Suspicious Minds – Is Mario Draghi leading the ECB into a Trap?

We’re caught in a trap

I can’t walk out –

Because I love you too much baby.


Elvis singing an anguished melody to a beloved partner with whom he is entangled in a difficult relationship?

Or Mario Draghi serenading the euro?

I was reminded about the lyrics of the classic Number One by an interchange in the Reuters Global Markets Forum in which I was guest speaker this morning, when the discussion turned to the question of the latest Greek funding operation.

The news came through that two-thirds of those who participated in a Reuters survey yesterday believe that Greece will have to undergo another restructuring of its debt to avoid bankruptcy, probably in the second half of 2013.

I would agree with these results. It is very difficult to see how the Greek government can service its debts. The question then is – how will the ECB be able to unwind its holdings of Greek government bonds?

The discussion ran as follows:

Q: I think the ECB’s previous policy was to hold bonds to maturity but my understanding with the new programme – the OMT – the ECB has said that, in order for it to keep buying and retaining a country’s debt, that country must meet certain conditions… Let me dig out the quote. Perhaps I got this wrong, but my interpretation of the ECB’s message was “we’ll buy your bonds but we’re just as capable of selling them…”

Or at least not buying anymore

Me: That’s what they’re saying – but I don’t believe it. The moment the ECB starts selling sovereign bonds on a significant scale, the entire Ponzi scheme may implode!

Q: That’s a good point actually, what would happen if the ECB did sell bonds that it had accumulated under the OMT?

Me: My question would be – who would buy them, and at what price?

My suspicion would be that buyers would only be found for the sovereign bonds of the peripheral Eurozone countries at prices well below those at which the ECB’s operations have driven them. So the ECB could be left potentially nursing very heavy losses.

So I don’t think that the ECB can offload the bonds of the PIGS that it has accumulated. It has no option but to sit on them. Mario Draghi’s commitment to do “whatever it takes” to save the euro has trapped the ECB. It can hold its position for a certain period of time, but eventually it will become unsustainable. That is why I predict that the euro will start to break up in between three and five years’ time.

My view is that Greece is likely to be the first member of the Eurozone to leave single currency, but not any time soon.  There is likely to be at least one more bailout for Greece before one of the troika – most likely the IMF – finally come to accept the futility of further support within the straitjacket of the euro. Under this scenario, Greece would restore its national currency somewhere between 2015 and 2017.

According to Wikipedia, it is all about “a mistrusting and dysfunctional relationship, and the need of the characters to overcome their issues in order to maintain it.”

And that’s just the euro.  Apparently Suspicious Minds was on a similar theme!

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