Politics are back and spoiling Mario Draghi’s good work

Politics are back in play in most of Europe, and this doesn’t bode well for central bankers. Even the almighty European Central Bank had a moment of weakness last week, when it broadcast a message so complicated to markets that it should not be surprised it fell wide of the mark.

The ECB did indeed extend its asset purchases beyond March 2017, but instead of keeping them at €80 billion a month as the markets widely expected it to do, it reduced them to €60 billion. This prompted people to speak about the T-word — “tapering” — even though the ECB is still buying assets.

This is worrying, particularly for investors in corporate debt. Analysts at Bank of America Merrill Lynch said after the ECB’s decision: “The bottom line is that less credit buying is not what the high-grade market needs. In fact, it needs as much corporate bond buying from Draghi as possible.”

They estimate that next year the supply of corporate debt will increase by 10% to around €450 billion in 2017, driven by the need to finance a wave of M&A. But they also estimate that the investment grade market needs to attract additional buyers of around €190 billion; they see investor inflows into this asset class at just €45 billion next year.

“The emphasis falls on Draghi to ‘balance the books,’ they said.

But it’s probably easier said than done. Slowly but surely, political calculations have overridden the central bank’s desire to do “whatever it takes” to save the euro. This latest decision is an example of that, because it means Draghi had to yield to the hawks in the Governing Council.

With German elections next year, that is no surprise. A while ago, Draghi was accused by German Finance Minister Wolfgang Schaeuble that with his low interest rate policies he had encouraged the rise of extremist party Alternative for Germany. Schaeuble later went back on these words, but it was clear that the political tension was rising.

Another example is that of the rejection of an extension for the rescue of Monte dei Paschi di Siena, the Italian bank which, following the resignation of Prime Minister Matteo Renzi, is finding it difficult to raise more capital.

The ECB refused to give the bank breathing space to carry out the capital increase after the appointment of a new government, which could indicate that it wants to please German politicians ahead of the crucial elections.

These are just two of the latest examples, but they serve to show that this kind of maneuvering could continue until end-October at the latest, when German elections must take place according to the law. You’ve been warned.