Tuesday and preparing for the turn ?
Late last week, some comments have boosted markets in anticipation of putting a floor under certain asset classes (beleaguered peripheral bonds and equity markets). Now some have already made the remark "we believe it when we see it", meaning that Nowotny's comments on the ESM banking license - and certainly Draghi's one on bond buying intervention (first secondary market, then even in primary markets) have raised high and unrealistic expectations. Because in order to deliver these promises, Draghi and European politics need to solve 1 "minor" detail : convincing the Bundesbank.
Concerning the ESM banking license, I think the interview given by ECB member Nowotny should be taken seriously in view of his reputation and remarks in the past. In addition, he's not considered to be a "dove", coming from one of the traditional core members of EMU (Austria). Basically, when Nowotny openly gives support for arguments in favor of granting a banking license to ESM, it probably implies that a U-turn in this field is probably a "fait accompli" and that behind the scenes technicians are already looking into the details of fast application.
Now on the Draghi comment concerning the ECB and diving into the EMU sovereign debt market. Is this a "Bridge too far" for the Bundesbank and what does the recent past tells us about points on view ? Now we had a nice precedent in March when apparently there was a quarrel between Mario Draghi and Jens Weidemann (Buba), a story (deliberately ?) leaked by the Frankfurter Algemeine. It involved LTRO 1 and 2 - 1,000 bio EUR of 3 year loans against collateral - and the Buba's accusation that the ECB had lowered its collateral rules for European banks. Here, Draghi downplayed the disagreement in a masterly PR fashion during the March ECB press conference :
"Jens Weidemann did not leak his letter of concern to the Frankfurter Algemeine. Furthermore, the substance and content of his letter is present in all of our minds. We cherish the culture of price stability at the Bundesbank and we all owe a lot to the Bundesbank in learning about its stability culture, we all have become custodians of this precious cultural element. Now we all are aware that monetary policy can't change everything. That said, the LTROperations unquestionably avoided a credit crunch in the euro-zone and the decision was taken unanimously. Furthermore, we all have to do the right things and do them together, we are all in the same boat"
So a unanimous decision, Jens Weidemann acting in good faith, we love the Bundesbank (!) and both politicians and monetary officials are doing what they can. Key question : are we still in the same boat ? It used to be that the Bundesbank as a politically independent central bank did it's own thing. On some occasions in the past, it even was powerful enough to topple governments, just ask Helmut Schmitt. Only at 1 occasion - leaving Weber' decision in 2011 in the middle - it lost the battle and this was the only occasion that a German central bank chief gave his own dismissal : Karl Otto Pöhl in 1991 after the German unification decision and the partial introduction of 1 DM for 1 Ostmark. For an excellent historic review on these issues, I highly recommend the following books written by ex-FT journalist David Marsh : "The Most powerful bank - inside Germany's Bundesbank (1993)", "The Euro, the politics of the new global currency (2010)" and "The euro, the battle for the new global currency (2011)".
But this is the post-1999 era and certainly the post -2010 era. So can the Bundesbank still show its muscles ? I am not entirely convinced and next to the usual external pressure, I even see some political movement and pressure coming from within Germany. And concerning German resistance towards an ECB potential change of strategy, we have seen people resigning (Stark ECB-Weber Buba) instead of forming new coalitions within the ECB to stop the trend. In addition, the game strategy and implications have changed as well. The political argument of being in the same boat will most likely be played out as follows : if EMU goes, chances are that the EU fate is sealed as well. And from a political point of view, that would mean the end of the European dream, not welcomed either by Germany or the others, with geo-political implications as well. I am not saying that this will be the ultimate successful strategy but it could be a trigger that pushes changes within the mindset of the Bundesbank, like it or not. Of course the turn won't be made that easily and something has got to give as well. And there most likely, the fiscal compact or the ingredients of the liquidation fund will come in, ie support if the debt is consistently decreased over a considerable period of time. But that is basically the original Maastricht revisited, albeit version2.0. "Realpolitik" is a word of German origin after all.
So when looking at the photograph beneath, two questions come to our minds :
1) Who is laughing sincerely ?
2) Who will have the last laugh ?