Investors can't wait to see what the ECB's next trick will be

Ints Kalnins/Reuters

A few weeks ago, few people had heard of the ECB’s Governing Council Member Vitas Vasiliauskas. In the last week that has all changed, thanks to a surreal interview Vasiliauskas gave to Bloomberg in which he described Europe’s central bankers, with apparent deadpan seriousness, as “magic people” endowed with limitless powers to shape Europe’s economic environment:

“Markets say the ECB is done, their box is empty. But we are magic people. Each time we take something and give to the markets — a rabbit out of the hat.”

It is arguably the most absurd — and honest — description by a central banker of the role of modern central banking in today’s economy. On Wednesday Vasiliauskas gave Reuters an eagerly anticipated follow-up interview. In it he waxed lyrical about the Eurozone’s rosy economic outlook.

“The current situation is stable with positive perspectives,” Mr Vasiliauskas gushed. “So if you ask me what do you think about possible steps during the summer, my answer would be: nothing.”

This is the same Eurozone where the unemployment rate still hovers above 10% and more than half of young people feel economically marginalized,according to a new poll. But that is not the Europe that Vasiliauskas and his ECB cohorts are worried about. For them the only Europe that counts, the Europe that they’re frantically conjuring figurative rabbits out of hats to keep in tact, is a Europe of giant, failing banks, bloated, debt-laden corporations, and a deeply flawed single currency.

To save that Europe, the ECB has cut its deposit rate into negative territory and is buying €1.7 trillion of mostly government debt. Through the so-called TLTRO-II it has promised to pay banks money to fulfill one of their most basic functions — i.e., lend to businesses and households. It is a measure that Vasilauskas leeringly describes as “very sexy.” The ECB is also about to expand the reach of its QE program to include corporate bonds. This should be enough to keep the punters happy, at least until the Fall, Vasilauskas says.

If further action is needed — which it no doubt will be — the ECB has plenty more tricks up its sleeves. It could even expand into new asset classes, Mr Vasiliauskas ominously points out. On one condition: they must have a direct transmission effect on the real economy. Asked if shares and property buys would have such an effect, Mr Vasiliauskas was delighted to reply that they would.

The next rabbit

And there you have it: the next rabbit out of the ECB’s hat may be the mass purchase of European (or even global) shares. Naturally, the policy will be welcomed with open arms by many of Europe’s publicly listed companies and banks, whose shares continue to languish far below the lofty peaks registered last year, despite all the billions they’ve poured into buy-back schemes.

The ECB would not be the first central bank to have crossed this particular Rubicon, but it will certainly be the biggest. As was revealed last year, the Swiss National Bank (SNB) had 17% — $94 billion — of its foreign currency investments and CHF bond investments in foreign stocks, including stakes in Apple Inc., Exxon Mobil Corp. and Johnson & Johnson. That’s the equivalent of 15% of Swiss GDP.

The only reason we know all this is that the SNB does something that virtually no other Western bank dares to do: it discloses where it puts its money, by filing a quarterly 13-F report. By contrast, the ECB operates under a pitch-black shroud of opacity. Despite engineering monetary policy that has radically redistributed economic risks and rewards throughout the Eurozone, the ECB has not the slightest veneer of democratic oversight. No one — apart from the magic people themselves — really knows what is going on.

In the face of growing criticism about its lack of transparency, the ECB decided at the beginning of this year to start releasing the Executive Board’s diaries — with a three-month lag. The latest batch of diaries shows that the ECB continues to meet regularly with major global financial players, despite the public outrage triggered by revelations last year that the central bank’s market chief, Benoit Coeure, had told a banquet hall full of bankers and investment managers that the ECB would front load its €1.2 trillion — now €1.7 trillion — asset-buying program before a summer lull.

On February 3, ECB Governor Mario Draghi met with Royal Bank of Scotland Group Plc to discuss “economic and financial issues” in Europe, the diaries show. Peter Praet, the ECB’s chief economist, met with Nomura, Germany’s Deka Group and Brussels-based BNP Paribas Fortis, as well as visiting SGH Macro Advisers in New York. Other meetings included Yves Mersch with Roubini Global Economics and Moore Europe, Benoit Coeure with Deutsche Bank AG, HSBC Holdings Plc and France’s Attali & Associes, and ECB Vice President Vitor Constancio with Axa Group. Someone at some point also appears to have met with representatives of the world’s biggest fund manager, BlackRock.

And Goldman Sachs? Both Constancio and Coeure each met with Mario Draghi’s former employer in Shanghai on Feb. 27 and Feb. 28, respectively, the diaries show. What was actually discussed during these encounters we will never know but as Adam Smith once noted, people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public.

According to the source of the news, Bloomberg, these meetings are necessary in order to avoid a repeat of last December’s “disconnect,” when markets sold off after the ECB announced a smaller stimulus package than investors had anticipated. In another article Bloomberg wonders how “helpful” these private encounters actually are, the answer to which should be patently simple: in a centrally planned monetary system, knowing what the plans are before they are publicly announced would be an immeasurable source of competitive advantage, not to mention vast material wealth — legalized insider trading. 

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