Draghi Takes A New Tact at the ECB

Italy's own former head central banker took over the role of head of the ECB (European Central Bank) and came through the door with a bang, cutting rates within the first few days of becoming the new ECB head.

It seems Draghi must know Italian politics better then his predecessor, Jean-Claude Trichet and understands that the changes the ECB and EU expect of Italy, are not likely to bet met, thus he has delivered a new ultamatum this weekend.

The formerly promised reforms, in exchange for ECB support of Italian bonds, has been not only slow in coming, but rather DOA. That may or may not be about to change, but change one way or the other is coming.

Reuters reports:

The European Central Bank often discusses the possibility ending the purchase of Italian government bonds if it concludes Italy is not adopting promised reforms, ECB Governing Council Member Yves Mersch said.


And Thus Draghi seems to be putting all or nothing on the table.


"If we observe that our interventions are undermined by a lack of efforts by national governments then we have to pose ourselves the problem of the incentive effect,"


"the ECB did not want to become a lender of last resort to help the euro zone solve its debt crisis and said it was concerned that its job could be made more difficult by governments that "don't meet their responsibilities."

"Our job is not to remedy the errors of politicians," he said.

And just how serious is Draghi?

Friday this ECB intervention in the Italian bond market was noted...

As Italian 10 year was sliding to an untenable 6.3% yield and moving higher, the ECB stepped in with supporting purchases at the green circle, it seemed to be a failed intervention.

However, when this most recent headline is digested, it may very well have been a demonstration to Berlusconi of  "With us, without us".

The ball is now in Berlusconi's court, however the changes demanded including : Spending cuts, higher tax revenues and labor reforms; still seem unlikely.

As it is with all of the PIIGS nations, the ultimate reality is that they still hold the trump card. For evidence of this, just look at Greece this week. A bailout crafted almost entirely for Greece was just about scrapped by Greece and it didn't take more then 48 hours for Ireland, Portugal and Spain to start manipulating data to enhance the chances of sweetening their deals. The one thing every politician and finance minister in Europe understands is that if 1 of the 5 PIIGS goes down, the entirety of the EU goes down.

Judging by the rapid decay in the credit quality of the recent former back-stopper of the EU, France and the manufacturing read this week of the only EU back-stopper left, Germany, it may already be too late.