"The Message From The ECB Was Clear"

[koganbot]

Or not.

Dueling headlines, both from the Associated Press:

ECB's Draghi: Bank may intervene on bonds (this is the one that claims a clear message)

Draghi authority tarnished as Germany blocks plan

(Top piece by David McHugh, bottom by Colleen Barry.)

Comments

[koganbot]

Wish the New York Post were more liberal on these issues. Then we'd get, e.g.:

FED TO ECONOMY: DROP DEAD

Update

[koganbot]

Krugman has this update, which he doesn't elaborate on:

"Update: Rumor is that the ECB is actually going to do more than Draghi seemed to say."

And now he's on vacation, leaving this plea:

"Note to the Europeans: you cannot have a crisis for the next couple of weeks, because I'm going on a long-scheduled family vacation — probably without internet access most of the time. Please wait until the last week of the month."

Spanish 10-year bonds back over 7:

7.165

Re: Update

[dubdobdee.livejournal.com]

http://ftalphaville.ft.com/blog/2012/08/02/1105721/was-draghi-really-a-disaster/

^^^Can't pretend I follow much (or indeed any) of this, but I saw several people linking to it as perceptive today.

[dubdobdee.livejournal.com]

http://economicsintelligence.com/2012/08/03/why-theres-more-in-draghis-may-day-speech-than-markets-realised/

This is rather clearer (maybe).

Europe: The Final Countdown

[koganbot]

Well, this is what Draghi said last week, and that the bank reiterated as policy this week:

Then there's another dimension to this that has to do with the premia that are being charged on sovereign states borrowings. These premia have to do, as I said, with default, with liquidity, but they also have to do more and more with convertibility, with the risk of convertibility. Now to the extent that these premia do not have to do with factors inherent to my counterparty — they come into our mandate. They come within our remit.

To the extent that the size of these sovereign premia hampers the functioning of the monetary policy transmission channel, they come within our mandate.

I (he says proudly) picked this out as the key statement even before I realized that Tim Duy had too (had read the Tim Duy piece, but didn't notice the particular significance of what he was putting in bolds and CAPS, might not have taken in that there were bolds and CAPS). I say (less than proudly, but then I'm not an economist) that I nonetheless didn't really make sense of it except to presume that in some way or other Draghi felt the ECB had the authority to buy bonds given certain circumstances. What I wrote was, "This statement has the merit of not being understood by me. It does seem to be saying 'Interest rates on bonds are within our mandate/remit' — assuming my guess as to what 'premia' means is correct, and assuming 'within our remit' actually implies some action (rather than no action)."

My problem was that I had no idea what was meant by "the risk of convertibility." And I didn't have the time or wit to find out. I gather from Cotterill's FT Alphaville piece that it means "risk that what's borrowed in euros will be paid back in lire etc."

What I gather from various articles (this is not my own thinking, and I haven't read the ECB statement) is that:

--The ECB, with only the Bundesbank dissenting, has stated that it's got the clear right to buy bonds in this circumstance, where the euro is at risk. Doing so is not bailing out a government (though that's a possible result), but is rather defending a system of debt and investment of which the ECB is a main part.

--Because of the Bundesbank intransigence, but also 'cause no country has asked the ECB to buy its bonds yet, the ECB has to follow some procedure (or something) before actually buying.

--If it hadn't been for expectations encouraged by Draghi's statement last week, yesterday's announcement would have been seen as a step forward, a significant shift.

--Last week's talk by Draghi was more or less in human language. Yesterday's ECB statement reverted to Opaque Oracular Central-Bank Speak. This is no longer appropriate, when what the markets fear is not rash action but no action. (I'm taking this from Jack Ewing's analysis in the NY Times that "It is just that the giddiest of investors were not ready for a return to technospeak." I'm drawing the conclusion that the ECB has to speak clearly now, whereas the analysis included the idea that speaking at least semi-plainly last week is what set up false hopes for yesterday.)

--And at this point, the markets aren't going to believe it until they see it.

Storbeck says in his post that the markets are panicking. I'm not so sure. Why should they take the ECB's word that it's going to do something, when it hasn't specified when and how it's going to do it, and it faces German pressure not to do it? However you characterize the markets, they're a reality (even if they're not realistic), and they will push Spain into default and thereby threaten the euro unless investors believe the ECB is irreversibly committed to buying Spanish bonds and, if necessary, Italian bonds.

Europe: The Final Countdown (Grammar Remix)

[koganbot]

Here's Tim Duy, yesterday:

They [the ECB] are not prepared to eliminate default risk by serving as a lender of last resort; they are only willing to eliminate the risk premia associated with a nation's exit from the Euro. I increasingly think that you can't separate the two, that only by serving as a lender of last resort can you eliminate the exit premia. But the ECB doesn't see it that way, and as such I suspect is willing to do much less than needed to resolve their end of the crisis. The more optimistic interpretation is that Draghi is really just repackaging all the risk premia, default or otherwise, as reversibility risk to limit resistance from the Bundesbank.

So maybe now I kinda at least superficially understand, at least on the level of, "Is it possible the ECB will buy bonds?"

I notice that Duy is doing with the ECB what I used to do with bands, which was to treat them grammatically as singular when the name was in the singular but then use "they" as the pronoun, and of course shifting the verb so as to correspond to the plural subject. Whereas I'm treating ECB as full-scale singular, using "it" as the pronoun, and I've now gone into treating bands as full-scale plural even when the name is a singular. E.g., "Girls Generation have scheduled their latest comeback." (In K-pop, "comeback" just means "latest release and its related promotions" (but not one-off download-only singles with not much in the way of promotion).) You might well argue that Europe are so hydra-headed that they should always be plural. "EUROPE ARE PLANNING THEIR LATEST COMEBACK: In their latest attempt to resuscitate the dying European Union, European leaders met in Brussels to formulate Europe's latest comeback, 'The Final Countdown.' Member states are expected to..."

[koganbot]

OK, reading Duy further, he's not one of the optimists. He calls yesterday an epic policy failure of the ECB. What he says, interpreting one passage:

Translation, I think: After the rescue fund is activated, and if the risk premia related to reversibility of the Euro remains high, then and only then will the ECB, reluctantly, buy bonds of affected nations. It is interesting that they acknowledge the seniority issue. Here I assume that the ECB intends to signal that they would share in any subsequent debt restructurings. It seems, however, that this might limit their willingness to buy said bonds, implying a less-than-aggressive response.

And

Also, if I am reading this correctly, if the ECB will only buy Spanish debt after Spain has asked for and received a EFSF/ESM program, then I think they intend to let the financial crisis engulf Italy until that nation also asks for an EFSF/ESM program. Is this correct? Because if it is, it doesn't sound like much of a firewall. And if they encourage the idea they will only help after the crisis intensifies to the point in which a bailout is necessary, won't such a policy increase the already troublesome financial fragmentation in the Eurozone?

So, if Duy's interpretation is correct, ECB action is dependent on governments acting first, which from Duy's point of view means further indecision and fecklessness.

[dubdobdee.livejournal.com]

http://www.voxeu.org/article/welcome-ecb
http://fistfulofeuros.net/afoe/whats-up-doc/#more-9725

^^^These are both from before the opaque and technocratic public statement, I think: the first a review of the strategy as a a whole, rather than the tactical strength or weakness of the most recent element, perhaps; the second a "Kremlinological" (as he puts it) reading of the public theatre of disagreement vs the coded giving of the Bundesbank nod to the previously prohibited, now merely "problematic" way forward.