Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Mario Draghi Distracts Investors With Just Promises To Save the Euro

Politics / Eurozone Debt Crisis Aug 06, 2012 - 11:32 AM GMT

By: John_Browne

Politics In the last week of July, ECB President Mario Draghi attracted investor interest worldwide by saying that he would do "whatever it takes" to solve the Eurozone crisis and, in the process, save the euro. Markets rallied as investors concluded that Mr. Draghi could only be referring to the financial heroine of quantitative easing (QE) and the transfer of toxic Eurozone sovereign debt assets from troubled private banks to EU taxpayers. This mini rally built on momentum that had previously been fueled by belief that Fed Chairman Bernanke would imminently announce a further round of QE in the United States.



Given the record of Central bankers for encouraging hopes that invariably have proved fruitless, it was surprising how international financial markets appeared to be taken for yet another ride. But addiction is powerful and financial heroine is little different to the real thing in its ability to fire optimism.

True to form, neither banker delivered the goods. On August 1st, Bernanke disappointed markets by failing to announce any QE despite offering a gloomy economic outlook. Stock markets wavered, but hung their hopes on Draghi. But the next day the ECB made vague promises of future actions but offered no definitive actions. Financial markets were deeply disappointed. The euro fell as Italian bond yields surged. In the United States, the Dow fell by almost two hundred points at one stage.

In order to lessen the anti-climax, Draghi feigned amazement that his July 26th statement had received so much attention. It was a display of arrogance typical of the Anglo-American led central banks. However, despite denying the markets the red meat that they most wanted, Draghi encouraged further anticipation in three important areas.

First, he undertook to 'address' the problem set by the ECB, insisting on 'seniority' over all other bondholders when making loans to Eurozone governments. Any yielding on this point will involve all EU citizens, including Germans, in greater sovereign risk. Second, Draghi said he 'may' undertake open market operations (QE) in amounts that would make an impact on Eurozone finances. Third, he made it clear that his 'intention' is to have the ECB buy toxic sovereign debt in secondary markets in tandem with the European Security Mechanism (ESM). This would appear to slide around the EU treaty rules forbidding any direct subsidies to member nations by the ECB.

In recent years, Euro politicians have shown themselves clearly willing to override any law and to adopt any suspect tricks to further their aims. However, on September 12th, the German Constitutional Court will decide on German participation in the various legal gimmicks that have been concocted to short circuit constitutional roadblocks. In the past, this Court has shown itself to be no pushover.

Germany is the economic and political powerhouse of the EU, and the Eurozone. Germans disapprove of QE and bailouts for what they see as irresponsible Eurozone nations. Furthermore, German voters have encouraged their politicians to veto the Eurozone's proposal that the ECB be granted a carte blanche license to print money and add even more debt to an already chronic debt problem. In concluding that Draghi will ultimately deliver the interventions, observers miss three crucial factors.

First, the ECB has a governing council of 23 members. According to the Italian daily, La Republica,seven (30%) of the members disapproved of further Eurozone sovereign bond buying by the ECB. A further four members were undecided. This leaves only 12 members, including Draghi's deciding vote, or 52 percent who are positive in support.

Second, the German central bank is by far the richest in Europe and disapproves of the ECB yielding its 'senior' creditor position and also the proposition that the ESM 'bailout' mechanism is granted a banking license.

Third, the Eurozone economic problem, like that facing the United States, essentially is one of solvency, not liquidity. Nothing that Draghi has suggested addresses this issue. Solvency is a political problem over which bankers are impotent.

Based on his recent exchanges with Senators and Congressmen, Fed Chairman Bernanke has realized that the same situation faces the United States. This likely makes him less enthusiastic about the unleashing of more QE policies that have thus far failed to deliver real growth. However, both Draghi and Bernanke know that markets need to be talked up, and they continue to do so unapologetically.

Enormous pressure likely is being exerted on the Fed and ECB by politicians, bankers and overblown financial markets that appear increasingly desperate for more cheap easy money. However, it is likely that the Fed and especially the German influenced ECB will either be unable or unwilling to deliver the easy option on the massive size that markets expect.

By John Browne

Euro Pacific Capital
http://www.europac.net/

John Browne is the Senior Market Strategist for Euro Pacific Capital, Inc.  Mr. Brown is a distinguished former member of Britain's Parliament who served on the Treasury Select Committee, as Chairman of the Conservative Small Business Committee, and as a close associate of then-Prime Minister Margaret Thatcher. Among his many notable assignments, John served as a principal advisor to Mrs. Thatcher's government on issues related to the Soviet Union, and was the first to convince Thatcher of the growing stature of then Agriculture Minister Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously pronounced that Gorbachev was a man the West "could do business with."  A graduate of the Royal Military Academy Sandhurst, Britain's version of West Point and retired British army major, John served as a pilot, parachutist, and communications specialist in the elite Grenadiers of the Royal Guard.

More importantly make sure to protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com , download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp

John_Browne Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in