Draghi’s New Clothes
August 12th, 2012
Has Mario Draghi, the president of the European Central Bank, over-reached himself? Are sycophantic lieutenants and desperate national leaders telling him everything he wants to hear?
Last week he indicated that the Frankfurt-based institution was poised to embark on new round of sovereign bond buying. In particular Draghi is eyeing the sovereign bonds of Spain and Italy — buying their bonds would lower the two PIIGS’s countries’ borrowing costs and make it easier for them to reduce their deficits and get their government accounts more into kilter.
However the plan, which follows €102 billion of LTRO money for European banks issued in two phases in December 2011 and February 2012, has gone down badly with the Bundesbank. The German central bank fears such a policy would drag the ECB into the business of financing governments, in which it is supposed to play no part.
According to a Reuters report last week, Otmar Issing, one of the founding fathers of the euro and a former ECB chief economist, warned that the latest plan would drag the ECB into the political realm. ”This ultimately makes the central bank a prisoner of politics,” Issing said. “This is a process that is very difficult to stop, because where do you set the limit?”
After pledging “to do whatever it takes to preserve the euro” on July 26, Draghi pulled back from embarking on the ‘shock and awe’ response that the financial markets were hoping for. Instead he tasked three committees with exploring ideas that the central bank’s policymakers could pursue. Draghi, a former governor of Italy’s central bank, took over as ECB president from Jean Claude Trichet in November 2011.
Some, including William Banzai 7 are wondering that Draghi may now be walking naked.
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