Showtime for Mario Draghi


It is not unusual to see in supermarkets a one-kilo box of something for £2.79 and a two-kilo family pack for £5.79. Like national lottery tickets, retailers treat the practice as a tax on stupidity. But Tesco, according to a story in the Daily Mail, has raised the barrier. At a branch in Bridlington it proudly offered one bottle of Harrogate spring water at 25p or two for 70p. Yorkshire was probably not the most sensible place for Tesco to try a stunt like that.

Likewise, an investors' conference in London might turn out not have been the wisest choice of venue for European Central Bank President Mario Draghi's "whatever it takes" pledge. The day of reckoning has arrived and four horsemen have been spotted in the City, apparently unconnected with the Olympics. Investors are expecting something from the ECB council meeting today. Whilst they have been content in the past with jam tomorrow, tomorrow has now arrived.

An interest rate cut would not do the job. Whether the ECB refinancing rate is 0.75% or 0.25% is irrelevant when Spain is having to pay upward of 6% for its funding. Cheap loans for euro zone banks would be seen as a positive: The Long Term Refinancing Operations (LTROs) around the turn of the year were successful in pushing Spanish borrowing costs lower, even if they left Spanish banks lumbered with even more dubious assets.

A sure-fire game-changer would be a commitment to support – in other words to buy – Spanish and Italian government bonds. The easiest way to do that would be to re-launch Jean-Claude Trichet's Securities Market Programme (SMP), which spent €200bn on Italian and Spanish bonds. The more controversial approach would be to grant the European Stability Mechanism (ESM) a banking licence. So armed, the ESM could borrow money from the ECB and spend it on Club Med government debt.

If the involvement of the ESM sounds like a fudge, it's because it is. Germany's Bundesbank is outspoken in its objection to the idea. It does not believe the ECB should be doing such things either, directly or vicariously. Another obstacle is the Spanish prime minister. If Mariano Rajoy makes no formal request for aid it cannot be forced upon him, other than through the SMP which is ostensibly just a way to "improve the transmission of monetary policy"; in other words, to equalise borrowing costs across the euro area.

The problem would be eased if the Spanish premier were to bite the bullet and apply for a bailout but all the signs indicate that Sr. Rajoy is playing a badminton strategy: if he can lose this round he will be better placed for the next one, when he really really does need the money.

The non-cooperation of Spain and the objections of Germany put the ECB president in a difficult position today as he negotiates for the release of his hostage to fortune. The global investors who applauded him a week ago will be listening just as attentively today. For Mario Draghi, silver or bronze is not an option.

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