Trader Talk

Draghi's 'Silence' Drags on Markets


Stocks weakened Monday as ECB President Mario Draghi, speaking to the European Parliament, said nothing he hasn't said before. And that is not good.

As Art Cashin has noted, traders were not looking for him to reiterate how LIMITED the ECB involvement was in the crisis, they were looking for a clearer way out. They didn't get it.

Given the rather bland testimony — with few new ideas, as well as a reiteration of no expansion of the bond buying program, it's little wonder traders sold into the news. Consider how "touchy" things are:

1) Over the weekend, the Greek finance minister said that negotiations over the second rescue project would be "tough." Indeed: the IMF is already projecting a 30 billion euro shortfall in Greece's budgetary targets, and it's getting worse by the day. And we are not hearing anything about the "voluntary" bond swap.

Who's going to make up for the funding shortfall? If it's the EFSF, that means there's a lot less money than everyone thinks in the EFSF.

2) there doesn't seem to be a lot of momentum behind getting more money to the IMF. The Bundesbank said there was "no reason to hurry" (huh?). If the Germans don't think there is reason to hurry, why should anyone else?

3) the eurozone leaders, led by Merkel, have said they want a new multilateral treaty enshrining fiscal austerity by March, 2012, but there's already signs that some countries (Czech Republic, Hungary, Sweden, among others) might object to certain terms. Ireland and Denmark would likely require a referendum to approve changes.

Any slowdown in getting a new treaty will be a problem. Many traders are anticipating the ECB will become much more aggressive with bond buying once a new agreement is reached. No agreement, no move by the ECB.

One interesting comment from Draghi: he said that it was time for an analysis of the extraordinary cost of a euro breakup. Here is Draghi calling the bluff of the naysayers, who so far have gotten a relatively easy pass just by saying the debt levels — for Greece, for many European banks, for Ireland — was unsustainable and a breakup of the euro was inevitable. Draghi is saying that the cost of the breakup far outweighs the cost of staying together.

I wouldn't be surprised to see some kind of high-level analysis from the ECB or the EU in the coming months.

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