BNP Furious That Draghi "Jumped The Gun"

Tyler Durden's picture

Ken Wattret who is chief Euroarea economist for BNP is quite furious with Draghi: the reason? Precisely what we warned last week: that Draghi is posturing and attempting to bluff the Bundesbank into accepting his "conditions." End result, Buba called the bluff and the ECB blew it in a fashion so spectacular that Draghi actually had to defend himself from reporters who were mocking him and the ECB with questions if the ECB won't get its inflation call wrong "again." It also prompted the head of the Central Bank to spin off Mario Draghi FX trading advisory, of which he is the sole employee, and issue the following Series 7 and 63 unauthorized advice: not to short the EUR, which incidentally was the dumbest thing he could say, because the one thing that can save Europe is if its currency keeps sliding (much to the benefit of Germany) in the process boosting Europe's manufacturing sector. That he openly warned against this is perhaps precisely why the EUR tumbled just after he said it. Trust us: the Chairsatan would love if investors were shorting the USD. Anyway, back to Draghi and the biggest French bank which realizes all too well one simple thing: Draghi no longer has credibility, and all those European banks which rely on the ECB for their day to day operations (like BNP) are suddenly far more exposed than ever before.

Specifically:

The ECB could have sweetened the pill of no action on debt purchases today with a few other initiatives but opted not to. This is compounding the sense of disappointment. There was a reference in the Q & A to other things the ECB could do, including LTROs, collateral requirement changes etc, and a hint towards something coming in September.

 

The lack of detail on all the above is a major problem. There were a few more details here and there in the press conference, including the ECB buying in short maturities, but it would have been far better for Mr Draghi to have kept quiet and deliver the "big splash" when there was sufficient agreement to allow the details, and the action, to follow in short order.

 

Expectations should have been much better managed and Mr Draghi's credibility is taking a hit accordingly. Hence the numerous questions in the press conference about whether the Governing Council was onside. He swatted those away, suggesting his comments in London had strong support, but the sense that he jumped the gun last week, at a cost to his and the ECB's credibility, will linger.

Bottom line: Draghi bought the markets a quick 5% rise for month end markups. In the process he made sure that nobody will ever again "believe" him.

From BNP

The markets response to the press conference is very negative, which is no surprise on the basis of the failure to live-up to the comments made by Mr Draghi in London a week ago. The bar had been well and truly raised and the ECB has under-delivered. (This is a common thread of eurozone crisis response, just think of all those summit meetings in the past!)

The way we saw it ahead of the press conference, the preferred route for the ECB is for the EFSF - for now, and then the ESM - to take the lead in sovereign market interventions, which would bring an explicit conditionality. The ECB would be willing to back this initiative with its interventions but would not front-run the process. This assessment has been strongly reinforced by what we heard today.

The conditionality is key. So the governments have to request the assistance to set the wheels in motion. The worse the adverse reaction in markets, the more likely the politics will fall into place. The problem is, of course, the stress in markets and ongoing uncertainty in between times.

The ECB could have sweetened the pill of no action on debt purchases today with a few other initiatives but opted not to. This is compounding the sense of disappointment. There was a reference in the Q & A to other things the ECB could do, including LTROs, collateral requirement changes etc, and a hint towards something coming in September.

On policy rates, there was a comment in the Q & A to it "not being the time" for further action. This suggests that our call of a move in September holds together, for the refi rate at least, in tandem with the new staff projections.

The decision regarding the rate on the deposit facility is a complicated one. The reference to the ECB being in "uncharted territory" is instructive: the ECB wants more time to assess the effects of the cut to zero and to mull over the pros and cons of going sub-zero.

Still, this is a secondary consideration, the real issue is how to interpret the "guidance", to use Mr Draghi''s words, towards a potentially more radical intervention by the ECB in the sovereign space.

To quote the relevant parts of the statement...

"The Governing Council extensively discussed the policy options to address the severe malfunctioning in the price formation process in the bond markets of euro area countries. Exceptionally high risk premia are observed in government bond prices in several countries and financial fragmentation hinders the effective working of monetary policy. Risk premia that are related to fears of the reversibility of the euro are unacceptable, and they need to be addressed in a fundamental manner. The euro is irreversible.

 

In order to create the fundamental conditions for such risk premia to disappear, policy-makers in the euro area need to push ahead with fiscal consolidation, structural reform and European institution-building with great determination. As implementation takes time and financial markets often only adjust once success becomes clearly visible, governments must stand ready to activate the EFSF/ESM in the bond market when exceptional financial market circumstances and risks to financial stability exist - with strict and effective conditionality in line with the established guidelines.

 

The adherence of governments to their commitments and the fulfilment by the EFSF/ESM of their role are necessary conditions. The Governing Council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective. In this context, the concerns of private investors about seniority will be addressed. Furthermore, the Governing Council may consider undertaking further non-standard monetary policy measures according to what is required to repair monetary policy transmission. Over the coming weeks, we will design the appropriate modalities for such policy measures."

 

There is plenty of information to digest in there. Key points include: the references to the need for strict conditionality; that governments must take the initiative; the recognition of concerns over seniority; and the possibility of acting in a size "adequate to reach the objective".

But what is the objective? What are "outright money market operations"? How will the seniority issues be addressed?

The lack of detail on all the above is a major problem. There were a few more details here and there in the press conference, including the ECB buying in short maturities, but it would have been far better for Mr Draghi to have kept quiet and deliver the "big splash" when there was sufficient agreement to allow the details, and the action, to follow in short order.

Expectations should have been much better managed and Mr Draghi's credibility is taking a hit accordingly. Hence the numerous questions in the press conference about whether the Governing Council was onside. He swatted those away, suggesting his comments in London had strong support, but the sense that he jumped the gun last week, at a cost to his and the ECB's credibility, will linger.

That said, amid the hullaballoo over whether Mr Draghi has mismanaged the communication in a spectacular way, and the adverse market reaction as a result, there is a risk of losing sight of the progress made over the past month.

At the 5 July press conference, we were told that the ECB did not discuss any unconventional measures at the policy meeting and the suggestion was that there were no additional initiatives in the pipeline. A month later, the ECB is talking about a potentially very different outcome. If the communication had been handled more effectively, that may have been today''s story.

The circularity of the process is also an important consideration. If the reaction in markets is bad enough, it will increase the likelihood that the countries which have been reluctant to ask for assistance will have to ask, opening the door for the EFSF/ESM involvement and conditionality which will then bring the ECB into play.

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slewie the pi-rat's picture

delayed risk0ff! [always comes right after riskOn]

no one seems to have noticed slewie's most interesting chart du jour:  INO.com Markets - Chart for U.S $ INDEX (NYBOT:DX)

TheSilverJournal's picture

Like I said yesterday, Draghi did not jump the gun, this was planned perfectly. The plan is for the ECB to over promise and under deliver, setting the Euro up for a big slam, along with Fed action to be overhyped and the Fed to then under deliver, for the US markets to be set up for a big slam.

The slam will occur over the next few weeks and eventually, CITIZENS will beg central banks to print.

Then the Fed goes on a buying spree and the Euro pumps out Eurobonds and the market goes on it's final ride up.

bank guy in Brussels's picture

Indeed Draghi is setting up the Big One, like you suggest ... the BNP guy has it all wrong

Also agreeing is the terrific Ambrose Evans-Pritchard, that Draghi is ready to do QE and bond-buying on a massive scale, soon, at the ultra-severe-crisis point that is not long away:

Evans-Pritchard writes:

« Wow, the ECB really is preparing to hit the nuclear button.

Mario Draghi has activated the ECB's monetary policy, risk, and market committees to draw up drastic plans.

This will include open-market operations – ie bond purchases – that may be "unlimited" and may be "unsterilised" (ie QE net stimulus).

The missile is being loaded. The launch trigger is being cocked (if you cock such things).

Markets have tanked because they don’t get instant gratification, but I rather suspect that they have missed the point. »

'Draghi Delivers'

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100019312/dr...

Scalaris's picture

 

 

While refraining from speculating about ECB's actions today, I did not expect any material actions, particularly after Draghi's rather transparent rhetoric during the past week.

The thing is that while Draghi might be accused for "jumping the gun", I don't think that his intend was so much to currently corner the opposition of ESM's banking licence request/demand, as to prime the situation with the appropriate motive-inducing outcomes of today's underwhelming delivery vis-a-vis no rate cut, no SMP re-activation and no introduction of a new LTRO, something which I think that he must have been quite aware about, when we was making his bold claims.

As Evans-Pritchard says, today's inaction is nothing but a precursor of a large-scale liquidity unleashing, purposefuly machinated in tandem with Fed's dormancy, both with the objective of deflating the already cocainated-in-anticipation markets, while leaving the dismal economic indicators from now until the end of the year to take their course, as well as to provide the opposing northern political class with a sense of expediency, amidst a more visible deflationary environment.

Bennie Noakes's picture

Drawing up plans is not the same as acting. And telegraphing your plans to the media is actually one form of jawboning.

Spain will very likely be forced to request a formal bailout and the Germans have signaled that they are OK with this. But the available bailout funding is limited and I don't hear the Germans talking about pledging any additional money into the bailout pools. They are certainly too small to handle both Spain and Italy. And it isn't even clear that they are large enough to handle Spain.

It seems very unlikely that Germany would agree to unsterilized bond purchases, no matter how much Draghi plans for them.

 

rsi1's picture

oh poor boy is crying, you got hurt in your trade?

malikai's picture

The crony bullshit fade trade is working out fantastically, if I may say so myself.

Muppet of the Universe's picture

Thumbs up if you were calling a 13000 QE a fat sack of shit.

malikai's picture

"But I just knew Bernanke would save us all! Look at the macro picture! Now what am I supposed to do?"

Suck it down.

ekm's picture

These people are IDIOTS.

Draghi or any ECB president is just an ORDER TAKER, exactly like the other "president" Herman van Rompuy.

 

What kind of freaking idiots are these idiots?

john39's picture

its an act... it keeps people believing that the system is real... like obama flying around in air force one or riding in that large black 'beas' limo...  gives the illusion of power where none actuall exists... keeps the sheeple from seeing the hand pulling the strings.

bdc63's picture

"What kind of freaking idiots are these idiots?"

I think you answered your own question ...

buzzsaw99's picture

the ecb is not the fed. their kung fu is weak.

ekm's picture

Even Bernanke is an ORDER TAKER.

buzzsaw99's picture

yes, he takes orders from jpm and the squid. however, legally they can do whatever the fuck they want. if they decide to buy jamie dimon the freaking queen mary tomorrow there isn't a damn thing anyone could do about it. not so with the ecb as they are reined in by the politicians. the fed on the other hand tells our congreff what to do.

ekm's picture

It's the opposite.

Congress and WH/Treasury Secretary can give orders to the Fed and they are obligated to comply. The power over the Fed is shared between congress and WH.

The Fed is left alone to do whatever it pleases as far as congress/WH allow them to do so, under GUIDELINES.

 

You see, the Fed does something when one party is in power, like Democrats had both WH and Congress until end of 2011. We got QE1, Qe2 and a lot of stuff we don't know.

Once Republicans got congress, no QE, no nothing. Just a balanced Twist for the sake of doing something.

buzzsaw99's picture

hank paulson went to congreff and demanded a bailout. they got a bailout. when the bankers tell congress to do something they do it. the bankers and billionaires own those weak pathetic gubbermint stooges.

ekm's picture

Oh, I agree. But it does not contradict what I said.

It may come down to a moment that the bankers will be like the cigarets companies and I think that moment is very close.

Politicians very soon will start blaming bankers. Ron Paul's victory about auditing the Fed is absolutely STUNNING as far as the mood of politicians is concerned.

buzzsaw99's picture

they will publicly blame the bankers in an election year but they will still do as they are told behind the scenes. the wall street banks own the doj, fbi, sec, and all the rest. the bankers and billionaires own the congress and white house lock, stock, and barrel. this will not change short of the apocalypse.

ekm's picture

You could be correct, by my observation is that the banks have lost considerable power and are basically subjugated to the government. Just an observation.

buzzsaw99's picture

i hope you are right

Totentänzerlied's picture

They don't just own them, they own them in perpetuity, because they can buy or destroy anyone who comes along thinking otherwise. Take that to a federal court, the judge is in their pocket. Count on it.

Getting Old Sucks's picture

We would need a communist dictator to do that.

Overfed's picture

It's situations like this that bring dictators to power.

Look for O'bomb-a to start calling himself  "His Excellency, President for Life, Field Marshal Al Hadji Doctor[B] Barack Hussein O'bomb-a, VC, DSO, MC, Lord of All the Beasts of the Earth and Fishes of the Seas and Conqueror of the Americas, the Middle East and beyond."

i_call_you_my_base's picture

Congress and WH/Treasury Secretary can give orders to the Fed and they are obligated to comply. The power over the Fed is shared between congress and WH.

I would point you to the ZH article from a few days ago with a declassified doc where the Fed threatens the Treasury and the Treasury complies.

ekm's picture

I read that document few times and my interpretation is totally different.

Long-John-Silver's picture

Draghi did not jump the gun, he jumped the Shark and it's starting to eat him.

Cult_of_Reason's picture

When next time Draghi tells “believe me” lie, everyone will ask “show us the money”.

Long-John-Silver's picture

Never forget that lie is in the middle of believe. "beLIEve"

loveyajimbo's picture

A Goldman dogturd has no credibility?  That must have been a mis-print!  Anyways, the whole thing was a Goldman play for short term bonanza on his comments... bet Lloyd "the 'Roid" made out like a thief on this planned pump and dump... Drag Queen Draghi needs a big retirement pool, he will be out on his ass soon...

jtmo3's picture

Blah Blah Blah, traders, bankers, infestors, etc, are all going to believe anything that can make them money...no matter who says it. Drahgi losing credibilty? Isn't that an oxymoron?

Pretorian's picture

Draghi made money for Goldman and gang. It was prearranged. There was journalist from Germany who asked him during the press "Why did you made that statement in London when nothing has been agreed on". Draghi muted right answer. Throw this SOB criminal out of ECB.

CH1's picture

Throw this SOB criminal out of ECB.

Please consider the hole in your logic here:

You want the criminal gang who appointed him (to assist their own criminality) to throw the criminal out. Then, the gang will appoint another criminal to help them in their crimes.

It's not one man who is corrupt, it is the entire system.

Power corrupts, and that goes for systems as well as individuals.

duckarooni's picture

It could of course be a gigantic setup to sucker in shorts and then blow them up with a surprise announcement. Or not.

toady's picture

Draghi is not to be believed, until his next head fake, which is totally believable, until its not.

Rinse & repeat.

ThunderingTurd's picture

Remember in '08 the market was slaughtered right after the Olympics was finished.  Setting up for part deux.

CrashisOptimistic's picture

Reporters should line up and urinate on Draghi as he gets out of his limo.

Nothing would sum up better global contempt.

hedgeisforpussies's picture

Jesus. this is the same pattern of events that was happening in 07 and 08 in the us. just open ur archives and look at the events. everthing started in early 07 when hsbc said they massive amount of bad debt in the us. everyone laughed including paulson and BB. then came summer of 07 with all mechanical funds blowing up. then came bs and leh. then fnma,fredi,aig,gm,ms,gs....... point is that politicians everywhere deal with one event at a time and it is always too little too late. even if BB and paulson did nothing events would unfold the same but much faster. history doesnt repeat but it rhymes. we will have many statements and other bs. then greece will fail and markets tank and ecb +germany will do smthng but noone will believe them and sp will go down to 700. then we trade there for 6-9 months and rally. whats the problem? 

Jlmadyson's picture

And if you have been around ZH you will know that many of us have said we have been in the same spin, prop, and pump cycle for over 5 years.

Nothing has changed save mountains of more debt.

Mr_Wonderful's picture

Tyler, a sliding Euro does help German manufacturing and exports but don´t forget that much of this goes to the Eurozone, I think over 60%.

Ghordius's picture

this is the way it's being propagandized in several countries and languages, including German, so don't bother with this pesky truth, it looks like nobody wants to hear it.

"A lie gets halfway around the world before the truth has a chance to get its pants on." W. Churchill

ekm's picture

Clarify further please.

Which one is pesky? Lower euro is better for Germany or 60% of exports go to europe?

Ghordius's picture

the truth is that German exports inside/outside the eurozone are roughly half/half since decades and that the "lower EUR is good for Germany" meme is being sold everywhere

meanwhile, many ask what happened to "the sick man of Europe", see that this was "fixed" by the EUR introduction and so sell that "the EUR is good for Germany because it sucks the others dry", while forgetting that Chancellor Schoeder brought forth as a flanking measure the "Agenda 2012", the most sweeping labour market reform europe has ever seen.

anyway, in every debate there seems to be the need to have some european country not behaving well enough so to pit the others against it

ekm's picture

I get your point. Thx a lot.

Mr_Wonderful's picture

Well, nowadays capital flows and maintaining asset bubbles is much more important than manufacturing and other real economic activity. Rising currencies tend to attract investment capital and vice versa.

Peter K's picture

Speaking of those countries involved, sounds to me like a stitch-up. :)

As far as Monti is concerned, he is a dispicable little man. He was pushing Rajoy to ask for a bailout, hoping that he could get the ECB to buy Italian bonds in the process. Not being able to swing that, he now will front a "plan" whose aim is to get Italy into a bailout, i.e. loss of sovereignty. This used to be called treason, and they used to hang people like Monti for that.

Or better yet, the classical manner in which Italians would dispose of their rulers was to drag them through the streets of Rome and let the dogs eat the remains. Couldn't happen to a nicer guy.

Hype Alert's picture

So what they are saying is Muppet management was a FAIL!

Although I beg to differ.  I'm sure many were caught off guard on the announcement last week and even more were slaughtered today and over the next few days.