A note on Munchau and QE - unintended consequences
Today Wolfgang Munchau in the FT focuses on QE European style and why an Anglo-saxon style QE would be to be preferred. Now I would like to focus on the first part because Munchau has a very good point here, something which we recently have stressed and focused upon in another framework, cfr
Munchau tackles the conditionality of the OMT (Outright Monetary Transactions) of the ECB, in other words buying up the sovereign bonds of countries in trouble subject to strict guidelines . He refers to an EU official even openly admitting the following : "May be nobody will apply and the ECB may never have to buy a single bond. If market sentiment is sufficiently positive, things might resolve themselves". This is a bit the Kayser Soze argument , the potential threat of a short squeeze when it comes to mega hedge fund positions. But the thing is : how credible is this threat ?
Munchau goes further :
"So do they really want to make the OMT look like a cheap trick ? I do not believe this was ever Mr Draghi's intention but if you link an ECB bond purchasing program to a political process, this may be the unintended consequence" And Munchau adds : "The main lesson I have drawn over the past of years is that you can never overestimate the complacency of European policy makers (!!). This notion of a self-fulfilling prophecy (without having to do anything at all) reminds me of what happened after the ECB started its liquidity program last year. That too was followed by a slowdown in political decision making. I had expected the same to happen with OMT but not quite so fast...."
So Spain has already made it clear it doesn't need help to avoid conditionality and Troika monitoring while various elections across Europe do not simplify matters. On the other hand, Mario Draghi cannot force governments to act.
And suppose for the sake of argument, it happens that for example Rahoy, Monti or whoever asks for a bail-out, subject to some harsh conditions. What are their odds of getting re-elected because that's what basically at stake here. What will happen when a new government kicks in based upon electoral promises to turn around certain decisions ? Just have a look at what has been happening over in Greece since May, no further comment required. Forget the higher ground and salvation at supra-national level, it's back to domestic issues and "politics around the church tower".
So the big ECB bazooka meeting of 06/09/12 could very well turn out to be 0% effective if we muddle through. It's a special kind of stalemate position where 1 player can't move and the other player won't move, like in chess a very frustrating result at the end of the game.