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Mario Draghi and the ECB have spoken on the new bond-buying plan that markets have been waiting for since the last time the ECB stopped buying bonds.Earlier, we highlighted BofA’s take on the plan (they were disappointed by the details).
Goldman Sachs debriefed clients this afternoon on today’s ECB announcement. Goldman economist Dirk Schumacher wrote in a note that indeed, “The announcements made at today’s ECB press conference were broadly in line with our expectations.”
However, Schumacher also said that Goldman expects Spain to request a bailout as soon as next weekend at the next meeting of Eurogroup finance ministers now that the details of the ECB’s bond-buying program have been revealed.
This version of the future-events timeline would jive with earlier comments from Spanish finance minister Luis de Guindos that Spain was waiting to hear details on the ECB’s plan before submitting a formal bailout request.
Here is Schumacher’s explanation, from the note:
Activating the OMT
With the ECB now having outlined its sovereign bond purchasing framework at least in skeletal form, the ball is now in the governments’ court. Front and centre lies Spain.
Looking forward, we expect the following time-line in our base case:
September 12: German constitutional court gives its blessing to the ESM. Although we expect some procedural riders to be attached to the decision, this would allow German ratification to be completed and the ESM to be established in relatively short order.
September 13-14: Spain to make formal request for EFSF support at the Eurogroup meeting. With a large (and uncovered) redemption looming at the end of October (and under pressure from other Euro area governments), we expect Spain to move towards seeking support.
Second half of September: Conditionality required by EFSF will have to be accepted by the Spanish authorities, presumably requiring a parliamentary vote. In parallel, approval of other Euro area countries for the provision of EFSF support will need to be obtained: in some countries (notably Germany), this will also require parliamentary approval.
By end-September / early October: Memorandum of Understanding (MoU) codifying conditionality is signed, formalising the availability of EFSF support for Spain. At this point, the necessary conditions established by Mr. Draghi for ECB purchases of sovereign debt will have been met, well ahead of the large Spanish bond redemption.
At that point, the ECB would stand ready to purchase short-dated Spanish government securities should rates back up. Market conditions at that stage will dictate whether such interventions take place. Risks to this base case are largely political: a Spanish reluctance to seek EFSF support given the current lower level of yields; or German parliamentarians deeming the agreed conditionality too light. Even if these political risks materialise, we would still expect Spain to be forced to seek EFSF support in the course of October as market conditions deteriorate as a result of the delay.
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