Reactions muted to Draghi’s bond announcement

Reactions have been muted to today’s decision by the ECB not to change its interest rates, and the associated announcement by bank president Mario Draghi regarding a bond buying programme.

Denmark’s Danske Bank said in a note that while the policy announcement was an important step along the way towards an ending of the sovereign debt crisis, it was in no way the actual end. The budgets of southern European nations still need to be put in order before the markets find relief, and that could take a couple of years, it said.

The ECB is seen as unlikely to stop with today’s announcement on bonds. Meanwhile it retains a number of other tools and measure at its disposal – such as making bank finance even cheaper or lowering its own rates to well under zero – which could be used to kick-start Europe’s economy.

Schroders’ European economist Azad Zangana said that Draghi’s big gun was “missing the ammunition” to be truly effective.

“In our view, the ECB has taken another step in the right direction, but is still some way away from totally removing the tail risks that investors fear. While the ECB has found the big gun in bond buying, it is missing the ammunition to make a long lasting positive impact on markets. Although the OMT (Outright Monetary Transaction) will have no explicit limit to the amount of purchases, there is a serious flaw in its design. The ECB’s insistence to sterilise the bond purchases means that the ECB can only buy bonds as long as demand for Euro T-bills remains (the sale of which absorbs the liquidity released by the bond purchases). If demand dries up, as it did for the SMP (Securities and Markets Programme) at the start of the year, then the bond purchases would be halted. In that sense, Draghi may be overreaching when he said that the ECB would “backstop” the monetary union.

“With regards to the ECB’s creditor status being lowered, this should help encourage more investors to buy peripheral debt.”

Tristan Cooper, European sovereign credit analyst at Fidelity Worldwide Investment, said that there were both positives and negatives in today’s announcement from the perspective of struggling peripheral states.

“Draghi seems to have met market expectations today, which is positive given fears of a disappointment. Peripheral bond markets are appropriately rallying in response. The ball is now firmly back in the court of Spain, which must now sign up to a programme or ‘enhanced conditions credit line’.”

“Any prevarication would lead to a big sell-off, which [Spanish prime minister] Rajoy can ill-afford. Then the spotlight moves to Italy, which will find it very difficult to stay out of programme if Spain goes in.

“Draghi’s comments were marginally negative for Portugal and Ireland. Much of the recent buying in those markets has been premised on the ECB stepping in in the short term. However, Draghi stated today that ECB support would only be forthcoming at the time when bond market reaccess was envisaged under their existing Troika programs, which is next year for both. On balance, though a positive day for peripheral Europe.”

Taking a more negative tone was Moneycorp. Glenn Uniacke, senior trader, described Draghi’s speech as “underwhelming and money supply neutral”.

In revealing the bond-buying programme, Draghi has introduced a safe guard to cut the borrowing costs of debt-burdened eurozone members, but this is only a short-term patch to the enduring crisis.

“Draghi claimed that the ECB will do ‘whatever it takes’ to save the euro, but his actions suggest that he might be happier leaving the harder decisions to the Eurozone politicians. Promises to sterilise the bond buying market are a victory for Germany and mean that the actions being taken by the ECB are not as aggressive as the Quantitative Easing programme employed by both the US Fed and Bank of England.”

“Quite rightly, Draghi understands that monetary policy alone will not solve the economic problems in Europe, but that it is his responsibility to maintain financial stability as the politicians look for the end solution.

“The initial reactions in the market have been to sell strongly on the Euro, however this is likely to calm and level out over the coming days.”

Clear Currency summed up Draghi’s announcement as: “Overall no major surprises, all very much leaked over the last few days. Still a little light on detail but enough to keep the market satisfied.”



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