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Markets have calmed down in a big way in the eurozone and around the world since European Central Bank head Mario Draghi said in July that the ECB was committed to do “whatever it takes” to save the euro.Spain’s government funding costs, which have become a focal point of the euro crisis, are currently at seven-week lows.
Spanish stocks have outperformed U.S. stocks by double digits over the past month.
This week, traders are newly energized: It seems that the German Bundesbank—which has played the role of spoiler plenty of times over the past few years of crisis—is at least in part becoming less of an obstacle for the ECB to embark on a dramatic, “game-changing” policy response in Europe.
Germany has been opposed to ECB intervention in peripheral bond markets, but their position is clearly weakened, all things considered. Ambrose Evans-Pritchard brought attention to an interview yesterday with German ECB board member Jörg Asmussen that demonstrates this pretty well (FT Alphaville provides a more complete translation of the interview).
Here’s the upshot:
Mr Asmussen told the Frankfurter Rundschau that the surge in Club Med bond yields over recent months “reflects fears about the reversibility of the euro, and thus a currency exchange risk” rather than bad economic policies in struggling states.
The ECB’s foremost mandate is the price stability of the euro.
Asmussen’s reasoning is that there cannot be a stable euro as long as large economies like Spain and Italy are thought to be at risk of going back to their old currencies. So an action that some people see as a “bailout” of Spain or Italy, or funding via central bank money creation (something that to Germans is strictly verboten), can be excused as protecting the currency.
Along those lines, it makes sense for the ECB to intervene.
The problem is that this simple change in framing doesn’t actually mitigate any of the risks involved with embarking on the massive balance sheet expansion that such a plan of unlimited government bond purchases would entail for the ECB, nor can anyone predict how a weakened banking system with diminishing appetite for sovereign debt would respond.
Deutsche Bank strategists outlined in a note this morning their exact expectations for what ECB intervention will look like, writing that “ECB bond purchases could start before mid-September according to our economists and our Fixed income strategists expect an ECB- ESM/EFSF intervention of Euro 410bn in total (180bn by the ECB and Euro 230bn by EFSF/ESM).”
The idea is that this support buys time for policymakers to make inroads toward debt mutualization in the euro area. But if uncertainty persists on that front, it could turn out to be some of the costliest time ever purchased.
The Bundesbank knows all of this, as does the rest of the ECB. The difference is that Germany is on the hook for a lot more cash than the others if things do go wrong.
So, Asmussen seems to be getting out in front of this, seemingly contradicting the line that the Bundesbank was taking up until yesterday morning, when it released its monthly report in which it said that it “remains of the opinion that, in particular, government bond purchases by the Eurosystem should be viewed critically and entail, not least, substantial stability policy risks.”
As Citi economist Jürgen Michels opined in a note to clients this morning, “While the Bundesbank is not able to stop the ECB going ahead with the CGBPP (Conditional Government Bond Purchase Programme), the German central bank plays a significant role in forming the opinion of both German public and politicians in respect of further euro area rescue activities.”
It looks like the Draghi train has already left the station, and now it’s up to the Bundesbank to justify its being on board.