‘Super Mario’ Draghing Out the Pain

07/26/2012 1:22 pm EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

The ECB President’s pledge to do ‘whatever it takes’ to save the euro is the latest in a series of false dawns, writes MoneyShow.com senior editor Igor Greenwald.

Terrible news for Spain and Italy this morning, notwithstanding gains ofmore than 5% for the stock markets in Madrid and Milan.

European Central Bank President Mario Draghi promised “to do whatever it takes to preserve the euro,” the common currency currently minting mass misery in countries that desperately need a cheaper substitute to regain economic vigor.

Draghi’s London speech was an Olympic effort worthy of weightlifting gold, hoisting the waterlogged euro nearly two cents higher against the dollar and jerking other global risk assets skyward as well.

It signaled a willingness to renew ECB purchases of Spanish and Italian bonds, treating the most visible symptom of Europe’s economic decay. Such purchases stopped in February under pressure from the ECB’s hawks and in the giddy aftermath of a three-year refinancing operation that encouraged Spanish and Italian banks to briefly take up the slack.

And though the banks now regret their winter splurge and are in no position to repeat it, the ECB in recent weeks has doused speculation that it would once again become the buyer of last resort, arguing that it can’t solve problems properly in the domain of governments.

But that was before Spanish bonds topped 7% amid street protests that made Spain look like a giant Greece. Suddenly, Draghi is willing to do whatever and declaring with premature bravado that, “believe me, it will be enough.”

Enough to keep destroying jobs all along Europe’s southern and uncompetitive flank? Certainly. Enough to prolong the flow of euros and of credit from the south to northern hidey-holes, despite the growing official exposure in the north to the eventual debt restructuring? You bet.

But ECB bond purchases have zero chance to reverse the continent’s steady slide into a deeper recession or to fix the payment imbalances at the root of the crisis. So Draghi’s intervention merely promises to drag things out a bit.

This is not the ECB’s mythical printing press, ready to flood the zone with easy money. This is, at best, a return to the grudging, modest purchases made late last year, in exchange for adherence to the disastrously misguided austerity targets.

The markets have now priced in a much more accommodative ECB, as they have time and again since the rot set in. All that remains is the next helping of disappointment as German conservatism frustrates the fast-twitch traders. Germany won’t squander all its leverage by giving the ECB the green light to intervene aggressively.

As Moody’s warned this week in shifting to a negative outlook on Germany’s AAA credit rating, “the contingent liabilities taken on by the strongest euro-area sovereigns are rising as a result of European policymakers' continued reactive and gradualist policy response, as is the probability of those liabilities crystallizing. Moody's view remains that this approach will not produce a stable outcome, and will very likely be associated with a series of shocks, which are likely to rise in magnitude the longer the crisis persists.”

Draghi’s speech will help the crisis persist longer than it otherwise might have. And that is hardly the good news investors seek.

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