Mario Draghi and the ECB have been critiqued all day long since the central bank president this morning unveiled the details to its new bond-buying program aimed at turning around the euro crisis.JPMorgan economist Malcolm Barr thinks it’s a game-changer, writing in a note to clients today that “from a big picture perspective, we believe that the new approach taken by the ECB will change the course of the Euro area crisis.”
However, there are a couple of details of the plan that ended up being “stricter” than JPMorgan thought would be the case (which could cause implementation issues).
And, according to Barr, “There was more Weidmann in the structure than we were expecting, but still not enough to get him on board.”
As always, it all comes down to conditionality and the willingness of program countries receiving bailouts to comply with tough austerity measures ostensibly designed to improve the euro periphery’s fiscal situation.
Here is Barr’s take, from the note:
Relative to our expectations, there are a number of features of the OMT which are somewhat stricter than we were expecting. In particular:
First, in order to benefit from ECB intervention, countries will need to be in either a full or precautionary EFSF/ESM program. Our expectation had been that an application to the EFSF/ESM just for secondary market support would have been enough to trigger ECB involvement. What this means is that the conditionality may be a little heavier than Spain and Italy would like.
Second, the involvement of the IMF “will be sought” in establishing conditionality. This has connotations of a further loss of sovereignty which Spain and Italy will dislike.
Third, the ECB has excluded existing program countries unless they are “regaining market access”. We had expected the ECB to reinforce Draghi’s message today by intervening in Portugal, which is already compliant in a full program. The rather arbitrary choice of timing on when to intervene undermines the notion that the OMT is about the transmission mechanism.
Fourth, Draghi highlighted that if countries are not compliant with conditionality, ECB intervention will stop. If this were to happen it would be a rather abrupt event. We had been expecting a more continuous approach where the ECB would adapt its yield objective as a country started to slip away from program compliance.
Barr remains optimistic despite the issues raised above, saying that the bond-buying plan “will evolve over time as the ECB gains experience,” and addresses the third point – which perhaps seems to introduce something of a contradiction – by writing, “The ECB is surely aware that the ability of a program country to re-access markets will not be independent of the central bank’s behaviour.”
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