ECB 'last resort' welcome, but political problems remain

(BRUSSELS) - Dramatic ECB moves to clean up unsustainable debt among fallen eurozone countries are what investors wanted, but political hurdles remain starting with a crucial German court decision next week.

Leading finance analysts declared on Friday that the European Central Bank is now a de facto US Federal Reserve-style "lender of last resort," despite the absence of a federal eurozone and pooled eurobond issuance.

The decisions announced by ECB President Mario Draghi go a long way towards meeting investors' demands, but they could be unpicked as early as Wednesday if the German Constitutional Court in Karlsruhe gives grounds to legal challenges to the European Stability Mechanism (ESM).

German Chancellor Angela Merkel has backed Draghi's masterplan, designed to bring down soaring borrowing costs for crisis-wracked countries like Spain.

But it is conditional on governments first accepting ESM bailout help and enacting German-inspired reforms enshrined in a related fiscal pact also under challenge.

According to observers, it could turn out that the German judges need more time to deliver a definitive ruling on whether these treaties -- on hold awaiting the judgement -- are incompatible with Germany's "Grundgesetz", or Basic Law, because they effectively force German parliament to surrender its budgetary sovereignty.

Analysts are keeping their fingers crossed, with economist Holger Schmieding of Germany's Berenberg Bank noting that since establishing an agreed bailout programme -- however light -- is "a necessary condition for ECB support, the ECB has de facto given the German Bundestag (parliament) a veto."

All significant decisions to issue support from the ESM -- or its predecessor, the European Financial Stability Facility which is not yet exhausted and could theoretically fill a gap in ratification -- "have to be approved" by German lawmakers anyway, he said.

Bigger questions, Schmieding reckons, are whether Spain will actually ask for help, how many countries will miss their deficit targets in a recession already under way, and what will be the effect of a Greek exit from the eurozone -- which Berenberg still says is a one-in-three possibility.

However, "the ECB is the final lender of last resort," he stressed. "Those who sign up to and abide by the rules will be protected against any market turmoil. Those who fall foul of the rules do so at their own risk."

Dismissing fears it would only create moral hazard -- encouraging governments to overstep spending -- or fuel inflation, he insisted that "countries have a sovereign choice to accept or reject the rules."

He underlined: "They cannot force other countries to pay up if they don't abide by the rules."

Other experts at Deutsche Bank or UBS also see the deal as paving the way for Madrid to call in eurozone aid -- despite mounting gripes against austerity-fueled mass unemployment.

Marco Valli of Italy's UniCredit warned that, despite the headway made, it was "impossible for the ECB to neutralise all the threats to the survival of the eurozone."

Valli emphasised that internal dangers raise "the risk that the government of a systemic country will backpedal on reforms."

Even watered down in comparison with Greek-style terms, any new programmes would still involve "a significant loss of sovereignty," according to more sceptical economists at London-based Capital Economics.

The eurosceptic think tank Open Europe also warns that Draghi's grand bargain "transfers far more risks from struggling banks and governments onto the ECB's balance sheet," and is effectively a bet that "a series of unpredictable political decisions in member states will go in its favour."

It argues that moral hazard has in no way been contained, given that "the eurozone is hesitant to revoke funding even when conditions are breached," as seen with Greece on repeated occasions.

Besides, over and above EU and IMF policing and peer pressure, when it comes to enforcement, "the only option the ECB has is to withdraw funding ... impossible to do without causing huge market distortions."

At best, unless yawning national gaps in eurozone competitiveness are not evened out, the plan will only "buy time," they say.

At worst, trillions poured into the well of eurozone debt could prove "extremely difficult" to unwind.