Win for Weidmann

The passage of time changes people. The advent of even foreseen circumstances can affect behaviour. NOTHING however, works better than fear. 

Here's Mario Draghi at his first press conference taking over from JCT in November:

“What makes you think that the ECB becoming the lender of last resort for governments is what is needed to keep the euro area together?” he said then. “No, I do not think that this is really within the remit of the ECB.”

Eight months later in July he unequivocally pledged to do whatever it took to save the Euro. 

Has Spain been saved? Is Italy sitting pretty? Is the worst over? No, no and NO. Forget the plunging yields and soaring shares for a moment and think of consequences. Possible, Impossible, Unlikely, Unintended, doesn't matter.

1)  Unlimited fire power is a good thing. It means you never run out of ammo. You could keep shooting all night long without worry. Of course, there's no guarantee that you'd hit the target and there's just no free lunch anywhere in the world, least of all in the ECB. There's going to be a heavy-duty bailout attached to every inch of the ECB's bond-buyin' assistance. Strict austerity and unpopular reform is going to be the carrot at the end of every stick and in fragile political climates, popular vote most often will determine the attractiveness of such packages. 

2) There are no specifics as to what extent the program would be implemented; no numerical cap on borrowing costs for Spain or Italy at which point the ECB decides it has done enough. Furthermore, even if the fire power is unlimited, there's a maturity cap that stands at one to three years which doesn't necessarily mean that long-term markets will suddenly have a change of heart based solely on lessening risk. A lack of access to the long-term market could signal the entrance of the EU's bailout funds which most certainly is nowhere close to covering what is required.

3) When has a loss ever been a win? Here's the most important part of the whole exercise. The President of the Bundesbank was the lone dissenting voice! Think about that for a minute. 

4) The ECB justification may be the "convertibility risk" but the difference in peripheral borrowing costs compared to Germany cannot be wholly attributed to a fear-of-break up attitude in investors. There's a lot of underlying macroeconomic fundamentals at play here.

5) Weidmann is now a hero back home. A loser in the ECB decision, his underlying view that bond purchases by a central bank are eerily parallel to debt monetization is the consensus in German academia. When the time comes to look at cutting the refinancing rate or perhaps raising them at the first sign of recovery, Draghi will run into Weidmann again, this time perhaps with a lot less leverage.

6) The instant euphoria of investors cannot be looked at as a barometer of dampening risk sentiment. A promise to stave off a break up is not the same as actually doing so and furthermore, a big play in-game does not guarantee a win when the clock runs out. Each second that passes will have an incremental effect on the old fear returning. Every moment of hesitation by Spain to be sold on the deal, every minor disagreement over the program to be implemented will stoke panic and raise fundamental fears of blatant moral hazard in the EU. 

7) Ironically, as Louis Bacon of Moore Capital states, there's been a market rally because a central bank violated its golden rule, using it's balance sheet to finance a deficit. Envision a scenario on the other side of the double-edged sword where targets are missed and forecasts are deemed unachievable. Do further rules and cuts kick in and send the country in question into a deep recession? Does the ECB stay quiet and continue buying bonds, risk losing the complete backing of Germany and destroying its own credibility? 

The Eurozone is an intricate maze of difficulty, its foundation long a quagmire. In the absence of unity, it will break apart but in the absence of decisiveness it will not survive either. Markets may react rationally or not but irrespective of the merits and advantages of the ECB program, what is most important is that a certain consensus seems to be taking a more opaque form, gathering shape and stature with every passing day. The German consensus, political and public, will ultimately decide the fate of the EU, just like it always has.