The ECB had its work cut out for it today – markets have rallied considerably over the past month ahead of the big ECB announcement detailing its bond-buying plan this morning. The bond-buying plan is formally known as Outright Monetary Transactions (OMT).BofA economist Laurence Boone sent a note to clients before the meeting saying there were only a few things the ECB could still pull out of its hat today to keep the market rally going and avoid disappointment.
Markets are definitely rallying, but in a post-meeting note to clients today entitled ECB not about to buy bonds, Boone writes that “for us, the negatives marginally outweigh the positives from the meeting.”
The big takeaway: “The decision-making process runs along two channels: 1/ the ECB, which was clarified today; 2/ politicians, who now need to decide whether to apply for support. If anything, the hurdle for such an application has increased today.”
Here’s Boone’s breakdown of the OMTs the ECB unveiled today:
1. Maturity focus “in particular” on 1-3y
2. OMT purchases to rank pari-passu with the private sector
3. No quantitative ex-ante limit on purchases (which the market will read as “unlimited”) – redemptions in 2013-15 amount to EUR 526 bn for Italy (BTPs) and Spain (SPGBs) together
4. The ECB to accept foreign currency collateral in a repeat of its 2008-2010 operations
1. Emphasis on conditionality even stronger than we had expected (as a minimum, ECCL only way to access ECB buying, IMF involvement desired, both significantly lowering the probability that a country will apply for EFSF/ESM support)
2. No yield targets, no ex-ante transparency on bond purchases (i.e., as before, the ECB will only tell us once a week how much they bought), no technical details on how these purchases would differ from the SMP
3. Ireland and Portugal will only qualify for OMT when they “are regaining market access”
4. Collateral eligibility criteria changes restricted to suspending the rating floor for government (and government-guaranteed) bonds – no changes to haircuts, thereby providing no relief for peripheral banks
5. SMP remains senior and is officially terminated, raising the question of who would be supporting the market while we wait for the OMT to be activated
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