tin in the pantry because they’re scared to death of swallowing some poisonous balance sheet. 

The problem for the ECB, of course, is that Espirito Santo and Erste are not isolated incidents, any more than Laiki and Fortis and Anglo Irish and WestLB and BMPS and … should I go on? … were isolated incidents. The problem is that no amount of public scrubbing and show trials can change the fact that the entire European banking system has been an enthusiastic accomplice to domestic political interests for the past 30+ years, stuffing their collective balance sheets to the gills with loans in direct or indirect service to domestic political demands. What? You mean that 6 billion euros lent to politically-connected business interests in Angola (a Portuguese colony until 1975) were maybe not such a good idea for Espirito Santo? I’m shocked! But precisely because the politically-inspired rot is so widespread, taking a bank like Espirito Santo into the street and shooting it in the head no more solves Europe’s systemic banking crisis than executing Bear Stearns in March 2008 solved the US systemic banking crisis. As Dorothy Parker once wrote, “beauty is only skin deep, but ugly goes clear to the bone.” That’s the European financial system: politically ugly, clear to the bone.

No one understands this sad state of affairs better than Draghi. I mean … the guy was the head of the Italian central bank, for god’s sake. You don’t think he was there for the initial unmasking of BMPS? You don’t think he is only too aware of the tentacles, excuse me … I mean board seats, that private companies like Mediobanca have throughout the sector? But this is just the skin-deep stuff. The ugly that goes clear to the bone is the manner in which the modern Italian banking system was designed to carry out political missions. This was the entire idea behind Berlusconi’s successful privatization of the banking system in the early ‘90’s: he and his pals got control of the really big banks – Unicredit, Intesa, etc. – in order to fund the Italian State, and the Left got control of the next tier of banks – the credit unions – in order to fund their local politically-connected small-to-medium businesses. It might not be crony capitalism at an African level of expertise, which certainly remains the global gold standard, but it’s not too shabby, either.

So with apologies to Lewis Carroll, here’s the choice facing our modern-day Alice – does she sing a lullaby that keeps the Red King sleeping for a few more years, albeit at the cost of drinking a terrible potion that will turn her into a hideous giant … or does she let the Red King wake up, shattering the dream and risking the existence of everything, herself included, but preserving the story of her beautiful face and form?

If I were a betting man (and I am), I’d wager on Draghi drinking the potion and keeping the dream alive, no matter how complicit it makes him in preserving a very ugly and very politically-driven status quo. But there’s a non-trivial chance that it’s just too much to swallow, that becoming the public face of a European banking system that will ultimately come undone in national political elections over the next cycle or two establishes a personal and professional legacy Draghi is unwilling to accept. There are no easy choices here. Does Draghi postpone what I believe is an inevitable day of reckoning over the politically bloated balance sheets of the European banking sector? Or does he accelerate that time table so that he can (perhaps) better control its unwinding? I suspect he’ll take the former course and choose delay. But maybe not. This is one of those unlikely events that no one will anticipate in advance and everyone will claim was obvious in retrospect, which makes it a perfect item to examine through an Epsilon Theory looking glass. Curiouser and curiouser …

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Al Huxley's picture

Narratives are always enough, when you've got a powerful propaganda machine behind you, and all you're trying to do is make money for a small group of insiders.  I'd have thought everybody understands this by now.  Remember back in February, all those analogs to 1929 that were being shown?  Where are they now?  Lets just concede the game - Ole Yeller and Draghi-ula have won, they have all the money, they write the rules, they own the governments, how could they not win?


Just accept the purely self-serving nature of the system, and the fact that its owners hardly even feel the need to provide cover anymore, and everything's easier to deal with.

Leonardo Fibonacci2's picture

The electrical (coal, natural gas, petrol, etc) power grid is about to go into "blackout mode" in 3..2..1.........

SafelyGraze's picture

maybe we are the red king

and maybe we are riders on the bus

do. not. slow. the. bus.

Pinto Currency's picture



Draghi and the other central bankers and politicians had another choice - reform and restructure the monetary and debt system.

Ghordius's picture

and that choice has not even begun to be applicable. as a reminder, Draghi is (just) the silver-tongued prez of the ECB, the national banks confederation that is going to be the regulator of the biggest 100+ eurozone banks from Autumn 2014 on

so yes, "There Are No Easy Choices Here". yet there is some chance that the ECB will bring some decent standards, by 2015. and a few defaults/restructurations

a further reminder: yes, a lot of the eurozone's banks are deeply enmeshed in the regional SME economies. yet it's not all a story of graft and corruption, by far not

switching from an economy based on SMEs and small regional banks providing them most of their external funding to a neoliberal financialized economy based on huge megacorps funded through IPOs, bonds and megabanks that don't have "skin in the game"... well, it's mostly a fervent wish of NY and London's financial centers

we'll see

logicalman's picture

That unfortunate exponential thing has a nasty habit of catching people out.

Starts off real slow. . . . . .

Then, suddenly, all hell breaks loose.


fonzannoon's picture

hmmm what's different between the summer of 2012 and this summer. hmmmm....



Al Huxley's picture

Exactly - 2 years ago - PIIGS were all the rage, but now they're fixed.  ANNND, they didn't have to do ANYTBING to fix those economies - they talked them back to health.

Al Huxley's picture

That's just a myth started by naysayers.  I say, as the markets approach the time asymtote they go straight to infinity.  It's probably a 'virtuous cycle' side benefit associated with zero interest rates - interesting things always happen when you divide by 0, and there must be something somewhere that has the interest rate in the denominator.

fonzannoon's picture

Al we must be fucking insane. Totally fucking insane. To be here day after day like this. Yet here we are....

Al Huxley's picture

I know, I have to stop it.  All the negative articles here make it hard to stay focused on buying the dips.

fonzannoon's picture

I am still pissed I was not all over the bank stocks. Even cnbc was hammering them and how bad earnings would be. A no brainer.

I went over to seekingalpha and tried bashing on some moron permabulls but they don't even respond anymore. The place is a total graveyard. They are deprived of Michael Snyder and Simon Black over there and are only able to comment on market related articles. it was a slow death but I think they are finally gone. The market is a centrally planned waste land.

Al Huxley's picture

Yeah, there's really nothing to talk about - discussing what the market's going to do is like trying to have a serious debate about whether or not the sun will come up tomorrow morning.

max2205's picture

What's Corzine dreaming of now 2 years later.....

fonzannoon's picture

walking around the hamptons shopping. while he is walking around the hamptons shopping.

Dr. Engali's picture

I'm about ready to hang it up. I'm tired of the click bait mediocre articles. The only thing that keeps me around now is the commentary.

fonzannoon's picture

I envy Akak. He pulled it off. Poor ekm got dragged back in. I thought he made it out.

SafelyGraze's picture

the comments, yes

but also, the ads

I have been loving me some undershorts. and ukraine ladies. and some 99-cent-commission trades.

and prom dresses.

and car insurance.


fonzannoon's picture

I was at the beach with my daughter last weekend and a geiko ad flew by. My daughter can't read very well yet and all she really saw was the fucking lizard and I watched her looking up and she said to herself "insurance". she has no idea what insurance is. Fucking amazing.

Al Huxley's picture

I use adblock plus when I'm running Firefox, but for some reason I recently started getting the links at the bottom of each article anyway (in explorer I see there are a number of attractive young chinese girls anxious to date me).  Anyway, so now I'll soon know - where to get iPads for $25, how to boost my testosterone, and how to make any woman obsess over me ( will be handy for hooking up with those chinese girls) - PLUS, a simple rule to get rich trading stocks AND (as if that weren't enough) I'll find out why I can't speak spanish. 

kaiserhoff's picture

All government accounting is a set of lies agreed upon.  If nothing big breaks, they will still be drowned in a tsunami of negative cash flow. 

Draghi has one and only one hope:  that Japan and/or China go down hard before Europe.

That will buy him a little more time to run, but where does he run to???

Dr. Engali's picture

Drahgi will do what all central bankers do..... Print, lie, obfuscate, and maybe send nail guns out as Krampusnacht gifts. To think he would do otherwise is nothing more than mental masturbation.

disabledvet's picture

What sucks is you say to yourself..."self! 30% interest rates are really bad!"
And then you knock them down to 5 or six and then say "self! This sucks too!"

Let's face it....Draghi is the medic from Iowa on Omaha Beach and "Europe" are the Germans with the mg-42 "whose bark is worse than their bite."

Interesting no mention of Poroshenko in this missive. "He is Europe now." A fascinating and to me highly surprising to be in. In effect "if you still believe in the dream you've got your identity covered in the East."

Such are the vagaries of these things....Lewis Carrol was of course a true master of this craft.

pods's picture

The silver tongue works because all currencies are merely a CONfidence game. 

If they ever had to do what they threatened (dollars from helicopters?) the gig would be up and the game would be over.

One giant game of make believe. Well, except for most of the populace in poor countries with lots of natural resources.  Those are the real farms.


Al Huxley's picture

They'll never drop from helicopters, because too many unimportant people will get it.  Bernanke used helicopters for the imagery, but he always meant 'I'll drop bags of money on my friends in the banks'. You can read his papers, he was pretty clear about it, and he did what he said.  Now Janet from another Planet's carrying on the tradition.

pods's picture

If he ever dropped actual currency (without debt attached) from helicopters, it would worsen the deflation.  Slitting his own throat.
Now, this would not make me lose one wink of sleep.  To quote Monty Python, there would be "much rejoice."

Bailouts were always about backstopping the banks.  It just had to be sold as protecting "our money" when in reality, it is a Federal Reserve Note.

Sucks because Al as you know, 90% of the people out there see the Fed as trying to help.  

Can't make this shit up.


Al Huxley's picture

I know, I can't fucking believe that after all that's been done people still take them at face value.  Mrs Debtfire could probably literally shovel money into Blankfein's pockets at one of her press conferences as she blathered on about how employment was improving and people would still take her at her word.

buzzsaw99's picture

ironic the imf head is from france with two trillion euro in sovereign debt, and the ecb head is from Italy with another two trillion. In the old days they would have weakened their currencies to buy dollars but now they are shackled to the euro which makes that debt all the more onerous. eventually the eu will become politically untenable imo.

AdvancingTime's picture

The Euro-zone is engaged in a talkathon, with fear of an immediate collapse off the table the members of the Euro-zone much like their political counterparts in America just talk about solutions without any action. For us in America news from across the pond dribbles out in small doses with almost daily media boost of promises that things are getting better. For more on all of "what is not happening" see the article below.



Cabreado's picture

The only consistency left is the speculation and voyeurism towards central bankers and their behavior, and the neglect of false leaders of the soveriegn variety who enable them.


Bossman1967's picture

What a bunch of crooked no good assholes wtf is going on in this world. Cant anyone in these leadership roles do what they are paid for? When is this crash gonna happen so I can get wasted.....

yogibear's picture

Draghi's become the financial John Wanye Gacy. How many finanically dead banks do have buried under your Euro house?

Luckhasit's picture

Alright Ben, tell us something we don't know.  We know what hes gonna do, Stevie Wonder could see that.  

Right a piece about the aftermath, like good doom porn does.

overqualified's picture

"Everyone agrees on the best recapitalization solution – an EU banking union, where all the big banks, regardless of nationality, are guaranteed by the entire EU" ?!? 

If everyone agrees on a bigger and forceful ponzi to save the actually collapsing europonzi then we are living in an insane asylum run by lunatics. Didn't they already got enough of more of the same bailout scams and fiat-debt-money scams? 


Ghordius's picture

yes. and? reality is a bitch. and reality is... currently a global reserve currency called the United States Dollar and the "forces of" globalization

jzz's picture

And ....again......evil US and evil $....you really are living in Lala land. Who do you think those evil US banks are owned by......ups ...surprise,half of them are from EU !!!!

With each comment you make you rapidlly lose any shred of competence and unbiased stance

famulus's picture

did i read somewhere recently that draghi is mentioned as the next president of italy as napoli is slightly old at 89. captain rat leaving the ship ?

MFL8240's picture

There is a very easy choice, get rid of the Goldman filth and remove Yellen and Obama as a start!

jzz's picture

To Gordius.......

And ....again......evil US and evil $....you really are living in Lala land. Who do you think those evil US banks are owned by......ups ...surprise,half of them are from EU !!!! US central bank, was made by European masters at the time......and consequently all the globalization scheme. You must be getting a big paycheck from Bruxelles, cause you are obviously educated person...so I can't see any other reason for your blind defense of EU. Defending the European Union you are practicaly advocating Americanisation of EU. What anoble cause.

With each comment you make you are rapidlly losing any shred of credibility and unbiased stance