It took the ECB a year of endless behind the scenes Machiavellian scheming to restart the SMP program (which was conceived by Jean-Claude Trichet in May 2010, concurrent with the first Greek bailout). The markets soared with euphoria that this time will be different, and that the program which is a masterclass in central planning paradox, as it is “unlimited” yet “sterilized”, while based on “conditions” none of which have been disclosed, and will somehow be pari passu for new bond purchases while it retains seniority for previous purchases of Greek and other PIGS bonds, will work – it won’t, and the third time will not be the charm as we showed before. Yet it has been just 48 hours since the “bailout” announcement and already Europe is being Europe: namely, it turns out that nobody wants the bailout.
On one hand there’s Germany for obvious reasons – not only are they footing the cost, but it is for them that the threat of an inflationary spike as a result of “unlimited” bond buys is most acute. But on the other, just as we predicted all along, are Spain and France, the biggest beneficiaries of the bailout, and whose bonds soared on expectations the ECB may buy them, who overnight have had a change of heart and say they never actually needed the bailout. Why? Because its politicians have suddenly had a change of heart and realize they will be sacked the second they hand over sovereignty over to the Troika or whatever supernational entity is in charge of the country following the submission of the bailout request.
More importantly, and as explained before, as long as the yield on the bonds of insolvent European countries is sub 8%, not one country will demand a bailout. And as long as these countries reap the benefits of cheap rates, the policies of pseudo austerity will continue (as a reminder, nobody in Europe has actually implemented austerity), where nothing changes, where budget deficits continue to pile on, where sovereign debt continues to soar, where politicians continue making the same flawed policy choices, and where the European slow-motion trainwreck continues, only with a brief delay in the final inevitable outcome.
By now everyone knows about the ECB party that sent US stocks to 4 year highs. Now comes the aftermath. From the NYT:
Greeted with initial fanfare by investors and economic officials, the unlimited bond-buying plan that the European Central Bank president, Mario Draghi, announced Thursday ran into immediate political problems in the crucial countries of Germany, Spain and Italy.
In Germany, despite Chancellor Angela Merkel’s support for Mr. Draghi and the independence of the Central Bank, political and news media reaction was scathing, with accusations that the bank, in seeking to stabilize the euro currency union, was subverting its mandate to fight inflation and forcing debt upon euro zone members.
“A Black Day for the Euro,” “Over the Red Line” and “Pandora’s Box Opened Forever” were some of the German headlines, with the normally sympathetic Süddeutsche Zeitung headlining an editorial: “The E.C.B. Rewards Mismanagement.” Even the German Bundesbank, officially part of the European Central Bank, put out a statement commenting acidly that the plan was “financing governments by printing bank notes.”
Here is where it gets funny:
At the same time, the two intended beneficiaries of the Draghi plan — Spain and Italy — expressed reluctance to ask the bank for help, even if both might eventually have little choice but to seek aid. The governments in Madrid and Rome apparently fear the political impact at home of bowing to whatever demands for harsh economic policy changes might come with the aid.
And just as we predicted before…
They seem afraid that the medicine might prove worse than the disease, because Mr. Draghi made it clear that there would be no bottomless well of money made available without a program of greater spending discipline.
“Those who did everything to have the E.C.B. help now say they don’t want it,” Ferruccio de Bortoli, editor in chief of the newspaper Corriere della Sera, said in a Twitter message. “Speculation will play on this contradiction.”
The disjunction between how officials seek to placate the lightning-fast markets and the reluctance on the part of the public and politicians to make further sacrifices and move at more than a glacial pace highlight why it has proved so difficult for Europe to overcome the challenges that still threaten to tear apart its 17-nation currency union.
All of this is just as we explained over a month ago: “In Order To Be Saved, Spain And Italy Must First Be Destroyed.” We also explained why this will not happen, and that instead of being saved, Spain and Italy will ultimately be destroyed, by appearing to be saved first: as Mario Draghi kindly obliged us on Thursday. And all with the central-planners’ and stats quo’s blessing.
The simple reality is that already the grand plan is fizzling, which was to be expected. After all politicians are involved. Recall that Goldman, who basically force fed its alum Mario Draghi the play by play (after leaking the ECB playbook hours in advance) now “predicts” (and by predicts, we mean demands) that Spain demand a bailout as soon as next week. Well, Spain PM Mariano Rajoy, who promised Spanish banks will never need a bailout one week ahead of the Spanish bank bailout announcement, already is digging his feet in. As Spanish El Economista write, Rajoy is “tempted” to delay the Spanish bailout request until after the Galician elections, i.e., until October 21. At the earliest. In other words, while the market has already front-ran the Spanish bailout demands, suddenly Spain will conduct at least 6 auctions between now and October 21, during which time bond buyers will be praying that eventually Spain will demand a bailout. Ironically, it is these same “bond buyers” who swallowed hook line and sinker the plan that Draghi et al laid out for them, namely to assume a bailout, and buy bonds, when by doing so, a bailout becomes unnecessary. Did we say bailout? We meant trap.
So what happens in the meantime? Well, Spanish bonds can languish in the 6%, 5%, or even 4% range, which in turn will embolden the insolvent Spanish government to issue even more debt, thus making its fiscal situation even more untenable (recall the Spanish financial system is broke for one simple reason: too many (soaring) bad loans predicated by the endless collapse in the Spanish housing market). And issue bonds it will have to: recall that as we first explained, and as Nomura subsequently understood, Spain is on the verge of running out of cash!
But suddenly now that the market pretends all is well, following the most recent bout of central bank intervention, no Spanish politician feels the urge to sign their own career death warrant and request that the ECB funds these purchases which Spain simply will not have the money for. Instead, the theater that “all is well” will continue until Spain does run out of cash (the record outflow in Spanish bank deposits makes that a certainty) at which point the transition chaos will be unprecedented as instead of arranging for an orderly transition, the panic in the Spanish government will be epic. Even the NYT now understands this dynamic:
Spain must pay back 20 billion euros, about $25.6 billion, in bond redemptions in October. And some analysts suggest that Mr. Rajoy will need to seek help to satisfy half of Spain’s 180 billion euro financing needs (about $230 billion) over the next year. “The Spanish fear is that they become another Greece — that they will have to chop off their right arm for a blood transfusion,” said Mark Cliffe, chief economist at ING Bank in Amsterdam….Mr. Rajoy is already losing popularity rapidly, and no one wants further political instability in Spain to add to continuing anxieties over Greece.
And this is only Spain. Throw Italy into the mix, which the NYT admits has been even worse at implementing reforms, and one can see why even the once intelligent bond market has demonstrated surprising stupidity with its ramp in peripheral bond prices last week (which really has been just a massive short squeeze).
But the piece de resistance, which readers of Zero Hedge know too well about, is that while jawboning will continue to yield results as long as reality finally demands an intervention, and Spain running out of cash will be just such an jawboning-event horizon, is that once the ECB is forced to begin buying, as up to now nothing has actually been done by the ECB which has merely taken rhetoric, promises and threats to a next level, it is all downhill from there:
There is a further uncertainty about the survival of the euro zone, which the Central Bank is mandated to defend. Once the Central Bank loads up further on Spanish and Italian bonds — it has already bought more than 200 billion euros ($256 billion) of European bonds, including 50 billion euros ($64 billion) from Greece — it will find it very difficult to stop its bond buying even if countries do not keep to their promises of reform. To do so would be a form of suicide, because it could set off market panic and force countries to exit the euro, beginning a process with no clear end.
Yesterday we explained why the Fed will do everything in its power to avoid enacting more LSAP-based QE (it simply does not have the capacity for the kind of massive program that everyone expects, and even an “open-ended” monetization will force everyone to do the math). Today, we learn why it is the ECB that also will do everything it can to not hit the buy button. The biggest paradox is that up to now, the fear of central banks, which is there in part due to their (rapidly dwindling) credibility, is what forced investors to “not fight the Fed/ECB”… and the banks took advantage of this by not doing anything, but merely talking. The time for talk is over, and for one reason or another, the time for action has arrived. Such action will very quickly demonstrate that the central-planning emperor was, indeed, naked all along, and the ramp across all risk assets was for naught.
It also means that the next time when the central banks attempt a comparable jawboning of risk, they will be taken far less seriously, if at all. At that point one may expect the PBOC to finally admit just how much gold it has acquired in the past 4 years, and that anyone who wishes to give a totally new and still quite credible monetary authority the chance, is invited to do so.
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P.S. The initial phrasing of this article’s title was “Suddenly, Nobody Wants The ECB Bailout.” We then added “In Europe” because there is at least one person in the US who is absolutely delighted by the ECB “bailout.” The US president.