A short while ago, I was taking a siesta, sleeping with a sound conscience, when I woke up with a start, my heart beating wildly, my forehead soaked with sweat and prey to a strong emotion: what if we had completely misunderstood the words of Mario Draghi, President of the European Central Bank, the day before yesterday? What if he had actually said something completely different to what we had heard him say?
This is far from impossible: during the period from 1997 – 2006, I conscientiously read every single speech made by Alan Greenspan, who was head of the Fed at the time, and I very often heard him say things of which subsequently not a trace was to be found in the Press, which believed nonetheless that it was conscientiously reporting his remarks. Some examples of this are to be found in my book La crise du capitalisme américain (2007) *
Everyone thought they heard Mario Draghi say on Thursday that the ECB would purchase as much Spanish and Italian debt as necessary to ensure that the lending rates charged by the capital markets returned to a reasonable level.
This is what I believed I had heard myself, and I droned on in my video yesterday, in unison with the International Press, that Draghi would keep the European money printing press running for as long as necessary.
But this makes no sense, if one bears in mind that Jens Weidmann, the head of the Bundesbank, would never accept such a monetary heresy.
Of course, Weidmann’s predecessor at the head of this venerable institution, Axel Weber had resigned in April 2011 rather than continue suffering from affronts of this kind, and Jürgen Stark, the Chief Economist of the Bundesbank, had also resigned for the same reason, and this in September of last year.
Hence without doubt the reason why I suddenly woke up in a cold sweat: Draghi was not talking about printing money, but about convertibility. He uttered the words, “these premiums are, as I have already said, to do with liquidity issues, but also, and increasingly so, to do with convertibility and with convertibility risk”!
To do with convertibility! Due to the fact that the extraordinary rates charged by the capital markets for Spain and Italy – right up until the moment he pronounced his reassuring words on Thursday – were not due to a risk premium for non-repayment but to a convertibility premium: for the loss that lenders would suffer in the event of a return to the peseta and to the lira!
To forestall this, all Draghi needed to do was to declare ‘we will do everything in our power to save the Euro’, and to convince everyone of what he was affirming by the firmness of his voice. To hell with ECB acquisitions of Italian and Spanish debt! To hell with Jens Weidmann and his monetary orthodoxy! To hell with the German Constitutional Court in Karlsruhe, reflecting on the beaches until September on whether the ESM is constitutional or not!
Nobody had heard what Mario Draghi had actually said: “Trust me: we will never abandon the Euro – and what I am saying here should be enough to make sure the convertibility premium falls back to zero, because there is no way there will be a return to the peseta and the lira, you have my word for it as President of the ECB”
“We will never abandon the Euro!” “We”? Let’s hope these “We”s really know what they are doing! Otherwise the Spanish debt will rapidly shot back over the 7% mark, as soon as everybody realizes that unfortunately these “We”s really didn’t know what they are doing…
* ‘The Crisis of American Capitalism’