Italy and Spain have to pass under Caudine Forks. Meanwhile the future of euro remains in trouble because of the low rate of economic growth.
“Believe me, it will be enough”; admittedly, an uncommon statement from a central banker.And,after a moment of uncertainty, the financial markets decided to believe Mario Draghi and stopped going short on Italian and Spanish bonds.
The ECB meeting of September 6 has shown that Draghi was talking seriously: with the only dissenting vote of Jens Weidmann (but with the support of Jorg Asmussen, member of the executive committee) ECB decided the “Outright monetary transactions”, without ex ante quantitative limits. Purchases will concentrate not only on short term bonds, but also on bonds with a remaining maturity of three years, and a wide range of collaterals is allowed and, very important, without seniority.
The ECB purchases are subordinate to a formal bailout from Efsf/Esm funds, according the "Enhanced conditions credit line" (Eccl). At first sight the conditionality appears illogical. Everybody, from Draghi to Schauble, says that ECB action is not a way of financing sovereignty debt, but aims at restabilising an ordinate monetary policy. If it is so, then the ECB should act in total autonomy. But the conditionality is a political agreement between Mr. Draghi and Ms. Merkel. The point is that in Germany there is a strong formation (from Bundesbank to right political sectors to popular newspapers) that want the end of the common currency, or at least the expulsion of the Mediterranean countries (with doubts about Ireland) - by the way, this is one of the reasons why even central bankers of northern countries like Austria and Finland supported Draghi. To stay under the Buba’s heels is not an easy living).
Ms. Merkel and Mr. Schauble say to Buba (and to Germans): “don’t worry, in order to have the ECB intervention, Italy and Spain have to pass under Caudine Forks, with the participation of IMF”. As Mr. Asmussen said in an official speech, it will be impossible to repeat what the Berlusconi government did in 2011 summer when EBC started buying Italian bonds. Nobody knows exactly what the Eccl implies; surely the respect of six pacts, fiscal compact and the like, but with the Troika that establishes, in detail, the timing of fiscal policy and of liberalization of the country, and controls each quarter.
Before talking of the “homework” policy that, according Ms. Merkel, should settle the debt problem of Mediterranean countries, let have a look at the results of the spreads bonos-bund and btp-bund. We have to remember that at the end of February both spreads were at 300 basic points, with a steep descend for Italy and a mild one for Spain.
For two weeks Italian spread went down to 280 points, but bad news from Spanish banks pushed the spread upwards, and at mid March Spain dragged Italy (the opposite of summer 2011, when Italy, that is Berlusconi, dragged Spain). The rise of both spreads continued until July, over 600 points (Spain) and 500 (Italy). The reason is clear: behind dollar there is the Federal Reserve, behind sterling there is the bank of England, but, until Draghi’s statement, nobody was behind Italian and Spanish bonds (in euro).
Suppose you manage a pension fund or an insurance; you are not a speculator, but you worry about Mediterranean bonds (a part very short term bonds). It is not at all surprising that more the 200 billions shifted from foreign operators to national banks in Italy and Spain. But if you are a hedge fund manager you speculate on the bonds fall, going short. So that after Draghi’s statement speculators had to correct their strategy buying Italian and Spanish bonds, and the spreads went down by more than 150 points.
The Karlsruhe Court decision on Esm and the Fiscal compact on September 12th has been positive, so the downwards movement of spreads can continue, but there are also clouds coming, like bad news from Greece (default or exit or both) and a recession more and more deep. Ms. Merkel will certainly try to avoid troubles before German elections, and surely the ECB decisions allow to gain time. But the future of euro is still in trouble; the end may happen not because of the high cost of debt but because of the low rate of economic growth.
The point is that the German economic policy (homework) produces recession; the expansionary austerity is a fable that only few economists believe. We need investments, both private and public, both at European and at national level. Until now nothing has been done, and the fear is that we have to wait until German elections, losing an entire year.