Counterparties: Mario Draghi’s shopping list
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Before we get into the details of what the ECB could announce, a quick update on the European debt crisis: It’s still there. Yields for Spanish and Portuguese debt are at or above the 7% danger zone, and Italy is publicly complaining that their debt costs have little basis in reality. Jens Weidmann, Germany’s top central banker, meanwhile, is reportedly both isolated and threatening to quit over his opposition to the ECB buying debt of struggling EU countries.
In a closed-door meeting in Brussels yesterday, Mario Draghi told the European Parliament that he’d be comfortable buying EU members’ bonds with maturities of three years or so. This, Draghi reportedly said, wouldn’t violate EU treaties. (Bill Gross tweeted that this bond-buying program would be something like writing “2-3 year checks”).
Of course, ECB bond-buying has been the summer’s worst-kept secret. As the WSJ’s Matt Phillips noted, Draghi said this on July 25: “To the extent that the size of these sovereign premia (in Spain and Italy) hamper the functioning of the monetary policy transmission channel, they come within our mandate”.
Draghi’s hints mean that three years into the European debt crisis, the ECB may finally return to limited, direct financing of struggling governments. Analysts, however, are all over the map as to what the ECB may actually announce after its meeting on Thursday, and whether it will involve yield caps.
One safe bet: more political entanglement. Even though Draghi insists the ECB is not political, his actions are still very much wrapped into discussions on what he recently called “the sharing of powers and of accountability”. Or, as Nomura put it: “Just imagine if the Fed had to play tough with California or worse Texas for example, to effectively impart monetary policy”.
The Economist‘s Charlemagne blog has a great description of Draghi’s predicament: He simply can’t fix Europe without the help of the continent’s leaders:
The euro’s crisis is fundamentally political, not monetary or financial. The ECB cannot fix the euro; it can only buy time. In many ways Mr Weidmann is right to say that, if there is to be mutualisation of risk it should not be done through the back door of the ECB, but rather through the front door (eg, with Eurobonds) and with the agreement of national parliaments. Some in the ECB think that the crisis will have to worsen before politicians take such radical action. Either because he cannot, or because he does not want to, Mr Draghi will not be the lone ranger.
– Ryan McCarthy
With that nod to incremental political change, on to today’s links:
A wonk is born: the rise of Ezra Klein – CJR
Wired’s investigation of Jonah Lehrer’s work finds “plagiarism, dodgy quotes, and factual inaccuracies” – Slate
Wired officially severs ties with Jonah Lehrer – Wired
What it’s like to fact-check at the New Yorker – Oxford American