Draghi Was Speaking Without German Authorization

Last week, Mario Draghi said that the ECB would do “whatever it takes” to save the euro, which was widely interpreted to mean that the ECB would intervene in the bond market to bring down Spanish and Italian bond yields. Following his statement, the Dow rose by over 500 points, reflecting the market’s expectation that the ECB will rescue the eurozone.

Readers will recall that I said to ignore anything Draghi says unless it is followed up by support from the German finance ministry (Schauble) and central bank (Weidmann). Now the evidence is in: Draghi was speaking without German authorization (see below).

Draghi’s statement has no information value unless it is predictive of future ECB policy, and I don’t see that we know anything more about ECB policy than we did before he spoke.

There will be no deus ex machina from the ECB until he can persuade Weidmann, Schauble, Merkel and the Constitutional Court (i.e., Germany) that this is both legal and desirable. That may still occur, but it hasn’t happened yet. Once this fact sinks in, I expect that the stock market's balloon will start leaking air.

I emphatically agree with Draghi that a rescue mission is required, but he is not in charge of the ECB and the markets need to absorb that fact.

Wolfgang Schauble, German finance minister:
(Seeking Alpha newswire, July 29)
German finmin Wolfgang Schaeuble rejected speculation that Spain is about to request that the eurozone's bailout fund [EFSF] buy its bonds. While the country's high interest rates are "painful," it is "not the end of the world if you have to pay a few percent more at a few bond auctions," Schaeuble told the Welt am Sonntag newspaper.

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Deutsche Bundesbank:
(Reuters, July 27)
Germany's Bundesbank dampened expectations for further action by the European Central Bank on Friday by upholding its resistance to the ECB buying bonds, a day after ECB President Mario Draghi raised expectations such a move could be on the cards.

Draghi sent a strong signal to markets on Thursday that the ECB was preparing further policy action, saying that the ECB was ready, within its mandate, to do whatever it takes to preserve the euro, referring also to inflated borrowing costs, which some saw as a hint the bank could revive its bond purchase program.

The Bundesbank, which opposes the ECB's Securities Markets Program (SMP) because it treads too close to the central bank's ultimate taboo of state financing, said on Friday it was still not in favor of such a step. "The Bundesbank continues to view the SMP in a critical fashion," a Bundesbank spokesman said "The mechanism of bond purchases is problematic because it sets the wrong incentives."

ING economist Carsten Brzeski said Draghi's words were interpreted too enthusiastically, and he should have maybe been more careful. "Bundesbank comments are confirmation that this is not going to happen, that the ECB is not going to play Santa Claus."


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