The main news in today’s European roundup is the reiteration by ECB president Mario Draghi EU Treaty Prohibits “Monetary Financing”

At a news conference in Frankfurt, European Central Bank President Mario Draghi said on Thursday that the European Union treaty prohibits “monetary financing.” He was responding to a reporter’s question about why the central bank doesn’t ramp up its bond-buying program. He also said that the ultimate decisions and political responsibility are in the hands of EU leaders, which will meet in Brussels on Thursday evening and Friday.

Draghi Fuels then Sinks Rumor ECB will Step Up Bond Purchases

The market has rallied for weeks on expectation the ECB would eventually get around to a massive bond buying program. The irony is Draghi personally fueled rumors the CEB would step up purchases (see ECB Ready to Push Boundaries on Interest Rates and Bond Purchases; One Size Fits Italy).

So Draghi got out of this what he wanted: A big plunge in Italian and Spanish debt yields, by doing nothing more than yapping.

The second irony is that Draghi is in essence a liar. He cannot come out and say the ECB is providing “monetary financing” with its bond purchases, even though that is exactly what the ECB is doing.

The ECB is under scrutiny by the German central bank, the German supreme Court, and German voter opinions. You have to give him credit for walking a fine line that has not brought out huge protests in Germany.

Europe Moves Towards Abyss

Fill Zuchi, native Italian, and founder of the Zebra Fund says Europe Moves Towards Abyss.

At one point in the discussion Zuchi states “Popular Discontent Could Sink Any EU Plan“.

Indeed. As I have been saying for weeks … “Eventually, there will come a time when a populist office-seeker will stand before the voters, hold up a copy of the EU treaty and (correctly) declare all the bail out debt foisted on their country to be null and void. That person will be elected.

Market, European Bonds Sink

On news there is no news, only rumors and promises to do something by March (See Eurozone Treaty Changes to be Finalized in March, Then a Vote in May, Then Country-Specific Referendums, Then?) the European bond market stages a mini-revolt after a several-day rally on hot-air from Draghi and Merkozy.

Italy 10-Year Government Bonds

Italy 2-Year Government Bonds

That’s quite a reversal off the lows. There is still an amazing disconnect between equity market performance and bond market performance over the past two months. Except for a few recent days, reversed today on Draghi’s comments, the bond market has responded if the situation is on the edge of the abyss. Meanwhile the equity markets act as if the ECB is going to print in a big way, eurobonds are coming, as are treaty changes.

I think the bond market has things correct. Can the equity markets hold on until May to find out?

Mike “Mish” Shedlock
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