The ECB meeting this week is getting some serious hype. Not only is a 25 basis point cut expected, some are calling for 50 basis points (easy money for all!), along with some other technical adjustments over and above the rate cut, to ease strains. Of course the big bazooka is the ECB pulling a Bernanke (and Japan, and UK) and going full quantitative ease. Although technically that has already begun as apparently not all the bond purchases of late have been steralized... but we're talking a big bazooka, not a rounding error. Steve Liesman of CNBC, who in movies and stories since, had become quiet the media front man for government leaks (i.e. what Hank Paulson or Fed members wanted the market to know) says market expectations could be too high on this latter (bazooka) point, at least in the near term.
- Markets appear to have high hopes for this week’s summit meeting in Europe to begin putting an end to the financial crisis. Yet there’s ample reason to believe the market’s hopes will be dashed again.
- Specifically, it seems unlikely that whatever is agreed to this week by leaders will be sufficient to prompt the European Central Bank to wield the proverbial bazooka that markets await so desperately.
- There are many complicated, legal and technical reasons why this is likely true, but there’s also a simple one: Germany is not going to allow the ECB to make an unlimited commitment to buy bonds of European governments.
- This idea was repeated to me in meetings with German officials in Berlin and Frankfurt last week — the ECB is not the answer, however much markets say it’s the necessary and only solution.
- The German strategy at this point is two-fold: First, put as much pressure on governments now to fix their deficit problems, so that markets see the troubled countries are clearly on improving fiscal paths. Letting the ECB backstop troubled sovereigns would take the pressure off governments, countering the German’s own strategy. Second, work for long-term changes to the European Union treaties, for example, allowing deficit violators to be sued in the European Court of Justice in the hopes of avoiding such problems in the future.
- These changes eventually — one day in the distant future — allow the ECB to backstop either individual sovereign issues or a Eurobond. But it's not going to happen this week or next month, maybe not even next year.
- Several times I heard comments such as this one from an official: “The bazooka requires ignoring of the German constitution and the (EU) treaty.” Neither the Merkel government nor the Bundesbank, as far as I can tell, has any intention of ignoring either. The obvious implication: unlimited ECB purchases will require changes to both before they can happen.
- Which is not to say that rules can’t be bent. Already the ECB has purchased $200 billion of bonds. There was speculation among German market participants I spoke with that the number could be quietly increased to $300 billion or $400 billion. But remember, even that first $200 billion was so controversial that it prompted the departure of two German officials from the ECB.
- There's also talk of lending from individual central banks to a fund controlled by the International Monetary Fund that could be used to lend to troubled countries. The idea itself is troubled in a variety of different ways, but what I heard is that the Bundesbank would not support such a fund if funded only by European central banks and meant only for European countries. It could, however, support a regular IMF program designed for all IMF members.
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