From Mark Grant, author of Out Of The Box
When Unlimited Has Limits
Everytime we get the next round of the “Great Cure” for Europe we get the same reaction which is a massive rally based upon the next new drug offered up by the Continent. Reality is reality and there is no denying the initial surge and hope springs eternal from the human breast and the jawboning done by Mr. Draghi has been quite effective and I acknowledge his performance. I also nod to the Southern countries in Europe that have ostensibly won this round and overcome and outvoted their neighbors that will have to fund if it gets to that. I continue to point out that under Mr. Draghi’s plan nothing will be done unless the Stabilization Funds are utilized which means that the ECB will do nothing unless the European Union agrees to it first so that the EU has a veto over any ECB action in effect but no one is paying any attention to that fact at present.
The ECB has shifted any move on their part to an approval process at the EU which will take months to be agreed upon while the ECB has tied their own hands and subjugated themselves to the EU as part of their stratagem but the markets obviously consider this to be a trivial fact. Perhaps this is why Germany has responded in such a benign manner; they know with certainty now that the ECB will do nothing unless the European Union agrees in advance and Germany can veto the entire process if it gets down to it and Germany actually now has more control over the ECB than they did in the past so that the Germans may secretly be quite pleased with the outcome. It is all games within games, a charade for the exhilarated crowd but that is Europe these days.
Nothing that has occurred has changed the financial positions of Greece, Portugal, Spain and Italy one whit but that is also not the focus of the moment. However I think it will be the focus again soon as the recession in Europe deepens and broadens and Spain and Italy both show up begging cups in hand. Then there is the German Constitutional court decision on September 12 and the decision whether to hand Greece another $50 billion or so or not. At some point the markets will figure out that the ECB just bound themselves in steel wire and that they can now do nothing without the reluctant agreement of the entire European Union where vetoes are possible and where Germany has a much greater sway but it often takes the markets awhile to figure things out and so be it. I have been here before a number of times during the European crisis and I always smile politely, nod my head and wait until the dawning of reality commences.
The Loss of Independence
In very real terms the ECB is now no longer an independent institution. The ECB has promised not to act unless the EU assents. The ECB is now totally subject to the whims of the politicians in Europe and whether the markets ignore this for the moment or not that is the truth of it. In promising redemption the ECB has also traded away its ability to act on its own and it will be interesting to see how this plays out.
The ECB Window
Maturities of 1-3 years for sovereign debt will now be viewed differently no doubt and a lot of money will be invested in the upfront years. They will be viewed as “protected maturities” with not only the backing of the sovereign nation but of the ECB as part of the credit considerations. Funding will also shift to these maturities to get a better rate but this will also cause a massive amount of roll-over in short maturities and failed auctions may occur because of the size of the short funding and the ostensibly lower interest rates that will append to these short maturities for a time. The Firewall concept obviously failed and here is the new, new plan and “unlimited” and “no cap” is only applicable if the EU agrees; otherwise it is a promise that may never be carried out or utilized but tell no one; it might upset them.
“Things are not always what they seem; the first appearance deceives many; the intelligence of a few perceives what has been carefully hidden.”