So I’ve noticed a renewed interest in the blog post “ECB Market Intervention: The Securities Market Programme (SMP)“. This was brought about by the following remarks by president of the ECB, Mario Draghi, in a speech he gave in London:
“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”
This comment was made in the context of a description of the Euro-Zone and the malaise that is taking over it with Spanish and Italian funding costs exploding over the roof. So what does he mean by those words? Well there are at least 4 interpretations:
1) He means nothing other than to restate that the ECB has the tools necessary to deal with the crisis, whatever the crisis is. This is true, but adds no new information, which makes it an unlikely correct interpretation.
2) He means that the ECB will wait to increase liquidity once the political/fiscal side has done its thing. While the political factor was contextual to the comment, with the central banker mentioning just some seconds before that
“When people talk about the fragility of the euro and the increasing fragility of the euro, and perhaps the crisis of the euro, very often non-euro area member states or leaders, underestimate the amount of political capital that is being invested in the euro.
And so we view this, and I do not think we are unbiased observers, we think the euro is irreversible. And it’s not an empty word now, because I preceded saying exactly what actions have been made, are being made to make it irreversible.”
This is however a more unlikely interpretation in that the ESM, Banking Union and a mutualise banking bailout for Spain and Ireland have already been agreed. Nonetheless, the very vague nature of the Banking Union at this stage as well as the unfinished/unratified state of the ESM could still be goal worth leveraging oneself towards.
3) It could mean that the ECB will intervene in Spanish and Italian Markets via the SMP.
4) It could mean that the ECB will intervene in Spanish and Italian Markets via more LTROs. This is unlikely because it would only drive creditors towards holding more high rated collateral from the core rather than actually lending to peripheral sovereigns.
What has been the Effect?
I am most prone to believe that interpretation 3 is the most correct. I also believe that this is what the markets though as well. Just check their reaction today (Thursday July 26th 2012):
Not too bad for a days work I suppose. Let’s see if it lasts, and if it doesn’t, let’s see if the enlightened monetary policy makers in Frankfurt can waive their magic wand and give the member states the wiggle room they need.