Cannons to the right of ‘im, cannons to the left of ‘im

Washington and Paris determined to twist ECB boss’s arm

The war of words over the role of the ECB is reaching fever pitch. But The Slog has learned that behind the scenes, the US is pushing hard for the ECB to take a much broader role.

Mario Draghi, boss of the  European Central Bank (ECB) came out fighting this morning in his first major interview since he took over from Jean-Claude Trichet. Bluntly observing that quantitative easing and huge ECB purchases of bonds were not appropriate, he took a position near to the German one, albeit holding out hope for wider bond purchasing “when the EFSF comes onstream next year”. Notable was his use of Berlinesque ‘morality’ issues:

“….this crisis and this loss of confidence started from budgets that had got completely out of control….we have to restore fiscal discipline in the euro area, and this is in a sense what last week’s EU summit started, with the redesign of the fiscal compact.”

Privately, Draghi accepts that the ‘compact’ is too vague and its timeline to set-up too long. Also, since the Brussels Summit several of those States who ‘signed up’ even to the compact’s principle have been back-tracking. But at present, the main pressure on the ECB boss is Franco-American. A Washington source confirms:

“Geithner left Europe [the week before last] smiling in public and spitting blood in private. He knows the other EU States aren’t up for it, and there has already been friendly pressure applied in Berlin. Merkel batted that straight back, so now the emphasis is on working with others to put pressure on the ECB. France is playing the lead role in this.”

Prominent German bankers such as Jurgen Stark and Lens Weidmann have been putting the other view in high-profile interviews of late. But in a further development during the last hour, the Slog’s Bankfurt Maulwurf offers further colouring in.

“As I told you,” he began, “Everyone in the banking sector will keep Merkel and Schauble on a short leash. But the French have some serious problems. A delayed bond-buying extension means that one ClubMed State could very likely collapse early in the new year. If that were to be Greece or Italy, the French banking system would be blown away.

“We should all remember that these confident numbers bandied about by the likes of Christine Lagarde take no account whatsoever of banking dishonesty and mutual insurance arrangements. I suspect the Americans understand this perfectly well. They would like nothing better than for Signor Draghi to throw money everywhere, but he cannot do that legally, and once you start on that line it becomes an unstoppable train. I have read the [FT] interview with Mario Draghi and I think he seems sound on such matters.”

All this is not, of course, playing well in the markets. A senior Spain-based credit manager told me yesterday evening, “If Draghi holds out, then it’s all over for the lenders. If he doesn’t hold out, then it’s all over for the single currency. It beats me how the senior players in this farce can’t seem to grasp those certainties.”

One man who certainly has is Nicolas Sarkozy. The French President has been made brutally aware of just how precarious the French banking position is. As part of the Brussels compact, more cash for the IMF and long-term liquidity to banks will be confirmed this week, but Fitch in particular declared itself unconvinced by promises to ‘speed up the move towards tighter fiscal rules’. It seems highly likely that S&P will give France another credit downgrade to match that of Fitch – if not by a further notch.

Nothing is giving, but something has to give. Treaties and constitutional changes will take a year or more at least to come into effect, but the markets want reassurance right now that money invested in eurozone debt is safe. Nicolas Sarkozy needs them to somehow get that reassurance. He and Geithner will keep the pressure up on Mario Draghi. As of course will Bankfurt and Berlin.