Friday, September 7, 2012

Super Mario delivers

European Central Bank (ECB) President Mario Draghi this morning outlined the details of the ECB’s bond buying plan which will be known as Outright Monetary Transactions (OMT).

As had been previously flagged, the OMT will allow the ECB to buy unlimited amounts of short-term (1-3 year) paper in secondary markets of countries that have previously applied to the EFSF/ESM for assistance.  The ECB did not commit to any yield or asset purchase target which we think is a good thing: the key word in the previous sentence is “unlimited”. Also consistent with earlier signals is the fact that the ECB won’t have seniority over other bondholders and that the purchases will be sterilised.

Understandably markets have reacted favourably.  There has been criticism of the ECB not having done enough over the period of the Euro zone debt crisis.  That’s only partly justified.  As I’ve said on many occasions the ECB can’t fix the Euro zone’s problems: that role lies solely in the hands of politicians.  That’s why the conditionality that will come with countries first applying to the EFSF/ESM is so important.

The speculation is that Spain will be the first cab off the OMT rank.  I’m not surprised they haven’t applied for assistance already: it makes sense to see what the rules of the game are before asking for help.  Even now there’s a couple of other hurdles to cross before we see Spain ask for help, not the least of which is the September 12th ruling from the German constitutional court on Germany’s participation in the ESM. 

Even with today’s announcement the ECB hasn’t fixed any of the fundamental problems behind the euro zone debt crisis.  What they have done in effectively announcing they are prepared to act as lender of last resort is to reduce market tensions, thereby opening a window of opportunity for euro zone politicians to get on with the job of fiscal consolidation and structural economic reform.  Let’s hope they take that opportunity.