Irrational Draghi Exuberance
Draghi's plan doomed to fail.
by Stephen Lendman
Thursday was Draghi day. He explained what ECB watchers knew. At his Frankfort press conference, he said Governing Council members agreed to unlimited bond buying. It's called Outright Monetary Transactions (OMT).
Bundesbank President Jens Weidmann alone dissented. He called Draghi's plan "tantamount to financing governments by printing banknotes." Doing so creates more problems than solutions.
In late August, Weidmann said bond purchases were "too close to state financial via the money press for me. The central bank cannot fundamentally solve the problems this way. It runs the risk of creating new problems."
OMT will target government bonds with one - three year maturities. Longer-dated debt with residual maturities of that duration will be included. Purchases ostensibly will be sterilized to keep money supply neutral. Don't bet on it. Earlier ECB promises fell short.
Draghi hopes to contain borrowing costs. Expect short-term success only. At best he'll buy time. Since crisis conditions emerged in fall 2007, every plan tried failed. They bought time, but little else.
Is this time different? Don't bet on it. More on that below.
Draghi's plan involves conditionality. One analyst calls it "Eurocrat-speak for debtor countries to agree to wear the particular austerity hair shirt we have designed for them before they get any dough."
Countries needing help must request it. Spain and Italy haven't asked. Rome wants Madrid to go first. Spain wants some conditions waived. They involve strict austerity. Doing so assures greater trouble, not less.
ECB rules prohibit direct state financing. As a result, secondary market purchases are planned.
ECB's preferred creditor status was waived. Doing so removes the requirement for central bank repayments ahead of private ones.
Draghi's plan solves nothing. He kicked the can down the road. He left many questions unanswered. One analyst called his scheme fantasy land. A chasm remains between promise and fulfillment. The ECB is notoriously unsuccessful in soaking up excess liquidity. Keeping inflation in check won't be easy.
Deep-seated problems are worsening. Bond-buying can't substitute for sound policies. Markets Thursday paid no attention.
Short-term fixes mean higher valuations. Push eventually comes to shove. Reckoning day can be delayed but not denied.