Submitted by Mark J. Grant, author of Out of the Box,
If the leaks from the European Parliament are to be believed then the lines are being drawn in the sand for quite a fight. The rumor is that Mr. Draghi is going to propose a plan to buy short sovereign debt (0-3 years) without limit if a nation fills out the requisite form and officially asks for aid with conditionality. The rumor further states that this short term-buying, which involves lending money directly to various governments and not just buying bonds in the secondary market, does not violate the mandate of the ECB which specifically forbids the ECB from doing exactly what he may be proposing. I find his argument spurious as defined by maturity and it will be quite interesting to see what reaction Germany and her allies may have to this scheme. The dog fight will begin later today as he releases his actual plan to the various central banks in Europe. The constant speculation will end and the reactions of the various governments will be front and center upon the world’s stage.
“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.”
I find this once again proof that the rules and regulations in Europe, the very stipulations that we rely upon, can be changed, modified or distorted with the blink of an eye and the wave of a hand. It seems that nothing is set in concrete, nothing is firm and that everything is moveable upon a moment’s notice. I find Mr. Draghi’s argument ridiculous, if the report is to be believed, and one fraught with fiscal danger as it would probably mean that all new sovereign financing would be within the timeframe that he sets and so the amount of upfront debt, which would constantly have to be rolled, would present a series of dangers including the inability to finance it as it comes due along with a balance sheet at the ECB that could swell well past the $4 trillion mark where it is now or 45% larger than the current balance sheet at the Fed. The world does not receive funding from alien worlds and there are consequences that append from having a ledger that expands without boundaries and where the slightest imperfection pricks the balloon and the whole bloated piece of plastic twizzles off into the air with frightening results and a dreadful sound.
If this rumor is at all accurate and Mr. Draghi is going to redefine the European treaty under his own terms then we may expect quite a reaction from various countries including Germany, Austria, the Netherlands and Finland. One supposes that they think the ECB should follow the rules and not make them and the Parliaments of various countries may not be too happy with the ECB overruling their political decisions for the good of Greece, Spain, Italy, Portugal and whomever might show up next. Personally I think it is going to get quite tense, as in backs up, teeth bared and the possibility of someone or another refusing to fund if this is going to be the scheme. The flashpoint may also be conditionality as the EU may have to agree first and then refuse to agree when it comes down to it which would be the can kicking play if this particular case. It is both Greece and likely Spain that will demand money and more money and there is only so much capital available regardless of what is sometimes touted in the Press where it seems that cash flows in daily from the next solar system and that no one is accountable for it.
When Mr. Draghi releases his grand plan to the other European central banks, likely after the close of the markets on the Continent today; the head banging will begin. I have called it the Battle of Frankfurt because it will be just that with the majority of nations, the countries that are troubled and need assistance, squared off with the minority of nations, those with the capital, in what I believe will be a demonstration of Mortal Combat. I think it will be that serious, that bone shattering and that the stakes are as high as they have even been in one of these contests because the divergence in needs and desires is strained to the limit. We could well see all kinds of erratic blows and then counter-blows and serious consequences as the positions harden and as the demands for capital increase.
The fourth and last Armada left Spain in 1598 sailing to rendezvous with the French. Greece, Italy and Portugal have joined the fight. Light the beacons along the shore. The fleet is approaching.