Notes From Underground

Listening to the Draghi press conference left me with little satisfaction and I failed to have any sympathy for the devil, although I don’t wish to paint it black. It seems that the goal of the ECB is to make Germany its beast of burden but the result will be realized as tears go by. President Draghi stressed that the recent ECB actions were directed at resuscitating a moribund economy saddled with banks wallowing in a morass of debt. If the ECB had not been aggressive, growth would’ve been 1.6% less, according to ECB researchers. Draghi was adamant that given enough time the ECB’s QE and TLTRO programs will have been proved to be very effective in generating economic growth and bringing inflation up to its mandated level.

In a question about the criticism emanating from Germany, Draghi stressed that the policies of the ECB are for the entire EU and not just Germany. But as George Orwell wrote in Animal Farm, some are more equal than others, especially when the one complaining is the creditor for the entire European project. When asked about German bank and pension fund concerns over the extreme low rates, President Draghi used the same argument as Ben Bernanke and Janet Yellen: Savers should stop complaining because there are many others benefiting from the low rates. Insurance companies should be happy the ECB large-scale asset purchases are resulting in capital gains and thus enhanced profits for fixed income investors as the ECB bids up prices. The Germans OUGHT to stop complaining for the low interest rates are a global phenomenon and would happen regardless of the ECB. Here is the CRUX OF THE ISSUE: Interest rates might be low in Germany but the Bundesbank and German citizens would not be loading the national account with sovereign debt from less creditworthy borrowers.

To make matters worse, the ECB laid out plans for the TLTRO 2 program that commences in June. The ECB will be purchasing corporate bonds from non-bank institutions. There will be a rush by European corporations to bring loads of debt to market knowing that the ECB will be pushing yields down to absurd levels. There will also be an increased effort to securitize sub par loans in bundles that can pass the concept of investment grade, turning the ECB’s balance sheet into a bad bank. The outcome is that the ECB will purchase so much BAD PAPER that the Germans will never be able to get out from under the massive debt load. If the ECB purchases such massive amounts of debt any move by Germany to rescind its guarantee for the ECB will result in a severe global credit implosion.

The trap is being laid and for Draghi speed is of the essence. The pressure to defeat Brexit becomes critical for a Britain outside the formal EU will provide the impetus for others to move against the UNION. The trap is being laid and as in the movie Bronx Tales: Now Youse Can’t Leave.

*** Key question of the day concerned the BIS changing the risk weighting on sovereign debt. This is something I have discussed many times and it is critical to the ECB QE program. If the central banks key adviser, the BIS, were to require European banks to haircut the sovereign debt on its balance sheets, the capital costs would cause many European banks to implode because of lack of capital. Draghi and his Vice President, Vitor Constancio are pushing hard for the preservation of the status quo for zero risk weighted assets.

Pay close attention to this issue for it can undermine the entire ECB QE program. The most advantageous position for Draghi is that the risk weightings will be influenced by the BIS Financial Stability Board which is chaired by BOE Mark Carney. Governor Carney is opposed to Brexit and will not want to provide any more uncertainty to the U.K. referendum by causing more turmoil in the EU. Draghi has a strong insider to make his case. As I have previously stated: The question for all European debt investors ought to be. Who guarantees the ECB? When the Germans awake to Draghi’s trap, the spark may have started the Prairie Fire. Don’t You play With Me …

Tags: ECB, EU, Europe, Germany, Mario Draghi, QE

This entry was posted on April 21, 2016 at 6:33 pm and is filed under ECB. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.