Paramo preparing us for an ECB silver bullet ??
Last Sunday (blog pick 1 out of 3), I took the liberty of freewheeling into the minds of our policy makers. We had already ruled out the EFSF or SPV/CDO option, both on grounds of credibility and political feasibility (Germany). But we also suggested that the ECB might be tempted to come into action but not as last resort buyer at general public request. Yesterday, my feeling was somehow confirmed when visiting a fixed income seminar hosted by JP Morgan Asset Management. When touching the subject of quantitative easing/money printing/shoring up sovereign distressed debt, AKA "bring out the bazooka", one of the key speakers elaborated a bit further on their Frankfurt visit the day before.
They had a long talk with José Manuel Gonzalez-Paramo, Spanish representative within the ECB's executive board. Paramo was quite open about the past behavior of the ECB - justification of no action - as about the near future. And the door for action was indeed not closed. The ECB is merely waiting for a clear political sign in the right direction. And if that sign comes, well, anything can happen.
The sign Paramo is referring to could mean 1 or 2 things. Primo, Merkel addressing German Parliament next Friday, preparing the audience for some kind of German altruism supporting the single currency all the way, but not entirely for free. And Segundo, details on this quid pro quo could be given during the 9 December EU summit : A joint move towards a euro-zone fiscal integration with a rapid change in various treaties to achieve this. Coupled towards more member state discipline and stronger supra-national policy action field (budget/economics) and supervision.
And if this should be the sign - after all a conditio sine qua non for a well functioning currency zone - the ECB could come into action on two fronts. It could lower interest rates further. Although not necessary nor to expect something big about it in business cycle terms, it's a kind of symbolic gesture of "benevolentia" towards markets but most of all politics : "you do your job so we can act accordingly", the law of communicating barrels. And if this should alter sentiment, they could do something extra by firing a silver bullet as a kind of Grand Finale: some well targeted considerable one-off purchases of government bonds. And in these markets, a silver bullet might be sufficient, no need for a bazooka : poor liquidity, no propriety trading in dealers' rooms and hence the only big time shorters in the market being London based leveraged vulture funds. An ECB move could cause a considerable short squeeze, with unwinding of positions very difficult because assets are hard to find, accelerating prices further up (yields down). Greetings from Frankfurt but more importantly a sign : instead of don't fight the FED, be careful as well when fighting the ECB.
But for this to happen, we need a credible political blueprint and a swift implementation of good intentions. And most of all, we don't need people crying out loud "where the hell is the ECB !". Rest assure, they are there, but they will only exit the cave when people stop making noise in front of the entry. And as a politically independent central bank, it should be like this.
One final remark : in a world where everything is manipulated these days by central banks (ECB a very minor detail), where it is hard to properly calculate risk premiums because of this behavior of zero-interest rates and artificially kept low long rates, you are fighting a lost war with honest weapons. And hence, before the Anglo-saxon press start shooting at the ECB for this possible unorthodox future move, they should also consider the following: the "voluntary structured" default of Greece with haircuts - so much co-orchestrated and criticized by that same professional written press - has been forced mainly out of systemic US risk motives. Because it wouldn't trigger a credit event and therefore wouldn't trigger CDS contracts to be honored. And hence it wouldn't trigger an AIG no2 style bail-out in the US. Because you can bet your life that those who were the major sellers of CDS premia on Greece are to be found right now in New York and London. And a Goldman Sachs bailout for example is something the world economy and more specifically some players can do without right now. Warren Buffet, to mention one of many. Another "tiny" moral hazard problem - one of some many - which still hasn't been properly addressed.