Mario and Mariano versus the man with the beard
- 6 September 2012
- From the section Business
"Believe me, it will be enough," European Central Bank boss Mario Draghi promised in July. The euro would be saved by any means necessary, he said. Today he outlined what that means.
The ECB will intervene into the bond markets and buy, most likely of Spain and Italy. The bonds will have one-to-three years left before needing to be repaid; which means it can buy a mixture of short term bonds and long-term ones about to need refinancing. And it will sit on the euro 230bn of long-term Spanish and Italian bonds it has already bought.
The combined aim of this is to bring the borrowing costs down for the Spanish and Italian governments: failure would mean their debt spiralling out of control, and any austerity measures taken to put this right tanking the economy into collapse. So it has to succeed.
The acronym for the new bond buying programme is Outright Monetary Transactions, or OMTs. To be clear about what it means: it is an attempt to remove the sovereign debt of these two huge time bomb economies out of the reach of market forces. A temporary abolition of the market by a Euro super state.
An important detail is that when the ECB buys these short-dated bonds, it does not claim "seniority" over other private investors. So in the past, if the ECB bought someone's debt, its own rules required that if that country then went bust, the ECB was first in the queue for repayment. Now it is joint first, with everybody else.
The second major feature of what was announced on Thursday concerns conditionality. In the past, the ECB has intervened into the bond market temporarily, with no conditions, to alleviate stress. But since this move is designed effectively as a proxy long-term lending programme for Spain and Italy, it needs conditions.
Cleverly, the ECB has decided that the conditions will be those attached to a different kind of bailout that is already in process: the EFSF and ESM funds, totalling about euro 700bn, with money from the IMF, will also be thrown at Spain and Italy.
Then, instead of a Greek-style harsh regime of austerity and recession, they will be allowed to choose a "precautionary" programme. There are no details of this at time of writing, but my strong suspicion is that the conditions attached to this will be less onerous than those offered to Greece, Portugal and Ireland.
But this is not the same as Quantitative Easing: the ECB does not print money to do it, or rather it does but then it takes an equivalent amount of money out of the eurozone economy from other sources. This is so that it does not effectively become a stimulus package paid for by devaluing the currency and the creditworthiness of Germany, Finland etc. The term is "sterilisation".
Likewise the ECB has shied away from naming a target bond yield - ie effective interest rate - for the stricken countries. That is part of the QE textbook, and it again proved too much for the Germans.
So the next move has to be Spain requesting such a programme and then agreeing to the conditions. They may actually be quite light, for all the rhetoric about "no bailout lite": Germany and the ECB are on record as saying Mariano Rajoy's Spanish government has a viable plan to reduce its deficit.
However, even the plan designed so far is yet to be properly implemented: it involves adding a euro 65bn austerity programme to the burdens on an economy that is shrinking rapidly and where unemployment has just topped 25%.
Since much of Spain's social spending is delivered by its 17 autonomous regions, who do not raise much tax themselves, this has the potential to blow Spanish politics apart. First problem, the relatively prosperous regions of Catalonia and the Basque country: Catalonia has just asked for a euro 5bn bailout.
On Tuesday next week there is set to be the mother of all demonstrations in Barcelona against this, and it will be one of those demos where the risk assessment for journalists will have to include getting blinded by the flashing diamonds on the wrists and fingers of the middle class ladies who will flock down the Ramblas holding "Goodbye Spain" placards, alongside gritty communists with hammer and sickle flags.
Second problem: the relatively poor regions like Andalusia, where 34% adult unemployment has pushed jobless farm labourers to start raiding supermarkets and giving the food away Robin Hood style, led by a left-wing radical local politician, Juan Manuel Sanchez Gordillo, mayor of the town of Marinaleda, whose trademarks are a big beard and a Palestinian scarf.
I've been with Mayor Gordillo this week as he has marched from town to town, demanding the repudiation of Spain's debts to bond holders. And even among the traditionally conservative rural communities he is getting a sympathetic response.
Third problem - a region like Valencia, where I've just returned from: the city of Valencia is home to numerous multi-million pound building projects paid for by a government that is on the verge of bankruptcy.
Without the ability to lard the palms of property developers and architects and numerous vested interest, both political parties - the People's Party happens to be in charge in Valencia but this phenomenon goes nationwide - may begin to lose their grip on middle class voters, much as happened to Pasok in Greece, which is now being out polled by a bunch of violent, Nazi-saluting fascists.
So the Spain problem as a whole weighs heavily on the conditionality debate. Nothing I have seen today dissuades me from the hunch that German Chancellor Angela Merkel has had enough of inducing political collapse in Southern Europe and will go along with a relatively mild conditions regime for Spain.
If this works, there is the added bonus that the bond market calms down and Italy never has to apply for a bailout at all. It will be aided in this by the ECB's decision today to allow junk credit to be lodged as collateral in the Euro cross-border payment system.
To do this deal the euro authorities have had to make a bonfire of the vanities of the Merkel-Sarkozy-Trichet period: harsh austerity, no permanent bond-buying, always claiming seniority for loans made etc. Germany blinked (though its man on the ECB still voted against today's move, Merkel signalled her approval).
Technically, for the plan to work, the ECB will probably have to buy a trillion worth of bonds and sit on them; and Mariano Rajoy - who has just said "there is not decision to ask for a bailout" will have to ask for one.
Politically though the risks remain. With the ECB now equipped with unlimited bond-buying powers, the way is open to let the Greek crisis come to a head: some analysts think there's a 90% chance of Greece being forced out of the euro now - with the Germans claiming harshness and intransigence versus Greece as the quid pro quo for softening on Spain.
A Greek exit is going to be messy, and creates the precedent for an exit among the increasingly restive voters of Europe, north and south.
And as long as growth remains flat - and the peripheral economies go on shrinking - the danger remains that they can never repay the debt - no matter at what rigged interest rate they get to borrow - and that Japanese style debt stagnation sets in.
My working model of the euro crisis has always been of a deep, structurally flawed currency combined with massive bad debts and some non-performing economies creating a long period of low or no growth; and this was being exacerbated by a series of crazy and inept policy actions that pushed the continent repeatedly towards a banking crash and euro-breakup.
What today does is, categorically, move away from the Merkozy philosophy of "let it bleed" and throws as much as policy can at this stage at trying to save the currency.
But even then, the other factors in the crisis have proved enough to shake social cohesion in southern Europe. And the fundamental crisis - the crisis in people's pay packets, and on their dinner tables - is not over. Nor can it be solved by technocratic improvisation, no matter how brilliant.
In the rise of the far left and right - from Andalusia to Thessaloniki - Europe's leaders can see what happens if they fail here. Today's decision pits the eurozone leaders and prime ministers against the men and women of the streets. I think, for once, it leaves the political elite with the upper hand. But only for so long.
Watch Paul Mason's report from Andalusia on Newsnight Thursday 6 Septemberat 2230 BST on BBC Two. Or watch afterwards on iPlayer or the Newsnight website.