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Markets were thrilled yesterday when European Central Bank president Mario Draghi said he would “do whatever it takes to preserve the euro. And believe me, it will be enough”.But Gluskin Sheff economist David Rosenberg said these were Draghi’s famous last words, much like when Hank Paulson had said in August 2008, “If you have a bazooka in your pocket and people know it, you probably won’t have to use it.”
Or when Ben Bernanke said in June 2008, “the financial crisis appears to be mostly behind us, and the economy seems to have stabilised and is expanding again.”
Rosenberg said Draghi’s words were pure rhetoric and he called Draghi a “leader of NATO – No Action, Talk Only – instead of a central bank”.
Draghi’s comments were widely interpreted as a return to the Securities Markets Program (SMP) which involves purchases of Italian and Spanish bonds. But Rosenberg said if this was in fact costless it would have been activated already.
He also poured cold water on talk about granting the European Stability Mechanism a banking licence. “Frankly, this is likely to be a political decision in the end, which is beyond the purview of the central bank.” And said a third LTRO (long-term refinancing operation) would do nothing more than buy some time.
Rosenberg argued that the underlying problem of Europe’s sovereign and banking sector would ultimately hinge on its fiscal and regulatory policy and that there isn’t much Draghi can do about it.