Simon English: 'Draghi Put' is keeping the real pain in Spain at bay

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The Independent Online

Outlook The "Greenspan Put" was the assumption rife among Wall Street traders that should shares fall to a certain level, Alan Greenspan, the former head of the US Federal Reserve, would intervene by slashing interest rates so much that bonds were no longer worth buying. Investors would turn to equities and the Dow Jones would soar. Everyone would be happy, or at least would feel like they were getting richer, even if asset prices were plainly inflated.

It worked for a while, a good few years, keeping the US housing and equity bubble afloat, while the Wall Street crowd made hay. Then the Greenspan Put crashed, horribly and inevitably, in ways for which all of us are still paying.

Unless you rode the gravy train in the right direction of course.

Perhaps there's something similar going on with the European Central Bank (ECB) president, Mario Draghi.

He is so desperate to save the euro that he keeps promising to buy up any old Spanish debt going to make sure that the country doesn't go bust. We are right behind Spain, he is saying, so you nasty speculators are wasting your time and your money by thinking it might go bust. The idea is that if markets think that the ECB is dead serious, they won't short-sell the debt.

This is not a new strategy.

Dealing with the 2008 Wall Street apocalypse, the former US treasury secretary Hank Paulson told it like this: if everyone thinks you have a bazooka in your pocket, you probably won't have to actually use it.

Central bankers say things so that they (hope) won't have to actually do them.

Because of the "Draghi Put", Spain keeps being stabilised, perhaps in defiance of the country's real situation. So Spain keeps avoiding having to demand a huge bailout because there's an assumption that the ECB is going to do whatever it takes to prevent this.

In turn, this makes Spain think it can muddle through without a bailout. Which in turn means it doesn't address its debt problems properly. Which means the ECB has to be ever more ferocious in its spoken defence of that country. Which means investors, particularly Spanish banks, keep buying government debt.

This circularity probably has to end sometime, in ways that may not be pretty.

They, we, could all get away with it, of course. If we do, it might be the biggest confidence trick ever turned.