But in this extraordinary comment on my post, someone who identifies as "cig" exposes a dimension to Juncker's plan that I had missed:
There is an obvious trade here:And cig adds:
1. get bridge loan of say €100m
2. create SPV
3. have SPV buy €100m worth of senior tranche of EIB project
3. have SPV (alone or with mates) issue covered bond guaranteed on these (+ admin spread)
4. sell covered bond to ECB
5. goto 2 (you've just got your €100m back from the ECB)
No risk for the trader here, she just makes the admin spread and uses zero long term capital (once the 300B are exhausted she gives back the €100m to the bridge lender). In that scenario it makes sense that it's the EIB that decides what project gets done as after all it's the ECB's money we're spending. Technically there's no monetary financing that a normal electorate can notice.
Now I'd like to know is whether this trade is the very point of the scheme and who understands that... Note that even if it's not, it may still work out that way anyway.When I saw this comment, suddenly everything became clear....Draghi's public support for Juncker's scheme in his Jackson Hole speech, followed by the ECB's surprise announcement in September that from November it would buy both ABS (as expected) AND covered bonds. The confidence of policymakers about the likelihood of private sector involvement in this scheme is indeed well-founded. The ECB is standing behind it - not directly, because as I pointed out in the post that would be monetary financing of governments, but indirectly in the name of "monetary policy". Never was falling inflation more opportune. The private sector's involvement in this scheme is completely risk-free, and whether the investment projects actually generate real returns is completely irrelevant.
If "cig" is right, then this scheme has two purposes: overtly, it is to increase investment across the EU - and covertly, it is to circumvent the treaties that prevent the ECB from financing sovereign investment.
As far as I know, no commentator has spotted this - not even the redoubtable Bruegel. Though I think the Cypriot economist Alex Apostolides understood it. "Why is all this crap better than a treaty change?" he asked me on twitter. Indeed, avoiding treaty change is what it is all about.
No way did Juncker dream up a scheme of such Machiavellian brilliance. This is the Goldman touch. Super Mario is at work.
Draghi's debt trap