EXCLUSIVE: How Draghi was buying Spanish bonds while claiming only that he “might” do so

The Slog

by John Ward

The caption on the left here shows you what the average eurozone citizen makes of the real state of play at the European Central Bank. But the suggestion of that caption is that, somehow, the ECB run by Mario Draghi is out of control. More accurately, the bank is beyond anyone’s control. The Slog analyses how, when the chips are down, Europe’s central banker simply does what he wants.

On July 5th 2012, US Liberal economics writer Paul Krugman scoffed in the New York Times that the ECB was doing “the minimal amount” to help with the eurozone bond crisis.

On July 6th 2012, Spanish bond yields edged up to a dizzying 7%.  On that same day, frustrated ECB board member Joerg Asmussen said too much was being expected of the Bank. “We must explain what the limits of our powers and mandate are,” he said in a speech. “The ECB cannot compensate for what others – notably political authorities – fail to do. There is no substitute for good policies.”

He was right: the europols were dithering and squabbling, as usual.

This is what happened next. The following morning, as the chart below shows, the ECB’s daily liquidity shot up from €100billion to €540billion. July 7th 2012 was a Saturday, when few if any financial folks were at their desks.

The following Monday July 9th, Mario Draghi made a full statement to the European Parliament’s Economic & Monetary Policy hearing. He didn’t think that using the weekend to secretly more than quintuple the ECB’s liquidity to nearly half a trillion euros was worthy of mention.

With Spanish yields showing no sign of abating, over the next 11 days Draghi increased the ECB daily liquidity by another €100 billion to €580 billion. Four days later on July 24th 2012, Spanish bonds reached 7.57%. The IMF’s Cristine Lagarde was in full panic mode and screaming at every pol she could find to dosomething.

The turning point factor in the Spanish sovereign debt crisis has always been nailed as the July 26, 2012 policy statement by Draghithat “the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” What Mario again didn’t say was that his bank’s liquidity dropped by a staggering €72 billion in just four hours of that very same day.  Amazingly, the next day Spanish bond yields fell sharply to 6.9% – and in response to that, the Madrid stock market forged ahead by 4%.

Throughout this period, ECB President Mario Draghi said only that he “might consider the resumption of bond buying”. But it was from this moment that Wolfgang Schäuble decided the Italian was not to be trusted. Jens Weidemann was incandescent about what had happened. On July 31st, CNN was reporting that ‘The ECB is widely expected to resume limited purchases of government bonds to ease the pressure on Spain and Italy’, but in reality the central banker was already doing it.

Weidemann resigned in protest at Mario’s under-the-table bond support five weeks later on August 31st.

Far from giving him a problem, Draghi welcomed the German’s departure. Having made his last move on a Saturday, he made the next one when most people would be replete and a little drunk: Christmas Day 2012. On that day, he somehow found another €100 billion of liquidity to stash quietly away. He then shelled out a whopping €200bn  during the month of January 2013.

And guess what? By January 11th 2013, FTAlphaville was writing about The Great Eurozone Bond Yield Convergence. Southern European bond yields were falling as northern ones rose slightly: the yield spreads narrowed dramatically.

Most of the financial press hailed Draghi as the hero of the hour for his gutsy statements at the time, but the truth is that, having illegally subordinated Greek bondholders earlier in 2012, the ECB President deliberately and secretly manipulated the eurozone’s ClubMed bond sector in order to create a picture of recovery that was simply false. There is no material difference between his actions in those cases, and those of Libor firms and Sovereigns working alongside central bankers to cheat the ordinary investor in the Gold and Silver markets. Similarly, those who lost heavily on Bear notes during 2012 have Ben Bernanke’s cavalier use of taxpayer QE money to thank for being slaughtered.

One massive question still remains: where did Mario get all this liquidity? Did he print it? Or did he have help from the US Fed? It’s an issue that doesn’t readily spring out of the records….but what Draghi’s behaviour in all this shows is that – as The Slog posted recently – he is completely beyond the control of any single government body or political leader. That any technocrat should have that much power is typical of the mindset of the European Union where, we have seen so many times, the lack of respect for liberal democracy and the will of the citizens is infamous bordering on legendary.