How Draghi was buying Spanish bonds while claiming only that he “might” do so

The Slog -

ecbThe caption on the left here shows you what the average eurozone citizen makes of the real state of play at the European Central Bank. But the suggestion of that caption is that, somehow, the ECB run by Mario Draghi is out of control. More accurately, the bank is beyond anyone’s control. The Slog analyses how, when the chips are down, Europe’s central banker simply does what he wants.

On July 5th 2012, US Liberal economics writer Paul Krugman scoffed in the New York Times that the ECB was doing “the minimal amount” to help with the eurozone bond crisis.

On July 6th 2012, Spanish bond yields edged up to a dizzying 7%.  On that same day, frustrated ECB board member Joerg Asmussen said too much was being expected of the Bank. “We must explain what the limits of our powers and mandate are,” he said in a speech. “The ECB cannot compensate for what others – notably political authorities – fail to do. There is no substitute for good policies.”

He was right: the europols were dithering and squabbling, as usual.

This is what happened next. The following morning, as the chart below shows, the ECB’s daily liquidity shot up from €100billion to €540billion. July 7th 2012 was a Saturday, when few if any financial folks were at their desks.

The following Monday July 9th, Mario Draghi made a full statement to the European Parliament’s Economic & Monetary Policy hearing. He didn’t think that using the weekend to secretly more than quintuple the ECB’s liquidity to nearly half a trillion euros was worthy of mention.

With Spanish yields showing no sign of abating, over the next 11 days Draghi increased the ECB daily liquidity by another €100 billion to €580 billion. Four days later on July 24th 2012, Spanish bonds reached 7.57%. The IMF’s Cristine Lagarde was in full panic mode and screaming at every pol she could find to do something.

The turning point factor in the Spanish sovereign debt crisis has always been nailed as the July 26, 2012 policy statement by Draghithat “the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” What Mario again didn’t say was that his bank’s liquidity dropped by a staggering €72 billion in just four hours of that very same day.  Amazingly, the next day Spanish bond yields fell sharply to 6.9% – and in response to that, the Madrid stock market forged ahead by 4%.

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