ECB buys time for Euro - also bonds?
Mario Draghi's comments in London this week prompted some euphoria in the financial markets, which Chancellor Merkel and President Hollande seem keen to encourage.
It tells you something about the state of anxiety about the Euro - and the centrality of the ECB's position in this sorry mess - that a statement of support from Dr Draghi, on a panel at a conference in London, should have had such an impact.
Still, the ECB president is someone who chooses his words and intonation carefully.
Thursday's comments were more emphatic than we have heard before. He also seemed to draw a link between the high level of government borrowing costs ("sovereign premia") and the ECB's own mandate.
Here are the key lines:
"To the extent that the size of these sovereign premia hamper the functioning of the monetary policy transmission channel, they come within our mandate.... We have to cope with the financial fragmentation, address these issues.... Within our mandate, the ECB is ready to do whatever it takes to preserve the euro.... And believe me, it will be enough."
Investors are probably right to see this as "verbal intervention" on behalf of the periphery economies. There may well be a hint, here, that the central bank is preparing to intervene in other ways as well.
But many have taken a further leap, to the conclusion that the ECB is about to resume buying Spanish and Italian government debt. That is possible. But the ECB is unlikely to do it right away, or by itself.
Why? First, because bond purchases are deeply unpopular inside the ECB - and not just among Germans and Finns.
Mario Draghi himself has said, many times, since taking over that he does not think the ECB should do things that Eurozone governments could perfectly well do themselves.
The ECB has not seriously bought sovereign bonds since the Eurozone's rescue facility - the EFSF - gained the legal right to buy bonds itself, at the end of 2011. That is no coincidence. If there is further bond-buying by the central bank it is unlikely to do it alone.
The second reason for the ECB to hesitate is a biggie: it is not entirely convinced that more bond buying, by itself, will be effective. Many market analysts have their doubts as well.
This is all due to the much vexed question of "seniority", which I'm afraid is another issue that comes under the heading of "complicated and/or boring but sadly important".
You'll remember (I'm sure) that the ECB did not have to take losses along with everyone else when Greek debt was restructured (ie written down) earlier this year. That sent a message to investors that debt purchased by the ECB on the open market was somehow "protected" from restructuring but the debt bought by ordinary investors and institutions was not.
So, if you were an investor with a suspicious mind, you might conclude that every euro of Spanish sovereign debt that the ECB buys on the open market reduces the amount of outstanding debt which could potentially be in line for a "haircut", or partial default. The smaller the pot of eligible debt, the more that debt would have to be written down, in any restructuring, to provide a given amount of relief to the Spanish government.
You can see, this is no small problem. It means that super-cautious investors might well not consider ECB purchases of Spanish debt as a reason to buy. In fact, they might well see it as another reason to get the hell out.
Of course, this assumes (a) that there are any super or even moderately cautious investors still holding Italian and Spanish debt; and (b) that people think restructuring of this debt is a reasonable possibility.
In fact, there is now so little liquidity in these markets that ECB purchases could still have a significant short-term effect.
But, as long as ECB debt is considered to be senior, serious analysts i speak to think there is a limit to what ECB purchases alone can do to help individual governments.
Of course, that is just as many inside the ECB would wish. They would rather not be helping governments at all.
The final reason why the ECB has hesitated to restart bond purchases is that it believes it has other options available to improve the "monetary policy transmission mechanism" in countries like Spain, without seeming to bail out the government.
When he says that mechanism is broken, the ECB President means that cuts in in the official ECB interest rate have not translated into lower rates for ordinary borrowers in countries like Spain. That is unarguable.
But if you're the ECB, lowering the Spanish government's cost of borrowing is not the only way to fix that. You can also try to do it by cutting the cost of borrowing for Spanish banks directly.
That is what the ECB has been wiling to do, time and again, in the past year or two - most recently in its massive long-term lending operations for European banks (LTROs) and its frequent loosening of the collateral rules for banks trying to get official liquidity. If market conditions for banks get a lot worse in the coming weeks, we may well be in for more of the same.
Perhaps Mr Draghi was signalling this week that he is willing to buy more government bonds, after all. Or perhaps the ECB has its own definition of "what it will take" to preserve the Euro - and it still doesn't include the ECB going out to buy a lot more Spanish or Italian debt while the 17 governments sit on their hands.
Mario Draghi's comments in London this week prompted some euphoria in the financial markets, which Chancellor Merkel and President Hollande seem keen to encourage.
It tells you something about the state of anxiety about the Euro - and the centrality of the ECB's position in this sorry mess - that a statement of support from Dr Draghi, on a panel at a conference in London, should have had such an impact.
Still, the ECB president is someone who chooses his words and intonation carefully.
Thursday's comments were more emphatic than we have heard before. He also seemed to draw a link between the high level of government borrowing costs ("sovereign premia") and the ECB's own mandate.
Here are the key lines:
"To the extent that the size of these sovereign premia hamper the functioning of the monetary policy transmission channel, they come within our mandate.... We have to cope with the financial fragmentation, address these issues.... Within our mandate, the ECB is ready to do whatever it takes to preserve the euro.... And believe me, it will be enough."
Investors are probably right to see this as "verbal intervention" on behalf of the periphery economies. There may well be a hint, here, that the central bank is preparing to intervene in other ways as well.
But many have taken a further leap, to the conclusion that the ECB is about to resume buying Spanish and Italian government debt. That is possible. But the ECB is unlikely to do it right away, or by itself.
Why? First, because bond purchases are deeply unpopular inside the ECB - and not just among Germans and Finns.
Mario Draghi himself has said, many times, since taking over that he does not think the ECB should do things that Eurozone governments could perfectly well do themselves.
The ECB has not seriously bought sovereign bonds since the Eurozone's rescue facility - the EFSF - gained the legal right to buy bonds itself, at the end of 2011. That is no coincidence. If there is further bond-buying by the central bank it is unlikely to do it alone.
The second reason for the ECB to hesitate is a biggie: it is not entirely convinced that more bond buying, by itself, will be effective. Many market analysts have their doubts as well.
This is all due to the much vexed question of "seniority", which I'm afraid is another issue that comes under the heading of "complicated and/or boring but sadly important".
You'll remember (I'm sure) that the ECB did not have to take losses along with everyone else when Greek debt was restructured (ie written down) earlier this year. That sent a message to investors that debt purchased by the ECB on the open market was somehow "protected" from restructuring but the debt bought by ordinary investors and institutions was not.
So, if you were an investor with a suspicious mind, you might conclude that every euro of Spanish sovereign debt that the ECB buys on the open market reduces the amount of outstanding debt which could potentially be in line for a "haircut", or partial default. The smaller the pot of eligible debt, the more that debt would have to be written down, in any restructuring, to provide a given amount of relief to the Spanish government.
You can see, this is no small problem. It means that super-cautious investors might well not consider ECB purchases of Spanish debt as a reason to buy. In fact, they might well see it as another reason to get the hell out.
Of course, this assumes (a) that there are any super or even moderately cautious investors still holding Italian and Spanish debt; and (b) that people think restructuring of this debt is a reasonable possibility.
In fact, there is now so little liquidity in these markets that ECB purchases could still have a significant short-term effect.
But, as long as ECB debt is considered to be senior, serious analysts i speak to think there is a limit to what ECB purchases alone can do to help individual governments.
Of course, that is just as many inside the ECB would wish. They would rather not be helping governments at all.
The final reason why the ECB has hesitated to restart bond purchases is that it believes it has other options available to improve the "monetary policy transmission mechanism" in countries like Spain, without seeming to bail out the government.
When he says that mechanism is broken, the ECB President means that cuts in in the official ECB interest rate have not translated into lower rates for ordinary borrowers in countries like Spain. That is unarguable.
But if you're the ECB, lowering the Spanish government's cost of borrowing is not the only way to fix that. You can also try to do it by cutting the cost of borrowing for Spanish banks directly.
That is what the ECB has been wiling to do, time and again, in the past year or two - most recently in its massive long-term lending operations for European banks (LTROs) and its frequent loosening of the collateral rules for banks trying to get official liquidity. If market conditions for banks get a lot worse in the coming weeks, we may well be in for more of the same.
Perhaps Mr Draghi was signalling this week that he is willing to buy more government bonds, after all. Or perhaps the ECB has its own definition of "what it will take" to preserve the Euro - and it still doesn't include the ECB going out to buy a lot more Spanish or Italian debt while the 17 governments sit on their hands.