Will the European Central Bank Relent to Political Pressures to Increase Debt Monetization?

Here is what I said last week

I would conjecture that rules, laws, regulations, policies or self-imposed limits change according to the convenience and the interests of politicians.

This seems to be happening. A dithering European Central Bank (ECB) may be “softening” their stance as pressures for her to backstop the Eurozone mounts.

The Euro crisis has been rapidly spreading like a wildfire.

Even Germany’s bonds are being dragged by the crisis. (chart from Bespoke Invest).

Last night, Belgium’s credit rating had been lowered by the S&P. Belgium follows Slovenia, Spain, Italy, Ireland, Portugal, Cyprus and Greece as euro-area countries having their credit rating cut this year. The country of 10.8 million people, whose capital, Brussels, is home to the European Commission and the North Atlantic Treaty Organization, last had its credit standing lowered in December 1998 by Fitch Ratings. (Bloomberg)

The following report from Bloomberg shows us how political interests will likely lead to a change in the rules of the game in dealing with the Euro Crisis, (bold emphasis mine)

European governments may ease provisions in a planned permanent rescue fund requiring bondholders to share losses in sovereign bailouts, German Finance Minister Wolfgang Schaeuble suggested.

Schaeuble signaled that Germany may retreat from demands that private creditors contribute to rescues in exchange for European treaty amendments toughening rules on budget oversight.

European efforts to speed the setup of the 500 billion-euro ($662 billion) European Stability Mechanism from its planned mid-2013 debut have lost momentum as Germany and the Netherlands resisted pleas by France, Spain, Portugal and Ireland to drop its bondholder-loss provisions.

“Basically, we agreed on the principle for the ESM already in July,” Schaeuble told reporters in Berlin after talks with his Dutch and Finnish counterparts today. “If we now manage to move toward a stability union, we’ll see how one might possibly adjust the treaty.”

The debt crisis rattled Germany, Europe’s biggest economy, with the failure of a bund auction two days ago. Bond yields in Spain and Italy surged today, with Spain dropping a plan to auction a three-year benchmark next week and Italy being forced to pay more to borrow for two years than for 10. Belgium's credit rating was cut today to AA from AA+ by Standard and Poor's.

While there “may be discussions in Brussels” next week on sector involvement under the ESM, the aim of a finance ministers’ meeting will be to flesh out details of the agreement by EU leaders last month to write down Greek debt, recapitalize banks and strengthen the existing rescue fund, the European Financial Stability Facility, Schaeuble said.

ECB Pressure

As the crisis worsens, the European Central Bank is coming under pressure to step up its response. While France yesterday agreed to stop pressuring the ECB to print money, policy makers today signaled they are willing to offer cash-strapped banks more liquidity if needed.

Pieces of the jigsaw puzzle seems falling into place.

The probable reason why France has “agreed to stop pressuring the ECB” is because Benoit Coeure, chief economist at the country’s finance ministry has reportedly been nominated to the ECB to replace Lorenzo Bini Smagh, which appears to be part of the horse trading on the political appointments happening at the European Central Bank.

The growing clamor for the EU to have a "fiscal union" has served as veneer for the ECB to go on the path similar to the US Federal Reserve in pursuing an aggressive monetary policy stance.

Looks like we may be headed there pretty soon.