Thursday's ECB Announcement: Standby for More Euphoria

Seven hours from now, we will have the press release from the ECB board meeting, and then Draghi’s press conference. The markets wait with bated breath.

My expectation is that the ECB will announce three things:
1. A cut in the overnight rate from 0.75% to 0.50%.
2. Another LTRO (cheap money for three years) for the banks in the range of EUR 400-500B.
3. Revival of the SMP (bond buying) for “monetary reasons” in an unstated amount.

Another tranche of LTRO would be very helpful for Spain, coupled with the simultaneous EFSF recapitalization of its banks so that they are “solvent” for ECB lending purposes. That way, instead of the EFSF having to bail out Spain, the ECB can do it via the banks, which will use the funds to buy government bonds. The government can use the proceeds to pay its bills and fund the regions. This could keep Spain afloat pending the eventual startup of the ESM.

Reviving the SMP could have substantial influence on market sentiment as it hints at an eventual ECB rescue of Spain and Italy. But it will be purely symbolic.

Thus, the ECB can throw up enough dust and confusion to convince the markets that it will do “whatever it takes”, and thus redeem Draghi’s exigent promise. Audible relief all around, and then everyone in Frankfurt and Brussels can go off on their August holidays. There should be sufficient confusion and misdirection for the bullish to declare victory as they are wont to do whenever the sun rises in the morning.

However, what will be missing in this excitement is the fact that no part of the Troika has visited Spain to conduct an on-site examination of its banks or its regions. All we have today are two consulting firms’ estimates of the size of the banks’ asset quality problem. I sincerely doubt that they provided in any way for the impairment of the banks’ loans to the autonomous regions, all of which have lost market access and all of which are running operating deficits. I also doubt that a bunch of European consultants (no offense) have the slightest ability to do the down-and-dirty on the banks’ commercial real estate portfolios.

The World’s Opinion Page

Help support Project Syndicate’s mission

subscribe now

Those who haven’t lived through a real estate disaster may have trouble understanding that many such loans are worth not 85% or 75% or 70% or 50%, but nothing as in nothing. Raw land and unleased (or half-built) structures can be worth nothing. All those half-built condos on the Costa del Sol? They are probably worth less than nothing. They will stand as monuments to what might have been.

The regions have big deficits and can’t borrow in the markets, which means that their debt should be consolidated with the government, along with the gaping hole in the banking system. The cost of a full bailout of Spain will be much more than currently anticipated, and it will manifest itself over the next few months. But it will take a few weeks for that to sink in, after everyone is back at work in September.

http://prosyn.org/gvlW4fG;
  1. Television sets showing a news report on Xi Jinping's speech Anthony Wallace/Getty Images

    Empowering China’s New Miracle Workers

    China’s success in the next five years will depend largely on how well the government manages the tensions underlying its complex agenda. In particular, China’s leaders will need to balance a muscular Communist Party, setting standards and protecting the public interest, with an empowered market, driving the economy into the future.

  2. United States Supreme Court Hisham Ibrahim/Getty Images

    The Sovereignty that Really Matters

    The preference of some countries to isolate themselves within their borders is anachronistic and self-defeating, but it would be a serious mistake for others, fearing contagion, to respond by imposing strict isolation. Even in states that have succumbed to reductionist discourses, much of the population has not.

  3.  The price of Euro and US dollars Daniel Leal Olivas/Getty Images

    Resurrecting Creditor Adjustment

    When the Bretton Woods Agreement was hashed out in 1944, it was agreed that countries with current-account deficits should be able to limit temporarily purchases of goods from countries running surpluses. In the ensuing 73 years, the so-called "scarce-currency clause" has been largely forgotten; but it may be time to bring it back.

  4. Leaders of the Russian Revolution in Red Square Keystone France/Getty Images

    Trump’s Republican Collaborators

    Republican leaders have a choice: they can either continue to collaborate with President Donald Trump, thereby courting disaster, or they can renounce him, finally putting their country’s democracy ahead of loyalty to their party tribe. They are hardly the first politicians to face such a decision.

  5. Angela Merkel, Theresa May and Emmanuel Macron John Thys/Getty Images

    How Money Could Unblock the Brexit Talks

    With talks on the UK's withdrawal from the EU stalled, negotiators should shift to the temporary “transition” Prime Minister Theresa May officially requested last month. Above all, the negotiators should focus immediately on the British budget contributions that will be required to make an orderly transition possible.

  6. Ksenia Sobchak Mladlen Antonov/Getty Images

    Is Vladimir Putin Losing His Grip?

    In recent decades, as President Vladimir Putin has entrenched his authority, Russia has seemed to be moving backward socially and economically. But while the Kremlin knows that it must reverse this trajectory, genuine reform would be incompatible with the kleptocratic character of Putin’s regime.

  7. Right-wing parties hold conference Thomas Lohnes/Getty Images

    Rage Against the Elites

    • With the advantage of hindsight, four recent books bring to bear diverse perspectives on the West’s current populist moment. 
    • Taken together, they help us to understand what that moment is and how it arrived, while reminding us that history is contingent, not inevitable


    Global Bookmark

    Distinguished thinkers review the world’s most important new books on politics, economics, and international affairs.

  8. Treasury Secretary Steven Mnuchin Bill Clark/Getty Images

    Don’t Bank on Bankruptcy for Banks

    As a part of their efforts to roll back the 2010 Dodd-Frank Act, congressional Republicans have approved a measure that would have courts, rather than regulators, oversee megabank bankruptcies. It is now up to the Trump administration to decide if it wants to set the stage for a repeat of the Lehman Brothers collapse in 2008.