By LUIS MIRANDA | THE REAL AGENDA | SEPTEMBER 7, 2012
Mario ‘Super Mario‘ Draghi has unloaded his bag of goodies after the European Central Bank agreed to acquire the European continent. The line of states begging for a ‘rescue’ is headed by Spain and Italy, with Portugal and France waiting on the wings.
The European Central Bank announced the already expected purchase of sovereign debt to keep the financial collapse under control so that the bankers have enough time to absorb all free nations that are unable to pay their obligations.
As previously reported on this publication, the details of the program are murky, sketchy and as vague as possible to let the bankers make decisions as they please based on conditions on the ground. One detail was made clear, however. The ECB will have the power to buy unlimited amounts of sovereign bonds, the instruments issued by governments to cash their debts.
But before the ECB sends any money to Spain, Italy or any other nation in distress due to the unpaid liabilities, countries will have to review and accept a list of conditions that the bankers themselves have written, and under which the nation-states will have no flexibility. For example, countries in need of a bailout must officially request it to the ECB. Should the country decide to abandon the ‘rescue’ mechanism, the ECB is already threatening with stopping the purchases of bonds and sell the bonds that have been already acquired.
The positive answer from the ECB has already encouraged the artificially run financial markets, even though none of the nations that would eventually accept the conditions has actually requested the bailout. The risk premium of Spain has fallen sharply from highs of 638 points in the second half of July. The downgrade of the returns required of Spanish debt has been more pronounced in shorter maturities up to three years, as these are the titles that will focus on the operations of the issuing bank. Today, the Ibex 35 gained 4.91% and the risk premium has fallen below 450 basis points.
Once the countries request the ‘rescues’ — either for a full or partial bailout — the ECB will only accept the request if the country complies with all of the conditions imposed by the European bankers which will be provided through memoranda to each individual nation. The ECB said that the bond purchases of bonds with maturities of between 1-3 years will be made with no quantity limits. “The amount will be adequate to achieve our goals,” said Draghi in a statement a month ago.
The ECB also waives its preferred creditor status, something that frightened investors. Moreover, the liquidity created by these direct sterilized monetary transactions (the withdrawal of an amount of cash equal to the purchase of bonds), will be done as it was with the previous program. Purchases may be extended to other countries already bailed out, such as Ireland and Portugal, to the extent that they recover their market access.
The ECB had already bought debt of other countries since May 2010 and began buying Spanish and Italian debt in August 2011. However, these purchases stopped earlier this year, as the bank decided to rescue the banks instead. The decision by the bank to bailout the banks caused the vicious debt problem to get worse as the increase in debt and insolvency of financial institutions and nation-states demanded even more money. Now, the bank has decided to come back with more cash to keep on feeding the beast, instead of killing it.
It will just a matter of time before the bailout of nation-states becomes as insufficient as the one given to the banks back in 2011. What will the ECB do then to slow down the collapse? Free money or ‘rescues’ will have proven ineffective.
As for what will Spain and Italy do, what does a crack addict do when you offer him a pipe and the ‘springly’?