For anyone who thinks that the ECB is some pristine virgin which has barely been touched in that special monetary printing place, we, or rather JP Morgan's Michael Cembalest, has some news for you: "To-date, that’s what the ECB has done: of the 1.1 trillion Euros extended to European banks and governments (through sovereign/covered bond purchases and repo), 970 billion has been given by the ECB." So anyone demanding that the ECB print even more outright (which incidentally we are certain will eventually happen - our thoughts are identical to those of Dylan Grice from two months ago: "ECBCTRL+P: The Next Steps In The European Implosion") should probably keep this in mind. It will also explain why German members of the ECB are dropping like flies, and why Germany, which better than anyone else, most certainly proponents of modern reincarnations of failed Keynesianism, knows what happens when central banks have gone wild, is certain that the ECB proceeding to move from €1 to many, many more trillions of explicit monetary support, will mean nothing short of hyperinflation.
The bottom line is that the only entity in the world with the firepower to save Italy in the short term is the European Central Bank. If you remember the little plastic men exhibit from Labor Day’s Eye on the Market, most of the arrows pointed to the ECB, indicating that just about everyone, other than the Bundesbank and perhaps conservative parties ruling Germany, thinks the ECB should solve the problem by printing money. To-date, that’s what the ECB has done: of the 1.1 trillion Euros extended to European banks and governments (through sovereign/covered bond purchases and repo), 970 billion has been given by the ECB. The modest remainder has come from the IMF and EU countries themselves (e.g. fiscal transfers).
German members of the ECB appear to have resigned out of frustration with money-printing (Weber, Stark) and remaining ones like Wiedmann mentioned this week the reluctance of Germany to accept more of it, referring to the institutional memory of the Weimar Republic hyper-inflation. I have included 2 charts below on Weimar that show what he is referring to. There is no space here to assess whether such concerns make sense at a time of household and corporate de-leveraging in Europe; what matters is that HE thinks they do. We do not know the most critical answer: are German members of the ECB fighting a battle that has already been lost? In other words, will the destiny of the ECB be to print a couple of trillion Euros to buy or lend against sovereign debt for the next several years? Until European policymakers answer this question, investors cannot be expected to have a lot of confidence in its markets or in its institutions.