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Schroders : La BCE apporte l'artillerie lourde mais manque de munitions

“After months of delay and inaction, the President of the European Central Bank (ECB) Mario Draghi has today announced the restarting of sovereign bond buying after earlier announcing no change in interest rates (0.75%). The ECB has been struggling to effectively lower the cost of borrowing in peripheral Europe, mainly due to the perceived risk of debt default and Euro exit risk.

“The ECB will now end the dormant Securities and Markets Programme (SMP), but hold on to the some 209 € bn of government bonds until maturity, and continue to sterilise those purchases. The new Outright Monetary Transactions (OMT) programme will buy government bonds with a maturity of three years and under, but only those for countries that will be under European Financial Stability Facility (EFSF) or European Stability Mechanism (ESM - once active) programs, or a precautionary programme, which we think Spain may be considering. The decision to link the purchases to bail-out programmes is designed to ensure conditionality of help remains, and reduces the risk of moral hazard, where member states receiving aid decide to ease off fiscal and structural reforms. For countries already receiving bail-outs, they must regain market access before the ECB include them in bond buying. In addition, the ECB will give up its preferential creditor status on future purchases; effectively making it equal to other investors should a country decide to default/restructure.

“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 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 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. There was a fear that if the ECB was to start buying bonds but retain its senior status, existing and future private investors would have been subordinated, as was the case when Greece eventually defaulted.

“Overall, useful measures being taken today which will help bring relief to peripheral Europe in the short-term. However, the capacity of the ECB and European governments to bail-out Spain AND Italy is seriously lacking, and will continue to be short until the ECB and Germany realise that Fed-style Quantitative Easing is the only effective tool.”

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