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Markets are booming today, as we noted earlier.This stands in reverse to yesterday’s disaster, when Spain ended down nearly 5%.
In that context, Spain and Italy still down significant from two days ago.
But why the turnaround? The best explanation is that there’s a rethink of Draghi going on.
Yesterday it sounded like the ECB wasn’t ready to do much, or at least not as much as he suggested a weak earlier when he made some off-the-cuff comments about defending the euro.
Maybe there was more to what he said though yesterday.
At FT Alphaville, Joseph Cotterill makes several positive points about Draghi’s performance. The first is that Draghi is hammering home the problem with the perceived reversibility of the euro. He’s making a big point to say that as long as people worry that sovereign debts will be redenominated into another currency (Drachma, Lira, etc.) then monetary policy isn’t going to work, and that therefore a big focus will be on ensuring that this isn’t going to be an issue.
The fact that this is becoming so major is a very positive step in signalling a pro-active ECB.
But Cotteril notes an even bigger change, that Draghi said that issues of the ECB’s seniority over other sovereign bondholders would be addressed:
But we are burying the lede here — the central bank has also sent an enormously important signal on the seniority of its debt holdings above private holders.
That it would even officially talk about its seniority in the first place is a big change. ECB seniority has been veiled in the prerogatives of monetary policy, and the famous prohibition of monetary financing in Article 123 of the EU Treaty. Article 123 issues remain live: it’s why Mr Draghi once again batted away the sideshow of a banking licence for the ESM, in this press conference.
“Addressing” seniority might have to mean some kind of legal machinery OK with Article 123. Not easy. But the ECB’s creditor status is one reason why its bond-buying made things worse and helped finance investors’ escape from Spanish and Italian bond markets. Removing or curing it could have a big impact on the real money’s asset allocations to the eurozone. Of course if it’s only “clarified”, or there is some rum, hopelessly complicated solution – such as inadequate fiscal resources being used to write protection on the ECB’s portfolio – we have a problem.
So given all this, it’s not surprising that the market is reassessing Draghi from “total disaster” to “bummer.”
And bigger picture, there’s a case to be made now that both the Fed and the ECB have made it as clear as possible that they’re ready to act if things worsen. Many would argue that both haven’t done enough just given current conditions, but there’s still value in the “put”.