After the ECB left the interest rates unchanged, Draghi presented the bond buying program: Outright Monetary Transactions – OMT. Receiving ECB help doesn’t necessary mean a full adjustment program, but could be a “precautionary one” – ECCL – Spain might get easier terms or a soft bailout. Tension is high, even though many details have already been leaked.
EUR/USD has already moved higher, above the triple top but it fell strongly afterwards. Live blog of the press conference.
Highlights:
- ECB presents bond buying scheme: OMT Outright Monetary Transactions
- Meant to battle the unfounded doubts about the euro.
- Projections are now for a certain recession for 2012.
- Conditionality necessary, but also a precautionary program (for Spain) could be used. More on this: Draghi Lends a Political Hand to Rajoy
- Unlimited purchases, but no QE – full sterilization.
- Short end of the curve: 1-3 years means a better chance of not losing money – safe buys without explicit seniority.
- IMF involvement is sought, and is more than welcome – the preferred but not a precondition.
- ECB could stop the program whenever it wants – upon success or failure of countries.
- SMP Terminated – no new buys, current bonds re-absorbed and the bonds will mature. SMP bonds still have full seniority.
- We want to “recreate the singleness of monetary policy” – better transmit monetary policy.
- No more minimum credit ratings for governments in programs – we don’t care about rating agencies…
- Program will work because: the size is big, there’s no seniority and conditionality is attached.
Live Blog
12:00 GMT, EUR/USD at 1.2640, all times are GMT.
12:01 German and Spanish leaders meet today.
12:15 ADP Jobless Claims surprises to the upside: 201K. EUR/USD slides.
12:26 EUR/USD is at 1.2630 as tension mounts.
12:28 Press conference starts!
12:30 Also Juncker attended. Draghi explains rate decision first.
12:30 Inflation expected to fall in 2013 – nothing new.
12:30 EUR/USD drops.
12:31 Growth expected to remain weak due to high uncertainty.
12:31 ECB Decided on Modalites: OMTs for sovereign bonds.
12:32 OMTs will enable to counter distortions in bond markets due to unfounded reversibility of the euro. EUR/USD leaps to 1.2644.
12:32 Euro is irreversible. Countries should make reforms. Moves will remain strictly in the mandate.
12:33 EUR/USD falls in choppy trading.
12:34 More details: economies have deteriorated: mentions contraction in Q2. Where are the details about the bond buying scheme?
12:34 Euro economy to recover only very gradually, remain dampened.
12:34 Draghi talks about projections: both 2012 and 2013 have been revised downwards, with certain recession in 2012.
12:35 Inflation due to euro denominated oil prices. So, inflation is high now but will fall later.
12:36 EUR/USD falls to support at 1.2587.
12:37 Inflation expectations are higher. Risks are broadly balanced.
12:38 Draghi wants ESM and EFSF to come into action: pressure on the German constitutional court?
12:39 Deleveraging process continues, and this weighs. Segmentation weighs on credit supply.
12:40 Prices developments should remain in line with goals.
12:40 Labor market reforms are needed to increase competitiveness for more growth. Fiscal consolidation and debt sustainability needed.
12:41 Fiscal compact necessary for all of the above, and more Euro integration.
12:42 Bond buying details: Outright Monetary Transactions.
12:43 Conditionality: EFSF / ESM program is needed.
12:43 It can be a regular adjustment program (like Greece) or a new program called ECCL.
12:43 EFSF / ESM should buy on the primary market.
12:44 This program could be used for countries already in a program.
12:44 Shorter part of yield: 1-3 years – as leaked – no limits on bond buying
12:45 EUR/USD recovering from support, now
12:46 Sterilization – fully sterilized – as leaked
12:46 Updates every week, summaries every month.
12:46 SMP terminated – sterilization will continue and program will disappear when the bonds mature.
12:48 Questions begin
12:49 Decision not unanimous. “It’s up to you to guess”. Everybody knows it’s Jens Weidmann.
12:51 Buying on the secondary market doesn’t violate EU Treaty, article 123.
12:52 Article 18 justifies current action.
12:54 Euro area fragmented. EUR/USD falls below support, to 1.2577.
12:55 These decisions are necessary to restore the capacity to control the singleness of monetary policy in the euro zone.
12:56 Beforehand, also US weekly jobless claims surprised with a drop to 365K, a bit better than 370K expected.
12:56 The short term is closest to monetary policy. It decreases concerns about our seniority.
12:57 Some countries in a bad equilibrium that have bad self fulfilling prophecies.
12:58 “Both legs are needed for this action”. Involvement of the IMF shall be sought.
13:00 Bond markets are distorted in the eurozone.
13:10 EUR/USD recovers above 1.2587 as Draghi tries to answer hard questions.
13:15 The program is meant to be a full backstop for tail risks.
13:17 “I have no sense of drama”.
13:18 I would have preferred full unanimity. Governments have to take the policy. Concurrent policy action is necessary to complement monetary policy. Otherwise, effects of interventions are not very strong.
13:20 “The proof is in the pudding”
13:21 Was the “precautionary program” a hint for Spain or Italy? Answer: No. Oh really…
13:24 Draghi refuses to say when the program will begin – that means that Moody’s could downgrade Spain before the ECB moves. Moody’s expected to move before the end of September on Spain.
13:27 ECB will buy bonds of countries under adjustment program only if they regain market access.
13:28 EUR/USD chopping lower.
13:29 While euro reversibility worries are unfounded, some countries’ yields are due to real worries.
13:30 “We will monitor the situation very carefully. There is a risk that the debt issuers will move to the short term, but this would leave an unbalanced debt curve.
13:31 Press conference ends. EUR/USD finishes the presser much lower.
Background
After declaring that yields are unacceptable last time and saying the ECB will buy bonds, it is now time for some details from the head of the ECB. Leaked details talked about no QE.
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