Irrespective of the longer-term implications of the recent interventions of Draghi’s ECB, the Bundesbank’s now very public objections to the ‘looser collateral requirements’ of LTRO2 raises all sorts of uncomfortable questions.
How will this play in Germany? Have the Bundesbank drawn a big red line? Will a ‘democratic ECB’ fracture along the ‘AAA’ and the rest fault lines? Will national central banks continue to assume more of the (credit risk) burden?
The last thing Europe needs is division in its one truly credible institution. But national politics – dare I say national interests – are front and centre where-ever one looks.
In this context, but from a very different perspective, Richard Beinstein writes ‘Why the ‘risk-on’ rally will not last’ in today’s FT. To quote:
‘During credit bubbles, overcapacity builds on bank balance sheets. When credit bubbles deflate, bloated bank balance sheets are no longer a productive use of assets, and they inevitably contract. The only uncertainties are the means and the speed of balance sheet contraction. Economic history shows that the faster bubble-produced overcapacity is reduced, the quicker economies rebound. Economists, therefore, generally prefer speed in capacity rationalisation because they want assets to be used more efficiently. Politicians abhor such speed because it often means job losses and weak voter confidence.’
As an Irishman – and we continue to suffer the NAMA-esque drag of bank de-leveraging – I can tell you this is painfully true. And despite the delicious irony of ‘democracy at the ECB’ – when its been treated with much distaste elsewhere in Europe – beware the politics self-interest.