There is no grand bargain.

Whilst the world’s attention has been focused understandably on a supposed “deal” emerging at the European Council summit in Brussels, I have just witnessed an extraordinary press conference from the President of the European Central Bank in Frankfurt.

He’s Italian, and he should be good at plumbing, that’s why he’s called Super Mario Draghi. And certainly, initially he didn’t disappoint. An interest rate cut, the second in succession, completely unravelling two interest rate rises from the ECB earlier this year. For good measure he opened every valve and used every pump to flood eurozone banks with cash and liquidity. A menu of so-called non standard measures.

There are acute stresses in Europe’s banking system, even worse than some of the solvency issues identified by today’s European Banking Authority tests. National Central Banks have been given huge powers, at their own national risk, to accept even relatively bad bundles of mortgage and small business loans, rated just A (rather than AAA) in exchange for cheap central bank cash. There’s a special series of 3 year loans being offered in Christmas week, meant to tie banks over at the even more acute than normal stress point that is year-end.

Furthermore eurozone banks that aren’t lending to each other as much, and aren’t getting ordinary funds from the so-called money markets that want to invest huge quantities of risk averse case. The credit crunch for companies isn’t just a risk, it is actually happening. Even existing funding efforts for banks is simply being redeposited back at the ECB.

This I think is a bigger response than the post Lehman response. It is the classic Lender of Last Resort for the banking system and then a bit more. Markets saw this and surged.

Until Mr Draghi started talking about sovereign debt. And after all there is still a sovereign debt crisis raging in the Eurozone. I would précis his response as the following: “the ECB is not the place to sort out a fiscal crisis. That’s for politicians”. He specifically and directly hosed down well-placed suggestions that his “fiscal compact” speech last week meant that if EU leader deliver a credible strong fiscal structure, then he would help prepare the bazooka of massive central bank bond-buying like Britain and the US. He was misinterpreted.

He talked about the Bundesbank spirit, and almost spoke with a German accent. He repeatedly rebuffed the likes of your correspondent pointing out that with interest rates cut to 1%, it was an utterly normal in Britain and US to contemplate proper full blown quantitative easing: massive purchase of Italian and The Treaties do not allow it, he told us. There is a prohibition on monetary financing of deficits. By implication he accused Britain and America of doing this.

But he went further. He referred to suggestions emerging from Brussels that the IMF be used as a back channel for €150-200bn of eurozone central bank money to be used to fund Italy and Spain as “legal tricks” that we’re not “in the spirit of the Treaty”. He did suggest that it would be fine of such a route was used to fund another nation such as Indonesia, but not a Eurozone country.

There may be some wriggle room here. If the IMF resources are increased, and almost all of that happens to be used in the eurozone then that might be tolerated. It is the establishment of a separate Eurozone fund within the IMF that would raise eyebrows. With opposition in Germany to turning the European Stability Mechanism into a bank that could be leveraged (as I wrote about yesterday) the bazooka looks far-off. One commentator suggested the ECB had today fired the Bazooka at itself.

What I’m beginning to appreciate from here in Frankfurt is that the organisation with the power, simply does not believe in the concept of a bazooka, for Governments. The Fiscal Compact Is not between Europe’s leaders and it’s shy central bank. It is between European nations. And that’s it.

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