The Reality Of The Rest Of Draghi's 'Believe-Me' Speech

Tyler Durden's picture

While it is probably not surprising that so many decided to focus on those few words of relevance to an implicitly self-aggrandizing crowd of long-only risk-takers and commission-makers; the truth is that, as UBS notes, "Draghi was stating a fact, not changing a policy". Putting the fateful sentence in the context of the rest of his speech/interview is critical and most importantly, we agree with UBS' Justin Knight's opinion that Draghi did nothing more than make a technical observation on an impairment in monetary policy transmission (as we discussed here). Regardless, if our interpretation is correct, then the rally in peripheral bonds should unwind quickly. The size of the move probably has knocked many shorts out of the market.


Justin Knight, UBS: Mr. Draghi was Stating a Fact, not Changing Policy

Peripheral bond markets rallied sharply on a single sentence uttered by Mario Draghi in an interview with Bloomberg on Thursday. When read in isolation, the sentence appears to indicate a change in policy in which the ECB would begin targeting peripheral yields. However, it is important to put the fateful sentence in the context of Mr. Draghi’s overall remarks. Thus, in our opinion he was doing nothing more than making a technical observation on an impairment in monetary policy transmission.

The sentence in question is:

“To the extent that the size of these sovereign premia hamper the functioning of the monetary policy transmission channels, they come within our mandate”

This implies, perhaps strongly, that the ECB’s mandate includes bringing yields to levels where they do not hamper policy transmission and then keeping yields there. However, this interpretation does not fit either with the context of the rest of his interview, or with previous equally strong statements to the contrary. Indeed, it does not mesh with the current institutional framework in Europe.

Mr. Draghi immediately followed the above remark with

“So we'll have to cope with this financial fragmentation, addressing these issues”.

Financial fragmentation – the fact that some banks have better access to market liquidity than others ? is the subject of this section of his speech. This sentence suggests that the policy response should be aimed more directly at financial fragmentation directly rather than peripheral yields per se. Put another way, it seems to us that he was simply stating that elevated sovereign risk premia impair the transmission of monetary policy as they raise the cost of bank borrowing (and therefore of lending). In the last ECB press conference, Mr. Draghi stated the favoured policy response to fragmentation:

“But in a highly fragmented situation, when a bank is short of funding, they only can go to the ECB. And if the bank is solvent, the ECB stands ready to provide all the liquidity they need. That is important. We should not forget that. I have been saying this on and on and on since the beginning. The ECB is providing liquidity and will keep all liquidity lines open to solvent banks.”

As policy, this is a far cry from the market’s interpretation du jour. Mr Draghi has been vocal about the ECB’s inability to target peripheral yields. In December he referenced the need to respect the spirit of the rules on monetary financing laid out in the Treaty. In the July press conference he also said:

“With regard to the ECB, I have said on numerous occasions that we are certainly supporting the euro area economy by achieving our objective of price stability in the medium term, and we want to act within the limits of our mandate. I don’t think there is anything to gain by asking the institution to act outside the limits of its mandate, thereby destroying its credibility”

Taking these statements together, it appears to us that the ECB already is addressing financial fragmentation. The Bank is providing unlimited liquidity to banks at the policy rate, and has proven quite willing to adjust its collateral requirements.

More broadly, it seems evident that the ECB does not have a mandate to create the informal fiscal transfer union that a cap on peripheral yields would ultimately imply. The fiscal authorities could provide that mandate. However, from our layman’s perch they seem relatively unconcerned with recent market developments. Furthermore, Article 123 of the EU Treaty, which prohibits monetising debt, has its origins in German economic thinking on the hyperinflation of the early 1920s. Therefore, it is very unlikely to be compromised easily.

We expect Mr. Draghi to clarify his comments in the coming days. That might mean waiting until the August 2 press conference. Regardless, if our interpretation is correct, then the rally in peripheral bonds should unwind quickly. The size of the move probably has knocked many shorts out of the market.

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agent default's picture

Believe me... we're fucked. 

stocktivity's picture

“Timothy Geithner and Wolfgang Schäuble today met on the island of Sylt to use the informal atmosphere for an open exchange of views on global, U.S. and European economies.

Sylt - Sylt has long been a playground for Germany’s rich and famous, and is called the "German Hamptons" for good reason. Pronounced "Zoolt," Sylt is a surreally beautiful, 25-mile long island on Germany’s North Sea coast, that has one of the longest unbroken stretches of immaculate sandy beach in all of Europe.

Unemployment over 8% and Americans struggling to get by but little Timmy is sent to an expensive resort to bullshit. Oh well...Sylt was probably the only place in the world they could have talked. By the way...did either of you assholes ever hear of Skype?  You could have saved us taxpayers a bundle. It's all Bullshit!

bank guy in Brussels's picture

John Ward of 'The Slog' is running very interesting pieces, which say that the real action behind the Geithner meetings now, is the discussion of Greece leaving the euro-zone, but with possibly the US coming in as Greece's economic 'saviour' and then using Greece for not only its mineral wealth, but as a new American central base for the Middle East ... maybe even one that will replace Israel!

Fascinating stuff, and Ward has a lot of sources. His most recent piece:

'Greece: the Washington v Berlin poker game returns…to Athens’ advantage'

Schmuck Raker's picture

Thanks Bank Guy. I don't know how realistic his theory is, but it is interesting.

Even the About page was good reading...

The Monkey's picture

Here is the shit. If you are feeling bearish, go find some fucked up issue like Zynga, Morgan Stanley or HP and go after the puts. Hedge with some calls is something decent like Walmart or Apple.

The indices may move up or down (most likely the direction you do not expect). But no matter the market, the shit will get flushed and the gems, on a relative basis, will shine.

john39's picture

>>maybe even one that will replace Israel!

that can only mean that Israel wants to strip mine greece for natural resources, but under the appearance of the U.S. doing it, as usual....


piliage's picture

US bails out Greece? Maybe...

I suppose if you look at it from the Dems perspective, if they don't do it they lose the election if Greece does run out of cash by September 20th and trashes the global economy. If they do it before the election, they get crucified by the right, but hey, what do they care? They are 'saving American jobs' or 'helping an important ally' blah blah blah BS...

We all know it's all dick sucking at this point, but the hacks in office right now are so shameless and clueless they'd whore out their own grandmothers (or sell out the American taxpayer to Europe) to stay in power for four more years. The vast majority of Americans are too stupid to understand what is going on anyway, I suppose they feel they can lie their way through it. They just might be right (sadly).

Cult_of_Reason's picture

It is very similar to Obama's: "Believe me, it will be change you can believe in..."

If someone feels he/she needs to say “believe me” (individual knows that he/she is telling a lie and many reasonable people will not believe it), 85% odds the person is either lying or bluffing (I will post a link to the study when I find it).

iDealMeat's picture

No need to..  'Believe' does not exist without the 'lie' in the middle..

azzhatter's picture

yep, a classic example of a lie. Whenever a guy says "this is a true story" you know it's bullshit

Drashta's picture

The reality is that the bankers who are playing the markets do not have to spend time parsing words in statements. They just pick up the phone and tell the statement makers what is it that they want to get done and when.

eddiebe's picture

Seems to me that in the financial markets lies are much better and effective than the truth.

Fedophile's picture

Tyler: "as we discussed here"

Here where? There's no link.

caimen garou's picture

computers and robots are trained to believe anything.

New_Meat's picture

"The Bank is providing unlimited liquidity to banks at the policy rate, and has proven quite willing to adjust its collateral requirements."

Wonderin' whether this has anything to do with the unlimited dollar swaps? ?? ???

- Ned

Cursive's picture

Oh, so we are going to deconstruct utterances now?  Draghi knew exactly what he was doing last Thursday.  Fuck all these asshats.  They will be crushed under the steamroller they are building.

The Monkey's picture

Crushed 4 years from now after you have lost all your money shorting the market and then have a real recession to contend with. Don't listen to these bearish blowhards. You never, ever short in front of a series of central banks unless you are shorting volatility.

They DO NOT want the markets to go down.

Meesohaawnee's picture

yes. he did know. Im sure it was well calculated and known in the inner circle beforehand.. Very staged. Come on. Look who he worked for. Need we say more.

Hype Alert's picture

"Regardless, if our interpretation is correct, then the rally in peripheral bonds should unwind quickly. The size of the move probably has knocked many shorts out of the market."


With the shorts out, it should be a fun ride.


The Monkey's picture

If it were that easy, kids would do it. This market ain't gonna tank anytime soon.

The Monkey's picture

You want to see the "shorts out" of the market? Wait until next week.

Rainman's picture

"If  Banks are short of funding and still solvent......ECB will provide all the liquidity they need " ?? Must be a lot of Fannie Maes around there.

JR's picture

It’s pretty hard to clean up a central banker and make him presentable as a legitimate policy maker when he is caught lying so many times…and when he obviously works for the large investment banks whose primary goal in the European crisis is to get their money back from those high-risk politically-connected loans. Draghi’s no different from Bernanke or Obama. What do they give the people but more debt and government tyranny? The central “bankers” are dealing with monstrous debt by increasing the debt.

My take, they can’t get away with it. They need a floor for sound money but they'll never voluntarily relent because they’re” Keynesians” and bent on ravaging debt by conspiratorial design. They’re hijacking western civilization under the threat of bankruptcy, lowering all boats while raising their own, to push Americans and Europeans into their world governance scheme.

We don’t need apologies or clarifications on what Draghi said or didn’t say; we need undiluted national sovereignty, freedom in the market place, limited government and an unshackled productive sector. In short, we need the central bankers to stand a great deal less "between us and the sun.”

Americans and Europeans either take back their countries, their monetary systems and their self government or their complacency will end in financial deprivation and terrorism under a banker tyranny.

Catflappo's picture

I think Draghi rubbed his right eyebrow and slightly shifted his weight from his left foot to his right foot just as he said the word "and".

I think this can unequivocally be interpreted that he thinks the Greek PSI is a good model and that Spanish 10 year yields will not be allowed to go back above 7.00%.     

He'll possibly have sushi for lunch.

Snakeeyes's picture

Evans-Pritchard has a better view. The timing of the Spanish debt is soon in terms of rolling over.

LMAOLORI's picture




Special Report: How Spain dumped a bad bank on the little guy


Insight: ECB thinks the unthinkable, action likely weeks away


disabledvet's picture

the "Janus face." not sure if it applies in the case of "the euro"...but if anyone is looking for the meaning of it:
was "the face on the coin" back in those days....among others i'm sure.
still...fascinating to think about...especially given the oh so honest reality that chance plays vis a vis wealth creation of any kind. still...this situation looks to me more like a two headed eagle...something the Germans know all too well of course:
the question of course is "who represents the Church and who represents the State"?

ekm's picture

Particularly seeing what Ron Paul managed, nothing is going to happen until after elections. In the meantime they badly need lower oil prices, hence they badly need a crisis.

Crisis is coming, make no mistake about it. It should have happened in Nov 2011 when europe froze up.

Check Hilsenrath on the link. Just fresh.