ECB floating way out of its depth

by John Dizard

Financial Times
November 20, 2011

Captain: Okay, men, now listen. We’re going to blow out the water now and see if we can get our rear ends out of the sand. If we make it to the surface, things could still get pretty rough. Traffic’s heavy up there. And we have to pray the engines start, so we can get out of this mess. The condition the boat is in, we have got to head straight for La Rochelle. If we make it ... it’s half a bottle of beer for each! There is one thing on our side; they won’t be expecting us. Well men, all set?

The Crew: [in unison] Jawohl, Herr Kaleun!

Das Boot (1981)

As I understand it, European Central Bank directors are feeling at bit like crew members of the fictional U-96 submarine. Plagued by leaks (going out, in the ECB’s case), depth-charged by menacing Anglo-Saxons, and, of course, way, way beyond their design depth.

A month ago, I had thought the complex financing structures being put together to get eurozone sovereign bond markets back on track would have to be replaced by a simple alternative. The European Financial Stability Facility would be incorporated as a bank, and its equity used as margin for classic sovereign bond repos funded through the ECB. That way, the ECB would be staying within its accepted mandate, while averting a general European liquidity crisis.

Well, I was wrong. The EFSF has made its first impression on the buyside, and it was not a good one. The European leadership has not been in the least interested in listening to advice from the US, but a bit more of that American “customer-centric” thinking on this problem would have been a good idea. The principal international buyers of any triple-A instruments these days would be Asian central banks, and central bank-related institutions. The EFSF, it was assumed in typical euro de haut en bas fashion, could stuff any amount of its paper into these accounts.

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