Today's Coming Crisis Movie

Thursday, March 1, 2012

Draghi Bazooka has not yet stopped Club Med money collapse

So the Draghi Bazooka II will be just under €530bn: Goldilocks, if you like that kind of liquidity. Not too high, not too low. Instant thoughts:

This is about €330bn of new money once you strip out roll-overs of shorter maturities. The last one in December was a net €200bn, so it is a nice shot in the arm for French, Italian, and Spanish banks, and their sovereigns.

They can borrow at 1pc for three years to buy Club Med bonds at over 5pc, the Sarko "carry trade". It is certainly a game-changer for the South, heading off the near-certain disaster that was unfolding before Mario Draghi took over the European Central Bank.

But be careful. It is in essence a Martingale play, a doubling up of a very risky strategy. Prof Charles Wyplosz from Geneva University said the ECB is taking a trillion-euro bet.

The weakest banks in the weakest countries are gobbling up ever more sovereign debt, concentrating systemic risk. If it all goes wrong, the ECB itself will be in grave trouble with ever expanding junk collateral. Read More