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Irrational Draghi Exuberance

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The ECB's earlier Securities Market Program (SMP) failed. Citibank strategist Jamie Seale believes OMT won't fare better. He called it dangerous. Will it do anything more than buy short-term relief? It's no solution, he stressed. "The economic backdrop remains dire."

SMP initially sent peripheral nations' sovereign yields lower. Doing so didn't last long. Moreover, Draghi may intend to let rhetoric more than policy do most heavy lifting. Unfulfilled promises only work for so long.

Goldman Sachs also dissed him. It called OMT SMP 2.0. It said no easy way out of crisis conditions exists. An ECB declaration about being pari passu leaves unanswered questions relating to voluntary debt restructuring. It also provides no assurance about sound policy measures following promises. Why now when not earlier.

Bank of America economist Laurence Boone doubts OMT's success. Draghi's plan is more negative than positive. Conditionality was tougher than expected. 

The IMF's role as monitor means Big Brother is watching. These factors lessen the likelihood that troubled countries will seek help or as much as they might have otherwise.

Draghi announced no yield targets, no bond purchases ex-ante transparency, and no technical details on how OMT differs from SMP.

Ireland and Portugal won't qualify for help until they regain market access. Greece is too far gone to help.

Peripheral banks aren't provided relief. Other reservations were raised. JPMorgan Asset Management 's Michael Cembalest said Draghi may have to engineer a massive debt restructuring and take huge losses. In a note to clients, he explained:

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"Europe is conducting one of the most unorthodox experiments of the last 100 years (a competitiveness adjustment mostly through wage and price declines instead of currency devaluation), and they are making it up as they go."

Euro countries face problems that won't quit. Peripheral nations are deeply troubled. Massive capital outflows hammer them. Southern Europe is experiencing the greatest amount "the modern world may have ever seen." 

Cembalest's bottom line is that Draghi may be in way over his head. He's holding on to "trillions in loans and bonds that the private sector won't want to own unless there is a miraculous rebound in growth and employment." It's nowhere in sight.

He dubbed the ECB the "European Creosote Bank." He can't explain what he means except to say it relates to a fictional character eating "several plates of mussels, pate de foie gras, beluga caviar, eggs benedict, leek tarts, frogs' legs," and other assorted delicacies washed down with bottles of expensive wines, champagne and ale. The result isn't pretty.

Other analysts call Draghi's plan short-term relief at best. It's a financial equivalent of France's Maginot line. It's vulnerability is clear. Outflanking it is likely. 

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Troubled banks need restructuring. Peripheral economies need massive amounts of help. Perhaps it's beyond what's possible to provide.

Instead of addressing problems responsibly, Draghi and political leaders opt for punishing austerity, rising unemployment, lower investment and consumption, deeper recession, and eventually a Eurozone breakup. 

Phoenix Capital Research's Graham Summers calls the EU beyond saving. Its banking system is 36 trillion euros in size. Its deposits are 15 trillion euros.

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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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Since money is an abstract symbol representing val... by Theresa Paulfranz on Sunday, Sep 9, 2012 at 5:36:10 AM
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