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Gaceta Mercantil, Buenos Aires quotes Stephen Pope & Spotlight Ideas

Thursday January 1st 1970

Transaltion from Spanish to English:

Todas las apuestas a "Super Mario" Draghi All bets on "Super Mario" Draghi
All bets on "Super Mario" Draghi

In recent weeks, markets expected the ECB intervention, chaired by Mario Draghi, to resolve  the debt crisis that has been running for five years.

By Gustavo Fiuma

 A strong "rally" occurred days earlier in the markets in the heat of a possible intervention by the European Central Bank (ECB) in September. This assumption is even more overvalued before the course yet and, above all, unusual for Germany to support this measure.  The headline that has appeared in various media was very blunt: "Merkel supports Draghi ", which is very surprising, because Germany has rejected over and over again and they were very difficult circumstances to its European partners ECB intervention.

A detailed analysis of the statements that have motivated this headline shows it is not so obvious from Berlin to support the plans of the monetary authority of the Old Continent.  A German government spokesman said that they are "concerned" over statements by the President of the European monetary authority, the Italian Mario Draghi, when asked about the possible loss of independence of the ECB if the entity involved. Specifically, the spokesman said that Draghi "in its latest statement, clearly referred to the responsibility of politicians in the euro crisis, and governments have no doubt that whatever happens does the ECB within the framework of its mandate ".

Questioned later if he meant by this response to the purchase of debt, the German spokesman said: "You can conclude that what has happened (Draghi's statements) are supported by the Government (German)".  Draghi, recalled the German representative, reiterated that classic "within its mandate" that when I pronounce a German, is an obvious reference to the control of inflation.

Although the Italian banker got "dodge" and finally the German reluctance to intervene in the bond market, "can not save the euro zone," said Simon Johnson, chief economist of the International Monetary Fund (IMF), between 2007 and 2008, Bloomberg .  "Optimists believe that Draghi is trying to end the political uncertainty that characterizes the euro crisis," he said.

Johnson recalls that in 2008, many investors thought they had the possibility of big bailouts implicit in the structure of the monetary union, and hence yields the debts of Greece, Germany, Italy and Spain were not much different."That confidence collapsed as Greece, Ireland and Portugal showed that the ECB would not support the government debt regardless of their circumstances," said Johnson, who warned that the Eurozone has many problems that are not solved by buying debt or lowering rates interest: "Lack of competitiveness in the periphery chronically poor growth in countries such as Portugal and Italy deeply damaged public finances in Greece and Spain, and workers who do not have enough mobility to go where the jobs are."

"Draghi has become the star of the European summer, both by those who did not feel politicians were able to resolve the crisis and did not know who to trust. said Tom Wirth, of Chemung Canal Trust. Speaking to Bloomberg he also blamed Draghi, in a good way, that "the fear of total collapse is disappearing." Experts say that although there is still no set route for resolving the crisis, and as it is expected to close in the short term, it can be said that the worst scenarios that were contemplating financial markets have disappeared from the table bets.

It is too easy to overlook negative news that keeps coming from Greece, which until recently was the most serious of all the problems.  According to The Wall Street Journal, the IMF has called for the Euro Zone countries reduce the debt burden that is stifling this country, which could mean new hope. Stephen Pope, managing partner at Spotlight Ideas said that now "is not the time to be bullish or bearish, but be skeptical."  More radical was the founder and co-CEO of PIMCO, the largest private fund manager in the world, Bill Gross, who warned in the pages of the Financial Times: "Do not put your money in Europe, because it will take still stay in crisis ".

That is the hope of today. With its new leadership, the ECB could buy the "toxic" debt in Europe, alleviate the current crisis and allow the return of global growth. Tat would be optimal, as a positive situation. However, do central banks have the power (or the ability) to solve debt crisis?

The answer, unfortunately, is no.  On second thought, maybe, in the case of the euro, because the supposed magic of resolving the crisis stems from the ability of central banks to buy debt issuing money ("monetizing the debt").  Even more if the central bank in question emits strong currencies such as the euro and the dollar.  When nobody wants to accept some debt, considering that it will not be canceled, central banks may be the "buyer of last resort", acquiring titles and increasing its balance.

 The U.S. central bank (Fed), the Bank of England (BoE) and several others have bought hundreds of billions from the outbreak of the crisis in 2007 and 2008 by the famous shopping programs baptized "QE" (quantitative easing ). The next program is the Fed waited anxiously for the next few weeks, which would increase further inflating its balance sheet (of "toxic", including real estate, the source of the crisis of "subprime").

The ECB also has a program ("Securities Market Program"-SMP) to purchase "toxic" assets, which in his case are securities issued by peripheral European countries with unsustainable debts perceived. It  did it through the "Long Term Refinancing Operations" (LTRO). It has acquired fewer titles on the market and let the crisis from spreading. La razón es la falta de acuerdo de algunos miembros del BCE para “resolverla” vía monetización de la deuda. The reason is the lack of agreement from some members of the ECB to "resolve" via debt monetization.

In times of normal growth of the economy of excess currency in the system leads to more inflation, generating losses for segments of the population, which indirectly and without agreement, pay the bills. In times of recession or low growth, less inflation risk but there is a risk of "default" and prejudice of being with governments that support them and their taxpayers who pay their bills. That is, if there is no magic to create money, "Super Mario" should not be the solution to the euro.

If the euro zone were a single country, not a collection of sovereign countries, the problem would be less. In that case, analysts believe the ECB, if necessary, and have undertaken a more ambitious procurement program. Countries have diverse economic performance, some with unsustainable debts, the result of excesses committed in the last ten years or more. Some states, such as Greece and Spain, require adjustments do not seem to be politically viable.Apparently, for the euro to survive in its current form is necessary to split the losses with the rest of Europe.

The problem is that there are different perceptions about the fairness of the "socialization of losses". The leaders of the European countries do not get easily convince their societies of the need to transfer resources to struggling economies. The crisis in Europe in recent years is a reflection of this difficulty, as, for example, the approval of the necessary resources and destinations for the European bailout fund (ESM).  Only when the situation worsens, the peripheral countries walk to the "default" and the euro is on the edge of collapse, progress can be made in the "socialization of losses" (and, simultaneously, in the implementation of strong adjustment in countries with problems).

Stronger performance of the ECB is certainly an indirect way of socializing losses. Correct or not, a bloated central bank balance seems to cause less problems. The support packages societies Fed and BoE Bank of Japan (BoJ) suggests that there is little risk of inflation aversion cesasión or payment of securities purchased.

Support for financing via ECB LTRO last year, indicating the same. Not to mention that, in practice, the potential losses in the event of dissolution of the euro already covered: the system of credits and debits in the euro system (TARGET 2), Germany already has an asset position of almost 30% of its GDP. But in the case of the euro, the best performance of the ECB may actually be the path of least political resistance (or even the only) capable of producing a bridge to the future.The ECB will be judged by the success of this strategy depends largely on a political solution in the medium term.

Similar risks faced by other central banks and their balance sheets degraded, depending on the success of future policies. Ultimately, these powerful central banks now seem rather vulnerable.

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