The Bundesbank Replies To The ECB

Tyler Durden's picture

Did the German Bundesbank roll over and die as Die Welt suggest, by yielding to the will of the ECB and Goldman? Or is it merely setting the stage for the inevitable German referendum? Many claim the Italian head of the ECB won today in his ever escalating confrontation with the last remaining German on the ECB governing council, although in reality he is merely doing what he has already done twice before. The outcome will be the same: abject failure to contain the crisis which will not be resolved until and if Europe succeeds in creating a united, Federal state, with one bond issuance authority. That will never happen: after all, 17 European states will never hand over their sovereignty to a third party, especially one which is backstopped by German cash. But it can pretend. In the meantime, Buba will not quietly go, instead it has already stated what it thinks, and what it thinks is that what the ECB is doing (once again) is "tantamount to financing governments by printing banknotes" and that monetary policy is now subjugated to fiscal policy. Full text of the Buba's response below:

"In the most recent discussions, as before, Bundesbank President Jens Weidmann reiterated his frequently substantiated critical stance towards the purchase of government bonds by the Eurosystem.

 

He regards such purchases as being tantamount to financing governments by printing banknotes. Monetary policy risks being subjugated to fiscal policy. The intervention purchases must not be permitted to jeopardise the capability of monetary policy to safeguard price stability in the euro area.

 

If the adopted bond-purchasing programme leads to member states postponing the necessary reforms, this will further undermine confidence in the political leaders’ crisis-resolution capability. This underscores the crucial importance of ensuring both credibility in the promised conditionality and the resolute determination to immediately terminate intervention purchases if the underlying conditionality is no longer assured.

 

The announced interventions in the government bond market carry the additional danger that the central bank may ultimately redistribute considerable risks among various countries’ taxpayers. Such risk-sharing, however, can be legitimately authorised solely by democratically elected parliaments and governments.”

And here is the biggest irony: by doing everything in its power to keep yields artificially low and markets artificially high, the ECB is removing any urgency by Spain, Italy, Greece, actually scratch Greece, and all other countries with unsustainable primary and other deficits, to fix their problems. Which is of course perfectly understandable: why should politicians risk their careers with socially unpalatable deleveraging (please don't call it austerity) programs when they can just continue doing what they do, keep getting reelected, and hope and pray that the ECB will punish all those bond vigilantes who understand that this particular game will not have a happy ending.

In other words, in 3, 6, 12 months, all economic indicators in Europe will again deteriorate, budget deficits will be greater, and economic viability will be even more hindered, but at least the stock markets of the world will be at all time highs, and hedge funds will avoid one more quarter of redemption requests, even as every country is careening toward disaster. Because unless Spanish, and soon Italian depositors, reverse the outflow of their money from local insolvent banks and into the core of the Eurozone, then today's ECB action has achieved absolutely nothing. In that sense: all Draghi is desperately trying to do is restore confidence in these two fulcrum countries. He can only succeed if he generates enough inflation to 'inflate' away the trillions in bad debt held by domestic banks. However, in the process he will also set off the great inflationary firestorm that sees Germany shift from "9" to 'auf wiedersehen', not to mention Brent in EUR to all time records, coupled with a food price crisis.

Lose-lose.

It is this that the Bundesbank is lamenting: the ever greater trade off of meaningless short-term market gains in exchange for long-term broad collapse and potentially hyperinflation. Sadly, nobody else is, or will be until not even all the world's central banks can control the fate of the bond and stock markets any longe.

* * *

Finally, here is the intro paragraph from the first official response in German Welt:

Financial markets cheer the death of the Bundesbank

 

ECB President Draghi breaks with brazen principles of German monetary policy. The central bank is pumping unlimited money in the bond markets. Stock markets cheer - for Germany, the nightmare begins.

Read on here.