Banking License as ECB's Bazooka?

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Reports (vague rumors) that ECB head Mario Draghi may have reached out to Bundesbank head Jens Weidmann moved the Dow more than a hundred points in the middle of Friday's trading day. (See: Markets Spike on Report ECB Is Weighing New Steps)

It certainly wouldn't be surprising that they talk, but the rumor mill threw in a rich tidbit: that they had discussed giving the EU's permanent bailout fund (the ESM) a banking license.

That may be inevitable, since it's what would be needed to provide the backstop for a Spanish and Italian bailout. But talk of that seems a bit premature.

The ECB is going to have to do something to lower Spanish and Italian bond yields; what is the best way to accomplish that?

There's plenty of other steps the ECB can take before announcing a push for a banking license for the ESM:

1) purchase bonds in the primary market through the EFSF/ESM, and in the secondary market through the Securities Market Program (SMP);

2) reducing interest rates into negative territory

3) A third Long Term Refinancing Operation (LTRO), perhaps, as Steve Liesman has suggested, a longer-term LTRO of five years or more, instead of the 3-year LTRO that has already been used. They could also lower collateral requirements.

No matter: Adrian Miller at GMP Securities noted to me that, while these are the logical next steps, the banking license would be a big deal. And all Draghi would have to do at the Thursday meeting is say that it is being discussed, and the ball would be set rolling. Even if Weidmann comes out immediately and reiterates the Bundesbank is opposed to the idea.

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