http://www.athensnews.gr/portal/11/57348

ECB thinks the unthinkable, action likely weeks away

30 Jul 2012

Drastic moves are being considered by the ECB to save the euro, but German resistance may be on the horizon (file photo)

The European Central Bank is thinking the unthinkable to save the euro, including resuming its controversial bond-buying program and possibly even pursuing quantitative easing - in effect printing money.

Bold action is probably at least five weeks away, insiders say, though some more clues may come when the ECB reveals its latest interest rate decision on Thursday.

Several other pieces have to fall into place before the ECB will act decisively, insiders say. These include a request for assistance from Spain, which Madrid is still resisting, a decision by euro zone leaders to let their bailout fund buy bonds at auction, and a German court ruling on the legality of the euro zone's permanent rescue fund, due on September 12.

Above all, ECB President Mario Draghi must overcome the resistance of Germany's powerful central bank, the guardian of monetary orthodoxy, glowering from the other side of Frankfurt.

Draghi raised expectations last Thursday that the ECB would resume buying sovereign bonds as Spanish and Italian borrowing costs vaulted towards levels that could force the euro zone's third and fourth largest economies out of the credit markets.

"Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough," he told a pre-Olympic investment conference in London.

Draghi made it clear he believes the ECB can legitimately intervene in bond markets to curb the high interest rates investors are demanding for buying Spanish and Italian debt rather than safe-haven German Bunds. "To the extent that the size of the sovereign premia hamper the functioning of the monetary policy transmission channels, they come within our mandate," he said.

His remarks surprised some colleagues on the ECB's policy-setting Governing Council, who had not been consulted, central bank sources said.

The counterblast from the Bundesbank came within 24 hours.

The once mighty German monetary authority, now an affiliate and the biggest shareholder in the ECB, declared its opposition to reviving the dormant bond-buying program, arguing that it would remove market pressure on heavily indebted governments to pursue austere budget policies and economic reforms.

"The mechanism of bond purchases is problematic because it sets the wrong incentives," a spokesman for Bundesbank President Jens Weidmann told Reuters.

The Bundesbank has also consistently opposed other ideas - such as giving the euro zone's rescue fund a banking license and letting it borrow from the central bank to fight fire in the bond markets - on the grounds that they breach a European Union treaty prohibiting monetary financing of governments.

Draghi and Weidmann will have a chance to thrash out their differences when they meet before Thursday's monthly meeting of the Governing Council. The outcome of this struggle between the ECB and the German parent on which it was modeled may determine whether the euro survives.

This account of the tug-of-war among Europe's central bankers is based on numerous conversations with ECB and national central bank policymakers, European Union officials and private bankers privy to ECB policy debates, who spoke on condition of anonymity because of the acute sensitivity of the subject.

Options

The ECB has already cut interest rates to a record low 0.75 percent, bought 211.5 billion euros-worth of troubled euro zone governments' bonds and loosened its collateral rules so it now accepts all kinds of paper from mortgage-backed securities to car loans as surety for funds.

Short-term options for further action include a deeper cut in rates and a further easing of collateral rules. But both are seen as having limited benefits and plenty of drawbacks.

The main idea under consideration is re-activating the bond-buying program for Spain and Italy in tandem with the euro zone's rescue funds. Supporting Spain would entail a negotiated agreement stipulating fiscal targets and economic reform conditions and international monitoring of them, several sources in the Eurosystem of central banks said.

To save Spanish Prime Minister Mariano Rajoy's face, such a program might be less exacting than the EU/IMF bailouts imposed on Greece, Ireland and Portugal.

The ECB might also make a third drop of long-term cheap loans to euro zone banks after lending them 1 trillion euros in three-year, low-rate funds earlier this year. But much of that money has so far ended up parked back in the ECB's vaults rather than being lent to other banks or to the "real economy".

Some central bankers believe a depreciation of the euro's exchange rate could ease the problems of peripheral countries such as Portugal and Italy, which compete with China in sectors such as textiles, shoes and furniture.

The euro has slipped from around $1.50 to just above $1.20 since the sovereign debt crisis erupted in early 2010, but any deliberate move by the ECB to weaken the exchange rate would be likely to anger the U.S. Federal Reserve and the Bank of Japan.

Big bazooka

Bold options such as accepting losses on ECB holdings of Greek government bonds, and the ultimate "Big Bazooka" of buying up masses of bonds from all euro zone countries, are also on the central bankers' radar screen, the sources said.

The latter would emulate the U.S. Federal Reserve and the Bank of England policy known in central bank jargon as quantitative easing, and to ordinary citizens as printing money.

Since the onset of the global financial crisis in 2008, the Fed has tripled the size of its balance sheet and the Bank of England's has more than quadrupled; but the ECB's has expanded less than threefold, mostly through long-term lending to banks.

When the ECB did buy Greek, Portuguese, Irish, Spanish and Italian bonds, a program suspended since March, it insisted that for each extra euro created, a euro was withdrawn from circulation by taking in interest-bearing deposits from banks. This is called sterilization, intended to prevent inflation.

The most radical option for the ECB would be to create money to buy debt across the euro zone without sterilizing the purchases. Insiders say that if such an operation bought debt from all euro zone countries, the ECB could avoid accusations of financing individual governments.

A risk of deflation could give the ECB cover to embark on QE, and some policymakers think that in extremis the Bundesbank could go along with such a policy, so long as it did not involve buying government bonds.

With inflation falling fast towards the ECB's target of below but close to 2 percent, growth slowing sharply in northern Europe and recession deepening in the south, the central bank has unusual scope to move.

By buying assets other than sovereign debt, such as bank and corporate bonds, the ECB could still pump money into the system while circumventing the "monetary financing" taboo. One option would be for the ECB to allow the euro zone's national central banks to do the bond-buying and carry the risk.

Yet some central bankers worry about whether QE would achieve the desired result of durably reducing sovereign bond spreads and reviving inter-bank lending.

Communications

The ECB used to be known for an iron grip on its communications policy. Board members and national central bankers were assigned key messages to deliver, and massaging market expectations was one of the great skills of Draghi's predecessor, Frenchman Jean-Claude Trichet.

That discipline began to fray in the 2008 financial crisis, when then Bundesbank chief Axel Weber opposed any interest rate cut below 1 percent. It weakened further in May 2010 when Weber openly dissented from the ECB's decision to start buying Greek bonds, arguing that it could be inflationary in the long term.

Weber and former ECB chief economist Juergen Stark both resigned in opposition to the bond-buying program, fuelling German public suspicion of the ECB, which was seen as having strayed from its German orthodox monetary roots.

Insiders say Draghi, who encourages debate, intentionally runs a less rigidly controlled ship than Trichet did.

However, several fellow central bankers were furious when Austria's Ewald Nowotny last week floated the idea of giving the euro zone's future permanent rescue fund a banking license, so it could tank up on cheap ECB liquidity. A legal opinion previously sought by the ECB had concluded that such a move would breach the treaty ban on monetary financing of governments, insiders said.

Nowotny's friends said he wanted to stir up debate and hinted Draghi was privately sympathetic to his view. Critics say he just muddied the waters and enraged the Bundesbank.

What works?

Within the Eurosystem, officials are puzzling over what will work. Merely reactivating the ECB's bond buying program, even in tandem with bond-buying by the euro zone's rescue funds, may be too small a bazooka to deter speculators from betting against Spain or Italy, two central bankers said.

"Hedge funds aren't stupid. They can count. They know how much is really available from the rescue funds, how much the central bank has bought so far, and what the political constraints are on doing more," one euro zone source said.

Even when ECB bond-buying was in full flow last year, the ECB's Governing Council limited purchases to roughly 20 billion euros a week, partly at the Bundesbank's behest, insiders say.

The experience remains seared into central bankers' memory after a debacle with Italy. Within days of making commitments to deficit cuts and economic reforms to convince the ECB to step in, then Italian Prime Minister Silvio Berlusconi went back on his promises and treated them as a joke.

"They felt cheated and they don't want to have that happen a second time," a senior financial source in the euro zone system said.

So barring a dramatic deterioration, ECB action may have to wait until conditions in the markets get still worse, Greece gets closer to the brink, and the euro zone, in the words of one Brussels crisis manager, "explores the edge of the abyss". (Reuters)

and might Draghi have just stepped out by himself , without running his schemes past Berlin first ..........

MONDAY, JULY 30, 2012

Did Draghi act on his own?

We've all heard ECB's president Mario Draghi's pledge to do "whatever it takes to preserve the euro." Risk assets have rallied dramatically on this announcement. Spanish 10-year bonds moved up over 7% in price for example.

Everyone of course assumes that the ECB has put together some type of plan to change its policy course. But did this statement come from the ECB (similar to the announcements of the FOMC) or is Draghi trying to do this on his own? Did the Governing Council of the ECB actually agree on this policy move of incremental asset purchases?

Apparently this announcement came as a total surprise to some at the ECB.

DER SPIEGEL: - ... experts at the central banks of the euro zone's 17 member states had no idea what to do with the news. Draghi's remark was not the result of any resolutions, and even members of the ECB Governing Council admitted that they had heard nothing of such plans until then.

This is a bizarre action by a head of a central bank - a statement that is interpreted as a policy shift that apparently has not been vetted by the governing body. It seems that Draghi, possibly without consulting his colleagues, has succumbed to political pressures.

DER SPIEGEL: - Now Draghi is apparently prepared to lend a hand to the hapless politicians. Under his plan, which essentially creates a new form of cooperation between governments and monetary watchdogs, both of Europe's bailout funds -- the temporary European Financial Stability Facility (EFSF) and the permanent European Stability Mechanism (ESM) -- and the ECB will intervene jointly in the bond markets in the future to bring yields down.

Now the ECB has been painted into a corner. They can either follow Draghi's lead without fully agreeing with him or they pause to deliberate on this matter and disappoint the markets. Both outcomes seem rather unsettling.

and......

http://www.zerohedge.com/news/reality-rest-draghis-believe-me-speech

The Reality Of The Rest Of Draghi's 'Believe-Me' Speech

Submitted by Tyler Durden on 07/30/2012 17:34 -0400

Bond

European Central Bank

Hyperinflation

Monetary Policy

Reality

Sovereign Risk

While it is probably not surprising that so many decided to focus on those few words of relevance to an implicitly self-aggrandizing crowd of long-only risk-takers and commission-makers; the truth is that, as UBS notes, "Draghi was stating a fact, not changing a policy". Putting the fateful sentence in the context of the rest of his speech/interview is critical and most importantly, we agree with UBS' Justin Knight's opinion that Draghi did nothing more than make a technical observation on an impairment in monetary policy transmission (as we discussed here). Regardless, if our interpretation is correct, then the rally in peripheral bonds should unwind quickly. The size of the move probably has knocked many shorts out of the market.

Justin Knight, UBS: Mr. Draghi was Stating a Fact, not Changing Policy

Peripheral bond markets rallied sharply on a single sentence uttered by Mario Draghi in an interview with Bloomberg on Thursday. When read in isolation, the sentence appears to indicate a change in policy in which the ECB would begin targeting peripheral yields. However, it is important to put the fateful sentence in the context of Mr. Draghi’s overall remarks. Thus, in our opinion he was doing nothing more than making a technical observation on an impairment in monetary policy transmission.

The sentence in question is:

“To the extent that the size of these sovereign premia hamper the functioning of the monetary policy transmission channels, they come within our mandate”

This implies, perhaps strongly, that the ECB’s mandate includes bringing yields to levels where they do not hamper policy transmission and then keeping yields there. However, this interpretation does not fit either with the context of the rest of his interview, or with previous equally strong statements to the contrary. Indeed, it does not mesh with the current institutional framework in Europe.

Mr. Draghi immediately followed the above remark with

“So we'll have to cope with this financial fragmentation, addressing these issues”.

Financial fragmentation – the fact that some banks have better access to market liquidity than others ? is the subject of this section of his speech. This sentence suggests that the policy response should be aimed more directly at financial fragmentation directly rather than peripheral yields per se. Put another way, it seems to us that he was simply stating that elevated sovereign risk premia impair the transmission of monetary policy as they raise the cost of bank borrowing (and therefore of lending). In the last ECB press conference, Mr. Draghi stated the favoured policy response to fragmentation:

“But in a highly fragmented situation, when a bank is short of funding, they only can go to the ECB. And if the bank is solvent, the ECB stands ready to provide all the liquidity they need. That is important. We should not forget that. I have been saying this on and on and on since the beginning. The ECB is providing liquidity and will keep all liquidity lines open to solvent banks.”

As policy, this is a far cry from the market’s interpretation du jour. Mr Draghi has been vocal about the ECB’s inability to target peripheral yields. In December he referenced the need to respect the spirit of the rules on monetary financing laid out in the Treaty. In the July press conference he also said:

“With regard to the ECB, I have said on numerous occasions that we are certainly supporting the euro area economy by achieving our objective of price stability in the medium term, and we want to act within the limits of our mandate. I don’t think there is anything to gain by asking the institution to act outside the limits of its mandate, thereby destroying its credibility”

Taking these statements together, it appears to us that the ECB already is addressing financial fragmentation. The Bank is providing unlimited liquidity to banks at the policy rate, and has proven quite willing to adjust its collateral requirements.

More broadly, it seems evident that the ECB does not have a mandate to create the informal fiscal transfer union that a cap on peripheral yields would ultimately imply. The fiscal authorities could provide that mandate. However, from our layman’s perch they seem relatively unconcerned with recent market developments. Furthermore, Article 123 of the EU Treaty, which prohibits monetising debt, has its origins in German economic thinking on the hyperinflation of the early 1920s. Therefore, it is very unlikely to be compromised easily.

We expect Mr. Draghi to clarify his comments in the coming days. That might mean waiting until the August 2 press conference.Regardless, if our interpretation is correct, then the rally in peripheral bonds should unwind quickly. The size of the move probably has knocked many shorts out of the market.

and.......

http://www.zerohedge.com/news/napoleon-central-banks-and-cost-boredom

Napoleon, Central Banks And The Cost Of Boredom

Submitted by Tyler Durden on 07/30/2012 10:21 -0400

European Central Bank

Another week of central bank watching ahead, and markets will play their customary game of chicken with the U.S. Federal Reserve and the European Central Bank. Both central banks have policy meetings this week – the Fed’s concludes on Wednesday, the ECB’s on Thursday – and capital markets have been moving higher in recent days on the hope of coordinated action. For investors and traders, this sets up a classic “Buy the rumor, sell the news” pattern for the week ahead. But Nic Colas of ConvergEx asks the deeper question, and the one that will retard any lasting move to the upside, is how much central banks can do without help from fiscal policymakers.

Nic Colas, ConvergEx...

One of the overarching themes of these notes is that human history repeats because human nature does not change. We learn, yes… But the genetic coding that allowed the species to survive through the millennia is still hardwired into our decision-making processes. The best example for investors is that humans run away from danger and cluster together for safety. Great if you are facing a hungry animal, but problematic if you get scared out of a volatile market or think buying a hot new social networking company is the path to outperformance.

Boredom doesn’t get its fair share of the press as a dangerous human characteristic, and I know of no better example of this than Napoleon – Bonaparte, not Dynamite – to highlight this failing. Two hundred years ago to the day, the self-crowned French emperor was sitting in the little town of Vitebsk, in what is now Belarus. He had just pushed the Russian Army out of the town and decided to camp there for the winter and continue his invasion of Russia in the spring. But after just a few days in this sleepy hamlet, he grew bored. One of his aides, Philippe-Paul de Segur, later wrote that Napoleon’s fateful decision to immediately advance onto Moscow came from this logic:

“How can I bear the boredom of seven months of winter in this place? Am I to be reduced to defending myself – I who have always attacked? Such a role is unworthy of me… I am not used to playing it… It is not in keeping with my genius.”

The rest, as they say, is history. Advance he did, with his army of 600,000 men under arms, reaching Moscow on September 14, 1812. The Russians never gave him the decisive battle he desired, preferring to burn their capital to the ground and move further east. Winter, famine and disease did the rest, and the Grand Armee left Russian later that year with less than 120,000 soldiers. It was the greatest military defeat until the German Army replicated the effort in World War II, to similarly disastrous effect.

Such is the price of boredom, and exactly 200 years later the U.S. and European central banks are sitting in their own virtual Vitebsk. Both organizations have meetings this week, and both are clearly at the decisive moments of further action. They do not want to stop and rest for the winter, and capital markets are restless for further action. In a nutshell, here is the battlefield each sees:

In the United States, the rush of better economic news during the first quarter of 2012 has slowed to a trickle. Employment gains have slowed to levels below demographic growth. The first look at Q2 Growth Domestic Product logged a measly 1.5% growth rate, down from 2.4% in the first. Long-term interest rates hover at or below century-low averages, signaling the threat of deflation - the greatest fear of any central banker.

In Europe, it is a story of the haves and have-nots. German bond rates are even lower than those in the U.S., but the Spanish and Italian governments must pay 6-7% for their incremental borrowings. Unsustainable levels, those, for countries where tax receipts are insufficient to cover expenditures.

Capital markets in recent days have sniffed out the inevitable truth – that both the ECB and the Fed feel they have to act. The timing and scope of their announcements is a wild card, to be sure. Both central banks have already exhausted their arsenals of traditional weapons such as short-term interest rate policy, with only modest effect. Their next steps with unconventional measures such as further bond purchases (QE III in the U.S. and targeted purchases of periphery sovereign debt in Europe) have the feel of stopgap moves rather than time-proven steps.

Like Napoleon’s invasion of Russia, however, the enemy of economic downturn is not giving the Fed and ECB a decisive battle. By way of contrast, the Fed’s first round of Quantitative Easing in 2008 was successful in stabilizing the financial system and pumping liquidity into the stock market. This bought some time for corporate profits in the U.S. to rebound and opened capital markets so companies could refinance debt at ever-more attractive rates. Now, the battlefield is different. Some points here:

In the U.S., we face the need to resolve the “Fiscal Cliff,” that combination of tax increases and reduced government spending that all come due between October 2012 and January of next year. The Presidential election process means little will be done to resolve this overhang until November, and even then a lame duck Congress will have little incentive to craft a lasting resolution.

In Europe, the cost of holding together the euro currency continues to climb. The Greek and Spanish economies continue to struggle, limiting tax receipts needed to fund the countries’ ongoing spending needs. Italian bond yields, even after the end-of-week rally, still hover at an unsustainable 6%. At the other end of the quality spectrum, Moody’s downgraded the outlook for German debt last week. As we recently noted, consumer confidence across the Eurozone is now more varied than at any time since before the 1992 Maastricht Treaty that began the road to monetary unification. All this means that politicians may want the euro to succeed, but they face local electorates that have their own parochial concerns over the long-term costs of that goal.

In short, the Federal Reserve and European Central Bank know they face a difficult battle since their natural allies – democratically elected governments – are not yet on the field. Capital markets know this as well. But the temptation to do something – anything, really – is simply too strong for both central bankers and markets to resist. All this limits the effectiveness of any central bank action and similarly consigns any market rally to a short life.

and......

http://www.zerohedge.com/news/german-coalition-member-urges-suing-ecb-over-draghi-open-ended-promise

German Coalition Member Urges Suing ECB Over Draghi Open-Ended Promise

Submitted by Tyler Durden on 07/30/2012 09:09 -0400

Bond

European Central Bank

Anyone hoping that the bitter animosity between Mario Draghi and Germany will be any less hostile this morning, following last week's guarantee by Draghi that all shall be well and the ECB will do "anything" to preserve the EUR, only to be followed by Germany's Schauble essentially saying this is certainly not the case, today we get a clarificationary follow up by Joerg-Uwe Hahn, a member of Merkel's junior coalition partner, FDP, who said that the German government should consider the "unusual step" of taking legal action against the European Central Bank over bond purchases. While Hahn's comments are for now seen fringe, the fact that Die Welt has openly broached the topic to an increasingly angrier population (and Spain's remarks that Germany itself has to be grateful for being bailed out after WWII will not help) will likely only strengthen the resolve of Germany to not relent to provocations by either Monti, as of the June 29 summit, but to demands from both Draghi and Juncker to accept that the ECB's printing utopia is in fact reality.

From Reuters:

"The European treaties allow member states to sue the ECB," Hahn, a member of the ruling centre-right coalition in the state of Hesse, told Monday's edition of Die Welt newspaper, adding that Berlin should consider opening a lawsuit against the bank via the European Court of Justice.

"It's time to open the toolbox of the (EU's) Lisbon Treaty and see how one can ensure that the ECB is brought into line to focus on its original task: monetary stability," he said, acknowledging that this would be "an unusual step".

Hahn's comments were in response to a pledge last week by ECB President Mario Draghi that the ECB was ready to fight to save the euro. "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro," Draghi said.

Asked about Hahn's suggestion, a senior member of Merkel's Christian Democrats, Norbert Barthle, responded cautiously, telling Die Welt: "If Mario Draghi says the measures are legally covered by the mandate, then I believe him for now."

Naturally, as we showed earlier, "believing" the ECB's head traditionally leads to substantial losses, as Germany will soon find out. Most likely sooner rather than later, if there are more articles like this one appearing in the Frankfurter Allgemeine titled "Bailouts without End."

and.......

http://www.zerohedge.com/news/moodys-ecb-can-do-no-more-buy-time

Moody's: "The ECB Can Do No More Than Buy Time"

Submitted by Tyler Durden on 07/30/2012 09:12 -0400

Bond

European Central Bank

It would be odd to suggest that one of the most scathing critiques of the ECB's attempts to talk up the market on nothing but hope, promises and expectations would come from rating agency Moody's, yet that is precisely what has happened. With Swiss, Dutch, Finnish, and German short-dated bonds once again hitting new record low (negative) rates (and Italian 10Y is weakening), it would appear that at least some of the market is not drinking the all-things-risk kool-aid.

Alistair Wilson, Moody's: Draghi Reaffirms ECB’s Willingness to Buy Time, but ECB Cannot Resolve Debt Crisis

Last Thursday, Mario Draghi, the President of the European Central Bank (ECB), said that “within [its] mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” The statement lifted market sentiment and sent Spain’s 10-year government bond yields back below 7%.

Media and market commentators have interpreted Mr. Draghi’s remarks as an indication that the ECB is willing to do more to support pressurized euro area sovereigns, for example by expanding the securities markets program (SMP) with further government bond purchases.

In fact, the statement was a supportive but very general one that contained no specific proposals and offered no firmer prospect of the crisis being resolved quickly. It reaffirms our view that the ECB will ultimately do all it can to support policy makers’ efforts to resolve the crisis. However, that is a necessary but not a sufficient condition for the euro area authorities’ current strategy to succeed.

The assumption of ECB support is central to the credibility of the authorities’ ‘muddle-through’ strategy for resolving the crisis – a reactive and gradualist approach that makes periodic shocks inevitable. The ECB’s willingness to act in a way that, by bolstering investor confidence in peripheral sovereigns, temporarily supports those countries’ continued access to debt markets, is a crucial element of the strategy. The ECB’s capacity to provide such support was amply demonstrated with the introduction of the three-year long-term refinancing operation in December 2011. Were the ECB unwilling to act in this way, the authorities’ muddle-through strategy would be unlikely to succeed.

However, the ECB can do no more than buy time: its actions alone will not resolve the debt crisis. Resolution will ultimately rest on achievement of fundamental changes to member states’ budgetary positions and debt stocks, on structural economic changes required to stimulate growth, and on institutional reform to the economic and fiscal governance of the euro area. Each change will take years to accomplish, and support from the ECB will be essential to the preservation of the euro in the meantime.

The timing of Mr. Draghi’s statement is significant. With the July Summit having failed to reassure euro area sovereign investors, and Spanish and Italian government bond yields having risen substantially over recent days, Mr. Draghi’s statement indicates the level of concern among euro area policymakers. It illustrates the extent to which current financial market conditions are credit negative for issuers across the euro area.

Moreover, notwithstanding the strength of Mr. Draghi’s statement, significant areas of disagreement remain between members of the ECB’s Governing Council on how the ECB should respond. Ewald Nowotny (president of the Oesterreichische Nationalbank and member of the ECB’s Governing Council) recently suggested, in a statement to Reuters, that the European Stability Mechanism should be constituted as a bank in order to be able to borrow from the ECB, a suggestion that the ECB has firmly rejected in the past.

Conversely, subsequent to Mr. Draghi’s statement, a Bundesbank spokesman suggested that expanding the SMP was “problematic”. These conflicting remarks illustrate the diverging views that have dogged the euro area authorities’ policy development and significantly contributed to the depth of the crisis.

and......

http://www.telegraph.co.uk/finance/debt-crisis-live/9437055/Debt-crisis-as-it-happened-July-30-2012.html

15.18 Spain has not, and will not, ask the EU to buy Spanish government debt to ease its borrowing costs, the head of the Spanish Treasury has insisted. Inigo Fernandez de Mesa told Spanish daily Expansion:

It is not on Spain's agenda to ask for help from the fund and to ask that it buy debt. Far from it [...] This has not happened and I can assure you that it is not going to.

14.49 The ECB did not buy any bonds on the secondary market last week, data from the central bank show. We hope to get more clarity on whether the ECB plans to buy any debt and when at Mario Draghi'sinterest rate press conference on Thursday.

13.31 The coalition government in Greece will meet this evening to try to agree on an €11.5bn package of cuts that will unlock the next tranche of its EU/IMF bail-out.

Junior coalition partners have so far refused to sign off on the new proposals, and a government spokesman refused to rule out new pension and salary cuts. The meeting will begin at around 4pm UK time.

The uncertainty in Greece comes amid rolling strikes by ATEBankemployees, who were protesting the state-run bank's takeover by PiraeusBank.

Separately, members of Greek bank union OTOE are also on strike today over austerity cuts.

_{A woman leaves a branch of the National Bank of Greece during a 24-hour strike by bank employees in Athens. The sign reads: "24-hour strike" (Photo: Reuters).}

11.08 The German government has "full confidence" in the ECB and sees no reason for legal action against the central bank.

Spokeswoman Georg Streiter was responding to comments made by German MP Joerg-Uwe Hahn this morning (see 09.21) that the government should sue the central bank over its purchases of peripheral debt.

Mr Streiter also said that the government's position on eurobonds remained unchanged, and shared debt liability was not in the country's interest.

08.52 Today's leader column in the Financial Times argues that theInternational Monetary Fund (IMF) should ask EU leaders for a refund on its loans to the indebted country and "confine its own role to giving open and honest assessments of the ensuing rescue attempt." More from the FT:

...the longer the IMF participates in a rescue it does not itself believe in, the greater the cost will be to its reputation and support outside the eurozone. Should any writedown on its lending even be proposed, it would enrage other shareholders, including the US and the big emerging economies. Its implementation would be a disaster, raising costs for other borrowers and in effect crippling the institution.

On balance, the fund was right to take the risk of getting involved in Greece. It has offered unrivalled technical competence and has tried to inject a sense of reality into the proceedings. But the risks to its reputation have now begun to outweigh the limited good it has been doing. The eurozone has money. It needs an impartial and outspoken adviser, not a co-opted fellow creditor. The IMF should look at how to extricate itself from further bankrolling the Greek rescue.

08.34 Reports that the ECB could take losses on Greek debt have gained traction over the weekend.

Intensive discussions are now reportedly under way among EU policy-makers that could see the European Central Bank and a number of central banks take a significant write-down on their Greek bonds as the price for avoiding a eurozone break-up and losing its weakest link.

08.03 We wake to news this morning that the Spanish economy contracted by 0.4pc in the second quarter. This follows a 0.3pc contraction in the previous quarter. On an annual basis, the economy contracted by 1pc.

The figures affirm the Bank of Spain's forecasts earlier this month.

Catharsis Ours

Monday, July 30, 2012

MONDAY, JULY 30, 2012

Did Draghi act on his own?

The Reality Of The Rest Of Draghi's 'Believe-Me' Speech

Napoleon, Central Banks And The Cost Of Boredom

German Coalition Member Urges Suing ECB Over Draghi Open-Ended Promise

Moody's: "The ECB Can Do No More Than Buy Time"

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