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ECB ready to act, but what about the Bundesbank?

By Alex Bueso -Chief Editor

Date: Thursday 26 Jul 2012

ECB ready to act, but what about the Bundesbank?

In remarks delivered today in London the European Central Bank´s President, Mario Draghi, promised to intervene to bring soaring sovereign bond yields in the periphery down. It´s that simple, comment analysts at Digital Look. Based on past precedent, however, and to varying degrees, some observers are wary of putting too much weight behind his words.

If not irreversible, then at least certainly enough for one day …



His precise words, which tore a gaping hole into short positions in various asset classes this morning, were these: “To the extent that the size of these sovereign premia hamper the functioning of the monetary policy transmission channel, they come within our mandate (…) [within our mandate] the ECB is ready to do whatever it takes to preserve the euro,” he said, adding: “believe me, it will be enough.”

“Enough” is exactly what many a trader decided he had been dished out following whip-saw movements in the prices on a host of different financial instruments today.

Nevertheless, in the big scheme of thing today´s moves, while encouraging, are not necessarily definitive (and were probably exacerbated by low summer trading volumes).

As well, the above begs the question of when will it be enough? That is to say, when will the central bank act. At its meeting next week? That now seems to be the working assumption of at least some analysts.

Another opinion is that of analysts at Unicredit, who this evening remarked: "but then came Draghi! In his speech in London today, he reiterated in the most forceful way that the ECB will do whatever it takes to safeguard the euro (zone) (…) How long the rally will last remains to be seen, but we have no doubt that a further excessive sell-off will be met by forceful ECB intervention. Next Thursday's ECB meeting and press conference should turn out to be rather uneventful, mostly repeating Draghi's statements of today and a recap of recent economic EMU data."

… but as for tomorrow



Those constant references to the ECB´s mandate, however, are exactly what those same skeptical observers have centred on to justify their reticence to fall in-line.

In that same vein, Mr. Draghi also stated: "the problem is we want to do it within our mandate, that is what makes the thing both effective and right. We don't want to supplement actions that have to be taken by governments, we can't supplement actions that need to be taken at the euro level—that is not our job. Our job is to maintain price stability and to handle the fragmentation of the markets."

Yes, he is willing to act. But ...



Fine, he wants to do it within his mandate; spot on, but what about the German Bundesbank has been some analysts´ immediate retort.

Even so, his willingness to act seems patent although the question of whether some governments have done enough remains?

Draghi´s opinion? “The progress in undertaking deficit control, structural reforms has been remarkable (…) They’ll [governments] have to continue doing so, of course, but the pace has been set,” he added.

Our opinion at Digital Look? Much the same, although we do have some doubts regarding how much some countries are willing to continue down the reform path (perhaps in part due to the fact that no real effective back-stop has been in place until now and the resulting stresses that has engendered). Having said that, to be honest, it´s not easy to be sure of anything in the current market situation.

Be that as it may, Draghi did also indicate that, “to the extent that these premia have to do not with factors inherent to my counter party, they come into our mandate, they come within our remit, to the extent that the size of the sovereign premia hamper the functioning of the monetary policy transmission channels, they come within our mandate.”

So again, are the monetary policy transmission mechanisms being hampered by those premiae? There can be no doubt in our opinion.

Lastly, we would simply like to point out that while governments must continue to do their bit, not having a sufficient back-stop in place (as occurs in the typical IMF adjustment programs, which is what this whole "thing" is) seems rather unreasonable (dangerously so some would say) if not irresponsible. Likewise, employing targeted stimulus measures (through the EIB for example) so as to buttress economies while [any further necessary] reforms are being carried out would also make sense.

Therefore, if this whole ‘euro-thing’ is truly irreversible, then let´s get to work.

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