Mario Draghi Reprises Hank Paulson: Demands Full Monetization Authority Or Else Threatens With End Of Euro

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Yesterday's "leak" of Draghi's comments that it is not monetization if just the tip only bonds with a maturity of 3 years or less are monetized, aka, legitimate monetization does not cause inflation was so horribly handled that the ECB huffed and puffed in a desperate attempt to appear angry, even though it was absolutely delighted that it had even more ammo in its war against Germany. Today, the leakage continues only this time nobody cares that Draghi's desperation is hitting the headlines left and right. As a result, Draghi literally pulled a carbon copy of Hank Paulson, and while he did not have a three page term sheet in hand, threatened that the Euro would end unless he was allowed to monetize short-term bonds. Here's looking at your Germany. From Bloomberg: "European Central Bank President Mario Draghi said the bank’s primary mandate compels it to intervene in bond markets to wrest back control of interest rates and ensure the euro’s survival. Mounting his strongest case yet for ECB bond purchases, Draghi told lawmakers in a closed-door session at the European Parliament in Brussels yesterday that the bank has lost control of borrowing costs in the 17-nation monetary union."

Bloomberg continues: "We cannot pursue price stability now with a fragmented euro area because changes in interest rates affect only one country, or two countries at most,” Draghi said. “They have no importance whatsoever in the rest of the euro area.” ECB bond purchases are therefore “a way to comply with our primary mandate,” he said, adding: “Frankly, all this also has to do very much with the continuing existence of the euro.” The reason he added the last part is because as Asmussen has hinted, the ECB believes it is in its mandate to do everything, including monetize whatever it needs, to prevent the market from dumping bonds and selling the EUR (ironically a weak currency is precisely what an economically impliding Europe needs). Of course, the reality is that Draghi has cause and effect completely reversed, and the only reason the EUR is plunging, as are peripheral bonds is because the local governments are doing nothing to fix their miserable fiscal reality, and will continue to do so as long as the ECB continues to intervene and give the impression that things are better than they really are.

But the worst news, is that the European Central Jawboner no longer seems to have any impact, and while the EURUSD did spike yesterday on these news, only  to retrace all gains, today's rehash of the same comments resulted in a brief 30 pips spike in the EURUSD, only for the entire move to be undone in under 10 minutes.

Which means only one thing: the market, as well as everyone else, is getting sick and tired of mere talking, promises and jawboninb, and now demands action. Which, however, is the worst possible thing for the central planners, as once again, their faulty theory will be exposed for everyone in pracitse: one can promise the moon, but when it comes time to deliver, not even the world's greatest central planners can do much if anything.

More from Bloomberg:

Draghi’s plan involves the ECB buying bonds on the secondary market of countries that ask Europe’s bailout fund to purchase their debt on the primary market, which would require them to sign up to conditions. Neither Spain nor Italy has made such a request yet.

 

The ECB sent proposals for the plan to national central banks today ahead of the Sept. 6 policy meeting. Germany’s Bundesbank opposes the ECB purchasing government bonds, saying it is too close to state financing for its comfort.

 

Draghi said the ECB’s interventions will not amount to monetary state financing as long as it purchases short-dated bonds.

 

“If we are to buy long-term bonds we are in a very delicate situation,” he told the lawmakers. “But if we go on the short-term part of the market where bonds have a length of time, a maturity of up to one year, two years or even three years, these bonds will easily expire, so there is very little monetary financing if anything at all that we are doing.”

 

Conditionality

While many countries have made “substantial progress” recently, “we can’t exclude that at some point in time this progress can easily stop because of adjustment fatigue,” Draghi said. “So that’s why we are asking for conditionality combined with these interventions by the ECB. I think this could stand against the charges that we are doing monetary financing, because we are not doing it.”

 

Draghi started his testimony yesterday with an overview of the economic outlook.

 

He said financial-market sentiment “has somewhat calmed down over the past few weeks.” Still, the situation “remains fragile and it’s surrounded by heightened uncertainty,” he said. “Looking ahead we continue to expect only a gradual recovery with subdued momentum and risks on the downside.”

 

Draghi said risks to the inflation outlook “are still broadly balanced, but certainly further intensification of financial-market tensions has the potential to affect the balance of risks for both growth and inflation towards the downside.”

 

Lending to households and private sector companies is “still very, very sluggish,” he said.

 

Asset Classes

 

Draghi said the debt crisis has distorted yields across a range of asset classes.

 

“Markets have perceptions of a certain country in a crisis,” he said. “Therefore they ask for higher interest rates in order to buy the bonds issued by the country. And when I say bonds I don’t only mean government bonds. Bank bonds, corporate bonds. Markets are asking for higher and higher interest rates, which in return reinforce the situation of the perception of the crisis. That’s where the main justification to step in is for the ECB and start buying bonds.”

 

The fact that the ECB’s monetary policy is only being transmitted in one or two euro nations compels the ECB to intervene, Draghi said.

 

“We have to rebuild the euro area,” he said. “We have to overcome this fragmentation exactly for pursuing price stability through changes in interest rates.”