Draghi's plan is really just the promise of future action--but that's enough to make markets soar today
09/06/2012 1:02 pm EST
At his press conference following today’s meeting of the governors of the European Central Bank Draghi explained that the central bank would buy unlimited amounts of Spanish or Italian government bonds through a program called Outright Monetary Transactions. The debt purchased by the ECB will not be senior to the debt held by other government bondholders and the bank will sterilize its purchases through the sales of other bonds so that they will not increase the Euro money supply and fuel inflation.
In other words, Draghi has promised that the European Central Bank will act as a backstop to prevent interest rates in Italy or Spain—and presumably other EuroZone economies—from spiraling into crisis.
But there are conditions attached that make the plan an outline for future action rather than a recipe for immediate moves.
According to the central bank’s detailed description of the plan, the bank will only buy bonds in the Outright Monetary Transactions program if:
1) A country has specifically asked for ECB intervention.
2) That country has worked out a conditionality agreement with the European Financial Stability Facility (the EuroZone’s temporary bailout fund) or with the European Stability Mechanism (the still to be approved permanent bailout fund).
3) Such a conditionality program could be a full-scale macroeconomic adjustment program (such as is in effect in Greece) or a precautionary program (Greece lite) attached to a credit line.
4) And such a conditionality program would have to include “the possibility” of direct bond purchases by the European Stability Mechanism of government bonds in the primary bond market.
Since no country has asked for ECB intervention (and the governments of Spain and Italy have been, so far, less than enthusiastic about asking), and since the permanent European Stability Mechanism isn’t yet in operation (pending the September 12 results of a German constitutional challenge), it’s hard to see when Draghi’s plan might go into operation.
But today at least, the fact that there is a plan, and that Draghi managed to override opposition from the Bundesbank (apparently the sole dissenter in the vote on this plan) to come up with a plan, is enough for the financial markets.