Citi On Draghi: Expect Nothing From The ECB Before The ESM Is Active (In September At The Earliest)

Tyler Durden's picture

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.

From Citi

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.

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disabledvet's picture

Can't say I know where all the Italian gold resides...and it is a massive amount btw...but if it found its way to the ECB...

TPTB_r_TBTF's picture

The Italians canT say they "know" where their gold resides...and on paper it is a massive amount btw... but it probably found its way to Asia.

roycewinsten's picture

It seems to me the ECB could open a credit line for the Spanish and Italian national central banks with which the national central banks could buy the bonds of their gov't. Then the national central banks repo those bonds to the ECB in a variant of the LTRO for a period of years - call it five. The ECB then would not be buying government debt but would succeed in funding the gov'ts for a period of time. Isn't that possible?

Everybodys All American's picture

btw not nearly convoluted enough. The major problem is subordination of any current bond holders leads to selling of those bonds. Which leads to the circling of the drain of the whole shebang.

SheepDog-One's picture

'No one believes Draghi'....WELL good enough to pump the garbage indexes back up to near year highs anyway! 

Gavrikon's picture

I'd be nauseated if it didn't happen all the time.

Squid Vicious's picture

Race to the bottom, Ben can't let the ECB win so easily so expect QE announcement soon, possibly from Jackson's A-hole

SheepDog-One's picture

SURE yea uh huh....'free moneez' trump card soon blah blah Jacksons hole surely this time is the charm yadda yadda.

AvenoSativo's picture

The German newsdaily Die Welt published a comment of Jörg Eigendorf, which is currently the headline on its web site:

Die EZB entpuppt sich als Trojanisches Pferd

(The ECB shows its true face as the Trojan horse [of Southern Europe]).

The sub-cap text is

"Das Vertrauen ist dahin, das Kapital verlässt Europa: Die EZB steht für ein Europa, in dem der Süden das Sagen hat. Die Folge wird eine gigantische Umverteilung zulasten des Nordens sein."

(The trust is gone, the capital leaves Europe: the ECB [now] stands for a Europe, in which the South has the say. The consequence will be a gigantic redistribution [of wealth] at the burden/cost of the North.)

The comment shows a great deal of frustration but it seems that the Germans don't know yet what they can/want to/should do.


TPTB_r_TBTF's picture

"South vs. North" ... hmmm? deja vu, where have i heard that before ...?

Oh wait, i remember- google just asked me:

"did you mean: North vs. South?"

That's right, last time, "it was different".  Never mind.

thad78's picture

I'm amazed Draghi's comments have such an inpact- NOTHIHG WILL HAPPEN til at least September, if then.By that time, all the rules will have changed again. Glad I'm out of this "market"- when 2 +2 =97, i give up.

The Monkey's picture

They have a huge impact because the Euro was so heavily shorted. You are in front of a bus when you short risk following a big drawdown in EURUSD and in front of central bank jawboning, action, etc.

SDRII's picture

santelli just reamed th cftc head of tech...the interview suffered tech problem cut away...hilarious

azzhatter's picture

Still having a hard time figuring out why Germany doesn't just leave themselves.

TPTB_r_TBTF's picture

because there is no democracy?

The Germans got the Euro shoved down their throats.  They didnT resist then ... why now?

SheepDog-One's picture

Just leave, Germany! Jesus H Christ on a popsickle stick PLEASE someone DO SOMETHING anyway! 

GlomarHabu's picture

Today the market's up on the Draghi.  Tomorrow it could be up on an obama fart or a a snap shot of Christine Lagarde's pudenda.

It's too surreal.

SheepDog-One's picture

'We gotta 'activate the ESM first! Spains gonna give us moniez, Italy's gonna give us da moneez....yea sure THEYRE broke too but oh well its HOPE!' uh huh sure whatever.

warchopper's picture

If Germany just lets the periphery implode, Germany can just come back and buy them a discount. 

TPTB_r_TBTF's picture

nope, TPTB get 1st dibs.  Unless you meant, "German Oligarchs should do that."  But they would have to check in with London 1st.


101 years and counting's picture

the ESM will never go live. only money going in would be germany, finland, france and netherlands. everyone else has no money to contribute, and would actually be draining the fund the second those countries contributed. Ex: spain to contribute 90B EUR and Italy to contribute 125B EUR. its good for a laugh, and that about it.

Meesohaawnee's picture

heres my take. Which should hold more water. If you could do it you would have done it years ago. You cant. No tech analysis needed. Someone tell the algos that. Are we gonna get another blog about technical analysis again today. Those people should feel like idiots today. like it ever changed

timbo_em's picture

Look beyond Germany. In the Netherlands general elections are up (Sept 12) and they hate printing money and (sterilized) SMP as much as the Germans hate it. And Finland has always been the closest to leave the party. So while those countries might not react to Draghi talking about doing something (why should they? he's only ruining his own credibility if he fails to deliver), they will act once he actually tries to do something.

All eyes on the Bernanke.

Dollar Bill Hiccup's picture

Vol killer in the house.

Look at the beautiful symmetry of the SPX selloff (post ramp) and recovery intraday.


Fool me once, shame on you.

Fool me n + 1 times? I'm comin after your silicon ... bitch.

roycewinsten's picture

Sorry, I posed this before but under another's message. Just learning how to work ZH's message board. My idea is this:

Isn't it possible that the ECB opens a credit line for the Spanish and Italian national central banks with which the national central banks buy their gov't's bonds. Then the national central bank either holds the debt or repos it to the ECB in a variant of the LTRO for a period of years - call it five. The ECB then would not be buying government debt but would succeed in funding the gov'ts for a period of time.

Cangoroo's picture

Seems plausible. What went by unnoticed is that mamy German economists seem to be convinced that the currency needs to built from scratch again i.e. variations in interests are tolerable but their will be a kind of outer limit for the currency which needs to be defended. So I guess many people have started to realise that a common currency with common interest rates is pure nonsense. What makes sense is to turn the Euro into a currency basket and then try to converge interest rates slowly. It is an admission to the fact that Keynes and Friedman were wrong and the Austrians were right. A de-centralisation of monetery politics works better.

Venerability's picture

Citi has been sounding utterly hysterical.

They are clearly too Short something or other - maybe at 1,000 leverage.

Will the next colossal failure be something in the Citi Nexus, rather than the JPM Nexus? 

Remington IV's picture

time for another barollo

Ted Baker's picture

Draghi can continue taking money from the Bundesbank behind doors like money printing but without of course breaking the EU treaty