The ECB & Conditionality
The markets may rally today, yields may fall as the ECB pulled out the BIG words, âwithout limitâ and âno cap.â This is the focus of the market and it is a very wrong focus. The entire ECB scheme is dependent on conditionality and this is the key to all of the hype!
Any action by the ECB will be telegraphed well in advance because of it; if anything happens at all. The ECB has now said that it will do nothing, not anything, without a country applying for assistance and without the agreement of the Stabilization Funds which means that the EU and perhaps the IMF will have to agree. To accept any application from a country then that nation will be audited as part of the process. Bear in mind that now when a country submits its numbers to Eurostat or to the Bank for International Settlements that no one, no fiscal oversight commission, audits the books and records of a nation in Europe. This is true for the sovereign and this is true for the banks domiciled in a country. The audits that have been conducted have all been for the troubled nations that have lined-up for aid. In each case, every case, with Greece being the most notable example the numbers have not been as presented. This was true for Greece, Ireland and Portugal.
So the ECB disavows the bond buying for Portugal, Ireland and Greece and the focus is upon who is coming next which is really Spain and Italy. Spain, by their own tacit admission, uses âdynamic provisioningâ as part of their economic policy. They stick to this on the basis of manipulating their reserves in good times and bad times and there is quite an academic argument appended to this notion but what cannot be denied is that it all gets down to fiddling with their books. Consequently it is a good assumption based upon sound logic that their books, the balance sheet for the country and their banks, are not as presented or thought. This is one reason, in my view, why Spain does not want a full bailout because it would mean that the sovereign and the Spanish banks would be subject to an audit and that certain discrepancies would have to be accounted for in front of God and their brethren.
Next we have hard evidence that the EU may not approve any such assistance programs. The Prime Minister of the Netherlands has said âNo more money for Greeceâ while the Finance Minister of Austria has stated quite clearly that Austria has had enough and that Austria will not be giving anymore of her citizenâs money to any other country in Europe. I think both statements are clear enough.
Consequently all of the ECB hype, jargon and fluff have no value if the EU wonât approve any of the aid programs. It is all just rhetoric floating around in the air. Even if the EU approved some program for Spain or Italy it would take months and the ECB has specifically said that they will not act, not buy any bonds, without the approval of the Stabilization Funds. The ECB scheme is cleverly designed and it reminds me of the second round of the European bank stress tests where the methodology was really fraudulent and hid the actuality as Dexia, Bankia and several Austrian banks have gone bust since then after we were assured, in the strongest of terms, that they were safe. The ECB has spoken and promised to buy âwithout limitâ but since it is dependent on an European Union where several nations do not wish to fund I find our current rallies dependent upon an assumption that is faulty and perhaps dangerously faulty in its basis.
That is where I stand!
