Mr. Draghi signalled at a London conference that the ECB would no longer stay on the sidelines, looking how the euro area disintegrates. In past days, Spanish yields climbed above 7.5% and Italian ones were rising too.
So, ECB chairman Draghi said “to the extent that the size of the sovereign premia (borrowing costs) hamper the functioning of the monetary policy transmission channels, they come within our mandate” He also said that “within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” These are very important statements that strongly suggests the ECB will intervene in the Spanish and Italian bond markets to avoid unsustainable yield levels. It points more to a resumption of the SMP programme of bond buying (with eventually some new modalities: Maximum yield level?….), than to the potential opening ECB Nowotny suggested on Wednesday when he said that granting the ESM a banking licence had some advantages.
Indeed, the ESM is currently not operational, as the German Constitutional Court is still examining whether the ESM treaty is in line with the German Constitution. Mr. Draghi recently also showed no appetite to follow that track. It might come again on the table, but only at a (much?) later stage.
The market immediately seized the comments as important and Italian and Spanish yields fell substantially. So far, so good, but words only are not enough. That’s why we expect now deeds of the ECB. These may occur at any time, but it is also possible that the ECB waits for next week’s ECB meeting to come up with a more formal battle plan. In any case, expectations are high and should the ECB disappoint these, we might see sharp, adverse moves in the peripheral bond market. Mr. Draghi does now, of course, how markets function and therefore we are pretty sure that his words will get some follow up action. The comments are important as they buy policymakers in Spain, Italy and EMU time to come up with further steps and as the past measures in these countries may start to show results.
Hours after Mr. Draghi, Mr. Noyer echoed his comments and was maybe slightly stronger in his wording by saying the ECB is active and vigilant to ensure lower rates feed through in troubled euro zone economies. This might suggest that the ECB is already buying. This might be true but we got no signals from the market this was already the case. We attentively look for signs in the next days of such buying.
One question mark is the reaction of the German monetary policymakers that were already from the start against the SMP and against the risks the ECB is taking on its balance sheet. If there would be “official” critique on the comments of Draghi, markets would react negatively, but we think that the German wing of monetary policymakers will, eventually grudgingly forego criticism. Firstly, because the situation on the bond market was untenable and if no remedy was found, a full bail-out rescue operation was needed for Spain (which would be costly also for Germany), but secondly because Germany is (albeit involuntary) holding up the implementation of the ESM, the firewall and thus would be the subject of wrath if Spain would have lost market access.