Whether it is central bank policy leaked as a strawman or as Stephen Roach notes, Jon Hilsenrath is the new Fed head (as what he writes - prompted by 'friends' - must be adhered to for fear of disappointing markets), UBS' Art Cashin notes a strange coincidence this week. While WSJ's Hilsenrath is the unofficial floater-of-ideas-and-saver-of-markets in the US, it appears The Economist's Greg Ip is the ECB's unofficial suggester-in-chief. As the avuncular Art notes "Mario Draghi's comments stunned the markets. What prompted the timing of the move? We'd like to present a possibility"
Art Cashin, UBS: Timing, Timing, Timing
Mario Draghi's comments stunned the markets. What prompted the timing of his move?
We'd like to present a possibility. On Wednesday, Greg Ip of the Economist, published an essay titled – "How the euro was saved.". Here's how it began:
IT IS always darkest before August. When policymakers head on vacation, risk-takers put their optimism on ice, retreat to cash, and leave markets to find their own level.
That’s how it’s looking in Europe anyway. Spain may be on the verge of losing market access. Any warm feelings its government generated with last week's new round of austerity were quickly washed away by mounting bad news on the economy, its regions’ finances, and its banks. European leaders, having announced plans to strengthen the European Stability Mechanism (ESM), can’t act on them until Germany’s constitutional court rules on their legality on September 12th. The European Central Bank remains on the sidelines.
It is easy to envision a downward spiral that results in multiple countries leaving the euro amidst a financial and economic meltdown. It is almost impossible to envision the opposite. But somebody has to.
In May, Peter Berezin of the Bank Credit Analyst adopted the viewpoint of someone looking back on the crisis from the year 2021, and described what today must seem like a hopelessly idyllic outcome:
Mr. Ip follows up with Mr. Berezin's proposal of a possible solution.
In Mr. Berezin’s telling, things had to get much worse before they could get better. In the fall of 2012, Greece abrogated its bail-out agreement with the IMF, European Union and ECB, declared a moratorium on all external debt payments, and began paying domestic bills with IOUs that it then declared legal tender. The ECB cut off Greece’s banks, Greece responded with capital controls, and relabeled its IOUs “new drachmas” which quickly plunged to 35 euro cents. Bank runs immediately commenced throughout the periphery; bond yields in Spain shot over 7%; global stockmarkets cratered.
The ECB was finally forced to act to save the euro: it announced it would buy as many bonds as necessary to cap all sovereign yields at 6%, with the exception of Greece. The ECB never had to buy any bonds: investors no longer had any reason to sell since the ECB had taken insolvency off the table.
Wait a minute! That sounds rather close to what Mr. Draghi was discussing. Coincidence? Probably, but the timing is stunning. Somewhat like the simultaneous but separate development of calculus by Isaac Newton and Gottfried Leibniz in the early 1600's.