Moody's: "The ECB Can Do No More Than Buy Time"

Tyler Durden's picture

It would be odd to suggest that one of the most scathing critiques of the ECB's attempts to talk up the market on nothing but hope, promises and expectations would come from rating agency Moody's, yet that is precisely what has happened. With Swiss, Dutch, Finnish, and German short-dated bonds once again hitting new record low (negative) rates (and Italian 10Y is weakening), it would appear that at least some of the market is not drinking the all-things-risk kool-aid.



Alistair Wilson, Moody's: Draghi Reaffirms ECB’s Willingness to Buy Time, but ECB Cannot Resolve Debt Crisis

Last Thursday, Mario Draghi, the President of the European Central Bank (ECB), said that “within [its] mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” The statement lifted market sentiment and sent Spain’s 10-year government bond yields back below 7%.


Media and market commentators have interpreted Mr. Draghi’s remarks as an indication that the ECB is willing to do more to support pressurized euro area sovereigns, for example by expanding the securities markets program (SMP) with further government bond purchases.


In fact, the statement was a supportive but very general one that contained no specific proposals and offered no firmer prospect of the crisis being resolved quickly. It reaffirms our view that the ECB will ultimately do all it can to support policy makers’ efforts to resolve the crisis. However, that is a necessary but not a sufficient condition for the euro area authorities’ current strategy to succeed.


The assumption of ECB support is central to the credibility of the authorities’ ‘muddle-through’ strategy for resolving the crisis – a reactive and gradualist approach that makes periodic shocks inevitable. The ECB’s willingness to act in a way that, by bolstering investor confidence in peripheral sovereigns, temporarily supports those countries’ continued access to debt markets, is a crucial element of the strategy. The ECB’s capacity to provide such support was amply demonstrated with the introduction of the three-year long-term refinancing operation in December 2011. Were the ECB unwilling to act in this way, the authorities’ muddle-through strategy would be unlikely to succeed.


However, the ECB can do no more than buy time: its actions alone will not resolve the debt crisis. Resolution will ultimately rest on achievement of fundamental changes to member states’ budgetary positions and debt stocks, on structural economic changes required to stimulate growth, and on institutional reform to the economic and fiscal governance of the euro area. Each change will take years to accomplish, and support from the ECB will be essential to the preservation of the euro in the meantime.


The timing of Mr. Draghi’s statement is significant. With the July Summit having failed to reassure euro area sovereign investors, and Spanish and Italian government bond yields having risen substantially over recent days, Mr. Draghi’s statement indicates the level of concern among euro area policymakers. It illustrates the extent to which current financial market conditions are credit negative for issuers across the euro area.

Moreover, notwithstanding the strength of Mr. Draghi’s statement, significant areas of disagreement remain between members of the ECB’s Governing Council on how the ECB should respond. Ewald Nowotny (president of the Oesterreichische Nationalbank and member of the ECB’s Governing Council) recently suggested, in a statement to Reuters, that the European Stability Mechanism should be constituted as a bank in order to be able to borrow from the ECB, a suggestion that the ECB has firmly rejected in the past.

Conversely, subsequent to Mr. Draghi’s statement, a Bundesbank spokesman suggested that expanding the SMP was “problematic”. These conflicting remarks illustrate the diverging views that have dogged the euro area authorities’ policy development and significantly contributed to the depth of the crisis.


Source: Moody's

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gjp's picture

I really hope that's true, but it seems, a la GW Bush regime, the market is of the opinion that it can make its own reality.  One day it won't work, but it's hard to guess why that day would be this week, when the denial train is running so strong.

vote_libertarian_party's picture

Just long enough for month end valuations to look good.  


How conVEEEEEEEnient.

francis_sawyer's picture

The ECB, with it's 'time', is no better off than Henry Beemis...

battle axe's picture

Moody's the  voice of reason? Well I thought I would never see the day....


Cursive's picture

Well then, Moody's, why don't you hang triple hooks on the ECB or any EU soverign?

LULZBank's picture

Its just war of the words, on both sides, for now.

RobotTrader's picture

Give it 4 more trading days, market drifts down, bears start beating their chests, then another "sudden" statement will fly out of Draghi's pie hole and the rally resumes again.

LULZBank's picture

Actually, Draghi makes such comments on the days when the markets are a rally.

banksterhater's picture

wrong. It came when S&P was about to seriously break below the 50-day

GERxit's picture

Even though I think Draghi & co and their verbal intervetions SUCK, I'm not sure who the greater fools are:

Draghi with his shit or the muppets buying up markets?

francis_sawyer's picture

So between Draghi & Hilsenrath, the world is safe for eternity... How much do you intend to profit?

Jake88's picture

Insanity would be to expect something different

Meesohaawnee's picture

that should get us to 1400 on the spy! Dead on robo!! dead on.

rsnoble's picture

Just like the US and all it's QE3 talk keeping the markets pumped up. Tell you what......if it's so great then fucking do it.

spanish inquisition's picture

Isn't that all a Central Banker can do? Buy time. Use mandate/policy to pull forward demand from further out on the timeline and hope the ship rights itself. This only works if the consumer is actually in a position (means and motivation) to move his purchase forward AND IF there is any mid to long term demand to pull forward.

scatterbrains's picture

"consumer in a position to move his purchase forward" wait we havn't even starting paying for any of this fluff yet how's that gonna happen?


surf0766's picture

Reality will suck especially for those who laughed at preppers.

ghenny's picture

I don't like the market going higher in this economic environment any more than others commenting here, but the truth is investors have nowhere else to go at current yields.  Corporate bonds are now only for the Sheeple.  Combine this with Central Bank intervention and I could see DOW 14,000 - 15000 within a few months.  Sorry folks thats the truth of it.  I don't see a plunge in the market given these realities for at least two years when economic fundamentals will probably reassert themselves and the policy makers will be truly out of gas.  If as I hope the policy makers get their act together during that time - which is my base case scenario and probably that of the Central Bankers - then we could see the market essentially hold at around the 14,000 - 15,000 range for a couple of years as we continue to work our way through all the debt mountains and real estate messes.  

canardo's picture

That's probably more or less the game plan. And it might even work. Provided there are no black swans such as sudden euro breakup and chaos, trouble in Japan or war in the middle east with usa and russia/china directly involved or God knows what else. Also, politicians getting their act together? I don't know about that one .... A lot of ifs and buts if you ask me.

silencemachine's picture

The Moody's rating about Lehman Brothes bond was AAA. And we know what happened. Do we really still believe Moody ? Let's be smart and reasonable. Istitutionals go ahead to buy Italian and Spanish bond despite their ratings. Maybe it was better to use Moody's reports as contrarian indicator.

Sudden Debt's picture

And that's where the catch phrase comes from:


DavosSherman's picture

Buy time with OPM.

Snakeeyes's picture

Look at the debt rollever for the PIGS. Moody's right, all Mario can do is fight a delaying action.

Jlmadyson's picture

The only thing central bankers have done for 5 years straight.

warchopper's picture

Ambitious people do not want to admit that they have failed. Failed they have.