European Central Bank (ECB) head Mario Draghi has shown the global financial markets that he knows how to negotiate with the Germans: like petting a porcupine -- very carefully! And yet, he has more than kicked the can down the road, he has in fact moved the ball down the field, in his latest maneuver -- first predicted in this blog.
By using the excuse of interest rate policy "transmission" -- clearly and unarguably (even in German ) within the ECB's treaty-based mandate -- to set up a form of "quantitative easing" or open market bond buying to support the troubled Spanish and Italian sovereign debt markets and thus save the Euro from the German passion for currency suicide.
To get to this point, he was forced to use "mother may I" language and hold his fire until after the German high court rules in mid-September on whether the very idea of the Eurozone's separate permanent emergency Euro rescue funding (the "stability mechanism") can legally be supported by German resources under that country's constitution. If the court says no, we are way back to Square One on the whole Euro mess -- if not worse. This would be like the U.S. Supreme Court overturning not just ObamaCare, but Obama!
In a related move, Draghi also agreed to require that the separate rescue fund be first to go into the distressed bond-buying business, and only after a specific request for such assistance from the Spanish and/or Italian government, because that process would trigger the rules, controls and austerity mandates that the Germans want to see set in concrete before they put their skin in the bond-buying game. The ECB has no mandate to impose such strictures on its beneficiaries.
In addition, Draghi agreed not to press for a "banking license" for the rescue fund, which would open the door to large-scale leveraging of the German contribution and thus expose the German Treasury to virtually unlimited risk. And finally, Draghi also dropped a broad hint that he would not insist on ECB bond purchases going to the head of the creditors' line in the event of a country's default: this not so much to please the Germans as to address a real concern in the markets the last time the ECB tried to indirectly help out the Spanish treasury. Clever, these Italian bankers.
At his press conference, Super Mario -- now known as "Subtle Mario' -- also let it be known that only the Germans were still opposed on principle to any bond buying by the ECB even though he has them in a treaty trap on the "transmission" point. This was a sort-of Colin Powell-like spotlight on German intransigence in the event that the bond-buying everybody in the markets and in 16 other countries seems to think it is necessary does not in the end happen and the Euro collapses: "If you blocked it, you own it!
American observers need to get used to how the Eurozone countries negotiate with each other -- with such a loose and ill-structured currency union, they have to use the only tools at their disposal -- plebiscites in the case of Greece, and Italian subtleties in the case of the ECB versus Germany. It takes time and space, but my sense is that Draghi has them where he wants them, and we'll just have to wait it out. Think Mick Jagger -- you can't always get what you want (right away), but if you try sometime, you just might find, you get what you need."
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