Draghi….lonely man at the centre of a storm

It’s only Wednesday, and already the lenders are looking for another guarantor

Washington nerves jangled by huge uptake of Global CB Dollar loans

Let me start proceedings with a quote from a Slogpost that appeared two hours before the Merkozy ambush of Cameron last week:

‘[Draghi’s] room for maneouvre on widescale bond-buying is more limited. But if Mario isn’t budging, then neither is Merkel. Quite simply, she is not going to agree a several responsibility before fiscal union. We have already heard the totality of what this summit will achieve, and that was announced Monday last – a set of agreed disciplines and punishable lines of fiscal management for eurozone countries. This is as far as the German leader will go to meet the markets. Watch the lady’s lips: no joint guarantees and no eurobonds until fiscal union is completed, and the power to enforce it resides in Brussels.’

I added, ‘….the most likely outcome remains the flim-flam we got earlier in the week, but with no firm timings on either Fiskalunion or power transfers. The markets will be less than impressed – but they weren’t going to like any outcome with no final guarantor apparent.’

 The markets only caring about who the final debt guarantor is going to be has also been a consistent theme in these columns. So it was only a matter of time before – having been right through all the politicians from top to bottom – the lenders/markets/bankers would start to put the bunsen burner under Mario Draghi. This is clearly happening bigtime.

At first when given the output of last Thursday in Brussels, Signor Draghi was enthusiastic. Now he is wavering – and with good reason: the IMF scam has been torpedoed by both Washington and Bankfurt, Commerzbank’s emergency has revealed the bank shakiness for all to see, Italian bond yields have spiked again, and the unanimity claimed so boldly last week is now dissipating. Privately, Draghi  knows the spin has failed. More to the point, he is not about to go down in history as the banker who didn’t leave enough money to help the eurobanks. But on the other hand, he daren’t say ‘no guarantees from me’, or the unravelling will accelerate. He is, literally, between the devilish bankers and the deeply indebted sovereigns.

The signs are not good. Already saved by global CB intervention last week, Credit Agricole today fired 2,300 people worldwide. That’s a big headcount reduction. And the 3-month loans given to the ECB from the Fed last week has leapt (largely unnoticed, I might add) from $4oomillion to $5.7 billion. I understand the Fed was expecting about half that level; sources also suggest that these startlingly big numbers have played a role in Washington’s publicly declared reiticence about the IMF being in for still more unrepayable eurodebt.

Meanwhile, it has taken just four working days for the Merkozy ‘Compact’ to slip back from April to midyear 2012….and even that was worryingly described by Jose Manuel Barroso as “our aim”. Hardly had Jose sat down before the euro dropped below $1.30 for the first time in ten months. This morning the Wall Street Journal is running a major piece headed, ‘All lost if ECB doesn’t act?’ At the end of the day, the Journal is a US-based bankers’ newspaper. If they’re running with observations from Paul Krugman like “It’s actually quite remarkable how many sensible people base their analyses on the presumption that the ECB will do what has to be done…But as far as anyone can tell, the monetary cavalry aren’t coming. And the bond market has figured this out”, then you have to assume this is based on the general opinion feedback they’re getting.

Down on the ground, Italy’s attempts to balance the books are in trouble. After a key parliamentary committee on Tuesday night approved a €30bn austerity spending plan, huge protests followed inside and outside the Parliament chamber. The euro has now fallen 2.5% since last Friday. Good for the ClubMed economies….but nowhere near enough to rescue them – and definitely not what the Merkozies wanted.

For a few days at least, Mario Draghi has the unenviable task of holding the hopes of Brussels and Wall Street in his hands. But does he hold any cards?