08:09 - Mario Draghi made what may in retrospect be recognized as a strategic blunder last week when he announced that the ECB would do whatever was necessary to save the euro. It was certainly a tactical blunder by anyone’s standard. Draghi’s comment led to a big upswing in the markets, which took his word for it. The trouble is, it is not within the power of Draghi or the ECB to save the euro, and whatever measures he announces today will either fall well short of what is required or will exceed the authority of the ECB.
The Germans do not control the ECB, and it’s quite possible that Draghi will today announce that the ECB will grant the ESM a banking license. Doing so is not in their power, and is specifically prohibited by treaty, but that may not stop them. And if the ECB announces that it will grant the ESM a banking license, the Germans will go berserk. In effect, granting the ESM a banking license will allow it to make unlimited purchases of sovereign bonds without “sterilizing” those purchases by selling other bonds that it already holds, which means those purchases will be funded by printing money. That is the line in the sand that Germany refuses to cross. If the ECB takes this step, it paints Germany into a corner with only one way out: departing the euro and returning to its own sovereign currency. And you can bet that Germany, which absolutely refuses to give the southern tier what amounts to an unlimited right to spend Germany’s money, will depart the euro before it allows that to happen.
So, Draghi has two choices. He can announce steps that are grossly insufficient to save the euro, and the markets will respond accordingly. Or he can announce that the ECB will grant the ESM a banking license, and Germany will respond accordingly. It sucks to be Draghi.
10:00 - What a shocker. Mario Draghi announced precisely nothing, and the markets are responding accordingly. Draghi didn’t give them the ESM banking license. He didn’t even cut the interest rate. All he did was promise to do something unspecified at some unspecified future date. So much for yet another “last chance to save the euro”. News flash: there is no chance, last or otherwise, for the euro. Speaking of which, I just moved series two of The Walking Dead to the top of our Netflix disc queue.
I just spent a couple hours cleaning up my lab, unpacking and inventorying chemicals, and so on. I really need to get some horizontal space freed up.