After an heroic resistance, the ECB has finally had to capitulate and reach (once again) beyond its constitutional mandate, by restarting its Securities Markets Program, this time to acquire Spanish and Italian bonds in the market.
The reason why this is not within its mandate is obvious: the Italian and, to a lesser extent, Spanish bond markets are huge and require such amounts of intervention to affect prices that it would quickly accumulate an amount of significance in terms of debt monetization, an inflationary policy explicitly forbidden in the EU Treaties.
However, in this case it has been made clear that it is a temporary situation directed to avoid a much greater evil: in September, once European leaders and Parliaments come back from their vacations the rescue fund (EFSF by its unimaginatively soviet-style name – European Financial Stability Fund) will take over from the ECB, supposedly take all the accumulated debt off its hands and continue the intervention on its resources.
What a neat arrangement. Pity the markets are not buying it entirely, possibly because of a few unresolved questions:
- Division in the ECB’s Council signals growing uneasiness on the side of creditor countries of the Eurozone. Understandably, they see this scheme as a backdoor rescue as a result of which they will be stuck with either Italian and Spanish debt, inflation or both
- A rough estimate of the amounts needed to stabilize both sovereigns, even in the shallow trade of August, is 7 bn EUR a day (10 bn USD) Compound this by at least 25 working days until the boys are back in town and you get a handsome 175 bn. Considering that the much meditated initial tranche of the Securities Markets Program, for Greece, Ireland and Portugal, lasted about six months and landed only about 70 bn on the ECB’s balance sheet, one wonders if the ECB has enough political ammunition to hold the fort.
It is not unthinkable, however, that the ECB succeeds in abating fear and we all make it to September relatively unscathed. If the whole operation is relatively cheap and calm is durably restored, then SMP will have saved the day. Alternative scenarios could be:
- The ECB accumulates North of 150 bn and hands the to EFSF, together with the bill. EFSF starts its operations with a disposable balance of 90 bn, nowhere near the almost inexhaustible capacity of a Central Bank to intervene and perhaps to be deemed insufficient by the markets.
- The ECB is alarmed by the level of peripheral debt accumulating on its balance and shouts to the governments for help… to find that everyone is vacationing in some recondite beach.
- The ECB doesn’t accumulate much and this doesn’t impair the ability of EFSF to act. However, the markets perceive that the gate is now guarded by a much weaker guard and test it again
Interestingly, at a time when European politicians don’t tire to admonish sternly their constituencies about the need to do away with the traditionally generous social benefits of their countries, their own personal vacations are one of the most serious threats to the integrity of the Euro area.
At least, even if everything goes to pieces a major calamity will have been avoided: the interruption of Europe’s politicians’ vacations.