STOCK MARKET WATCH -- Monday, 30 January 2012

[Ghost Dog]

66. Mario Draghi, the Latin Bloc’s monetarist avenger

By Ambrose Evans-Pritchard
6:28PM GMT 29 Jan 2012

Credit to households and firms shrank by €90bn in December alone. It is the biggest drop in a single month since the launch of the euro, worse than after the Lehman collapse in October 2008 or at any time during the Great Recession.

One dreads to think what would have happened to Europe’s banking system and to the solvency of Italy and Spain if Mario Draghi had not come to the rescue before Christmas with unlimited three-year funding at 1pc, against almost any collateral: that is to say, if the mad Hayekians had still been in charge of the European Central Bank...

... In the meantime, great damage has been done. The International Monetary Fund expects economic contraction of 2.2pc this year in Italy and 1.7pc in Spain, with further declines in 2013 - if all goes well.

This will play havoc with debt trajectories. Italy’s debt will rise to 127pc of GDP by next year. Spain’s will rise to 84pc, more than 11pc worse than forecast in September. There will be scant improvement to the budget deficit in either country. So much austerity for so little gain...

... The bitterness is starting to show. Rodrigo Rato, head of Bankia and a former IMF chief, said the structure of monetary union is rigged in favour of Germany. “When the Germans are in trouble, the other EU members help it, and when the others have problems, Germany takes advantage to lower its own borrowing costs,” he said.

There is a core of truth to this. The ECB set rates too low over much of the last decade to help Germany out of slump, setting off credit booms that destabilized half of Europe. The favour was not returned in mid-2011 when the Trichet-Stark team raised rates even though real M1 deposits were collapsing across Club Med, with consequences that are now painfully apparent...

/... http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9047851/Mario-Draghi-the-Latin-Blocs-monetarist-avenger.html