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Emergency Central Bank Intervention Coming?

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"Action by the EFSF (European Financial Stability Facility) would provide 'political cover' for the ECB to join the fray in a two-pronged attack."

Critics called Draghi's comments "cheerleading bluster" and a "bluff to get through summer." Market action was short-covering.

Germany's Finance Minister Wolfgang Schauble rejects ECB hyperbole. "Welt am Sonntag," he said. "No, this speculation is not true." 

Bailing out Spain tops Draghi's agenda. A 100 billion euro package is agreed. No more, says Schauble. ECB backdoor Spanish bailouts violate Germany's constitution.

He nixed an additional 300 billion euro lifeline. Europe's ESM (European Stability Mechanism) won't be operational until fall. At the same time, Spain's funding needs way exceed 100 billion euros. They may be tenfold that amount.

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At issue is who'll supply it. The Bundesbank and German ECB members oppose dramatic action. After Draghi spoke, they expressed opposition to more bond purchases. 

The Bundesbank opposes letting the ECB have sovereign debt monetizing power. Its mandate prohibits it. Officially, Draghi hasn't said he wants it. Unofficially, his July 26 bluster may lack muscle enough to overcome opposition to his comments.

Moreover, if the ECB and Fed act, will it be enough? Enormous sums on both sides of the Atlantic are needed. 

Most important is bailing out banks and sovereigns at the expense of letting deep-seated problems fester and grow assures levels no amounts can resolve.

Broken economies and financial systems need fixing. Giants banks created today's problems. 

Recovery depends on nationalizing ones worth saving, breaking them up, separating commercial banks from investment ones and insurance companies, and letting the others die.

Evans-Pritchard cited Professor Tim Congdon saying "the chief cause of Europe's credit crunch is the EU policy of forcing banks to raise core Tier 1 capital ratios to 9pc too fast." 

"Loans are shrinking because of a misguided regulatory assault. It is crazy to make banks shrink risk assets in a recession," he said.

Evans-Prichard added that LTRO problems abound. Draghi may have no way to resolve them. He cited Capital Spreads' Angus Campbell saying he needs radical ECB mandate change to deliver as promised.

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I was born in 1934, am a retired, progressive small businessman concerned about all the major national and world issues, committed to speak out and write about them.

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Thanks for continuing to report on this topic. I w... by Paul Rye on Monday, Jul 30, 2012 at 3:17:49 PM