The Mario Draghi brought forth a new and improved standard of “truth obfuscation” at Thursday’s ECB press conference. When Draghi answered a question about the ECB basing its policy on politics he answered: “We are not in a political game.” In his “perception” there is NO POLITICAL WAR BETWEEN THE ECB AND ITS MEMBER NATIONS. This is of course unadulterated nonsense as everything the ECB does is political. During the ECB’s initial state of decision-making, then-President Wim Duisenberg said, “WE HEAR BUT WE DO NOT LISTEN.” The ECB claimed it pays attention to political discussion but its policy is set by objective criteria. Duisenberg brought proof to the nonsense of objectivity as the ECB kept its interest rates ridiculously low to aid the Germans in their cost of financing German unification and making the implementation of the HARTZ IV labor restructuring easier to easier to absorb for the German government. Duisenberg’s policy of negative real yields put severe pressure on the EURO as it dropped in value from its initial price of 117.5 to 82.5 which created credit problems for all of Europe but the Germans. As usual, it raises the question, WHOSE EURO IS IT?
President Draghi continues the political charade as he pretends that there is no conflict of ideas between the ECB and the Bundesbank. Draghi depends on Angela Merkel to deflect criticism from the central bank, but as Merkel’s political popularity wanes Draghi needs to be very careful. In one of his favorite counterfactuals, Draghi raised the elimination of interest rate fragmentation across the eurozone as the single greatest marker of ECB success. This is nonsense for the only reason that interest rate compression across Europe has been a success is because the investment world and European commercial banks have accepted Draghi’s proposition of “whatever it takes” to hold the euro together. So investors have bought into irrational premise of massively reducing interest rate differentials. Couple that with the ECB purchasing 80 billion euros a month of assets and investors have become absurdly complacent.
It is the GERMAN CREDIT CARD that has eliminated fragmentation, but at what cost? And if Merkel’s popularity continues to erode, financial markets will question the broad guarantee of the German credit card. Last I checked, nations with LOW FICO scores were charged much higher rates.
One of Draghi’s great slight of hands was his response to the question about the ECB’s purchases of corporate debt. In answering whether the ECB was buying less than investment grade corporate debt, Mr. Draghi obfuscated by declaring the corporate purchases an unmitigated success because it lowered the borrowing costs across all sized firms even corporations that did not issue bonds because the lower yields on corporate bonds forced banks to lower rates on loans to small and medium enterprises (SMEs).
Well, in fact this has not taken place for EU companies but it has led to many U.S. corporations using the ECB’s generosity to issue U.S. corporate debt in EUROS at artificially depressed interest rates. Foreign borrowers have issued at least 40 billion in euro-denominated debt since the ECB enhanced its QE. So while many European firms have not benefited, the global financial structure has been a recipient of Draghi’s benevolence … all on the German credit card. Firms such as Berkshire, JNJ, Honeywell, Blackstone Group, Wells Fargo and several others have loaded the ECB balance sheet with more debt.
The ECB needs to keep its asset buildup operating at high speed before the credit card is maxed out. In a last great bit of financial subterfuge, Draghi maintained there is no market bubbles because bubbles require leverage and ECB research shows the world still deleveraging. Yes Mario, the private sector in many parts of the world is still deleveraging but the GLOBAL CENTRAL BANKS ARE MASSIVELY LEVERAGING GLOBAL BOND MARKETS. The ultimate leveraging machine is the answer to FED GOVERNOR JEROME POWELL’S riddles. When asked who guarantees the ECB, he said, “THEY HAVE A PRINTING PRESS.” The use of fiat currency to debase debt and currency is the penultimate leverage machine and that is truly Archimedes’ lever.
***In Friday’s Financial Times, there was an article titled, “Renzi Dares Brussels to Challenge Italy’s Budget Plan Ahead of Crucial reform Referendum.” Reporters Politi and Brundsen raised the issue of the political stresses throughout the eurozone. The Italian debt ratio has been in violation of EU rules for many years and Italian policy makers are under threats from Brussels to provide austerity budgets to lower the debt/GDP ratio. But Prime Minister Renzi is under political attack and would suffer political loss if his government tabled a restrictive budget.
The interest rates on Italian sovereign debt OUGHT to be rising as Italian debt increases and the threat of insolvency for several Italian banks overhangs its economy. BUT THE ECB WILL ENSURE THAT YIELDS ON ITALIAN BONDS ARE KEPT RELATIVELY LOW THROUGH THE USE OF QEAs. As the article pointed out, “the prime minister used blunt and direct language as he dared the European Commission to challenge his 2017 budget proposal ….” Anybody who believes that the ECB will begin tapering its QE program earlier rather than later is naïve at best. But of course there’s no politics going on in EU finances. The bigger question will be for the markets to begin wondering who is going to pay for Draghi’s drastic actions? Oh, add in the December Italian referendum and the idea of any tapering is an absurdity.