Earlier we heard Goldman's talk down of Draghi's comments, which we will not tire of saying, were absolutely nothing new. Now here is Citi's Jurgen Michel throwing cold water in the face of all those who believe that the ECB (which can't really do more LTROs unless it is willing to accept Zynga's virtual farms as collateral) will save the day with more direct intervention. To wit: "in our view, such action is only likely to be taken after governments have taken action first, i.e. by activating the bond market support facility for Spain and Italy." In other words, nobody believes Draghi, despite his stern warning to "believe" him - everyone wants action out of the ECB head, not talk.
After saying that the ECB has “no taboos” in respect of taking measures to maintain price stability, Mr. Draghi is now also outspoken in respect of taking unconventional measures to preserve the euro. Mr. Draghi’s comments suggest that the ECB is less opposed to supporting sovereign bond markets again either indirectly through multi-year LTROs or directly through the use of the SMP. However, in our view, such action is only likely to be taken after governments have taken action first, i.e. by activating the bond market support facility for Spain and Italy. Mr. Draghi did not touch on recent comments by Austrian Governor Ewald Nowotny regarding the ability of the ECB to provide funding to the ESM. In that respect, the crucial question is if the direct funding of the ESM is seen as a form of the prohibited monetary financing or not. So far, the position of the ECB has been that ESM funding would be not within its mandate, but an article in Dutch newspaper Financieele Dagblad quotes sources today as saying that allowing the ESM to tap the ECB’s open market operations would comply with the ECB’s charter, because, as the European Investment Bank (EIB) which has access to ECB funding, the ESM would have the status of an international financial institution.
For anyone confused, if Citi, which has had its pulse on Europe better than most (even DB which is explicitly setting European policy but had completely forgotten about that whole "subordination" issue), says nothing will happen until the ESM is active, which can happen at the earliest in September with the German constitutional court's decision, then the next two months will be very long and drawn out for those hoping for more short covering squeezes.
In other words, once again we are back to requiring Germany's blessing for any future bailout action. Which also explains why Draghi waited until today - when Merkel started her vacation - to pretend he is once again in control.