“When you’re in the shit up to your neck, there’s nothing left to do but sing.” This is what Samuel Beckett wrote and it was the way President Mario Draghi performed today. Never in the history of central banking has a policy maker spewed so much crap about monetary policy and the annals of central bank shenanigans is voluminous. The EURO CURRENCY rallied 1 percent on the headline of the ECB‘s desire to cut monthly purchases to 60 billion euros a month but announced that the duration of QE would be extended through December 2017. So tapering on a monthly basis, but not on a longevity measurement.
The bottom line was more QE is coming with the restrictions being determined on an AD HOC basis according to the whims of the ECB leadership. The previous restriction of buying debt below the ECB deposit rate of -40 basis points has been removed. The term period has been reduced to less than two years. Financial conditions will be of importance as instability can result in the ECB increasing the QE program if the global uncertainty continues to prevail everywhere. Basically, this was a power grab by an unelected official resulting in the ECB having control over the EU economy. Mario Draghi, of course, established the rationale for the ECB‘s actions by castigating European governments for not enacting structural reforms and fiscal stimulus in a more expedient fashion. See, it’s not the ECB‘s fault. They are doing what must be done.
At the press conference, journalists wanted Draghi to say that the ECB was tapering, but Mario would have none of it and was adamant that TAPERING wasn’t even discussed. Draghi was the master of obfuscation as he wouldn’t even answer if the decision was unanimous. It was the consensus he answered. This was revealing that the ECB is in shit up to its neck as the fragile structure of eurozone banks coupled with tepid economic growth is a nightmare for Draghi and the political landscape of France and Italy.
The ECB also announced it was allowing the use of cash to post as collateral, which frees up more high quality assets for the REPO market. Everyone wants German, Dutch and Finish sovereign debt. The ultimate impact of the ECB‘s policy of shortening its duration purchases and removing the -40 basis point restriction was a dramatic STEEPENING OF THE 2/10 yields curves: Germany +10, Netherlands +12, France +11 and Italy +15. The steepening curves will hopefully not be just a reflection of the credibility of President Draghi and his power grab.
The penultimate lie sung from the ECB President is that fiscal stimulus is needed but must adhere to the Maastricht criteria. Well, with the Italian debt/GDP ratio already way beyond the Maastricht rules how is the beleaguered Italian economy supposed to engage in an aggressive stimulus? The Germans will push for greater austerity in an effort to be Maastricht compliant. Mr. President, you are in the shit up to your neck. You can sing whatever tune you want but it seems you like the “Ride of the Valkyries.” I will be searching for Das Rheingold.