Euro Area: Locked in a Cycle of Market Pressure and Policy Response
The European Central Bank (ECB) has raised the prospect of a more effective bond-purchase programme. Unfortunately, it may require additional market pressure for governments to unlock that support.
The financial markets have reacted badly to Thursday’s ECB press conference. Given that Governor Mario Draghi was unable to follow last week’s “whatever it takes” speech with decisive action to lower sovereign-bond yields in the periphery, this is not surprising. But that was never really likely given the constraints facing the ECB. The central bank has now raised the possibility that it may now be willing to play a more proactive role in stabilizing markets—though only if governments make the first move.
The key message from this week’s meeting is that—if governments move to ensure “strict and effective conditionality” by signing up to the European Financial Stability Facility (EFSF)/European Stability Mechanism (ESM)—the ECB “may undertake outright open market operations of a size adequate to reach its objective.” (That objective would be to reduce sovereign-risk premia and repair the monetary transmission mechanism in troubled peripheral countries.)
Although the ECB has not yet decided on the “modalities” of the new programme, indications are that it will be a step-up on the ineffective Securities Market Programme. In the Q&A session, Draghi said this would be possible because intervention would now be subject to explicit conditionality (courtesy of the EFSF/ESM). He also suggested that the new programme would be more transparent, that purchases would be concentrated at the short end of the yield curve and that they would not necessarily be restricted to government bonds.
Earlier this week, we wrote that the ECB was unlikely to deliver a game-changer at this week’s Council meeting and it certainly hasn’t done that. Nonetheless, it has spelled out the conditions under which it is prepared to take a more active role in stabilizing markets and, in some respects, exceeded expectations. Immediate relief is clearly not in sight. But once Italy and Spain bow to the inevitable and ask for external support, a combination of EFSF/ESM purchases in the primary market and ECB purchases in the secondary market could help provide some stability.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Darren Williams is Senior European Economist at AllianceBernstein.