Here’s a chart of the yield on the Spanish 10-year bond, via Bloomberg.
The vertical line is when the yield hit nearly 8%, and Mario Draghi said three words that have changed the course of history in Europe: “Whatever it takes.” He was referring to the fact that the ECB would do whatever it takes to end the crisis, and he hinted right then that for the first time, the ECB would use its unlimited balance sheet to reduce sovereign borrowing costs.
Now since then, the ECB has put some more meat on the bone, explaining the process by which it might intervene to lower sovereign yields, but the fact of the matter is that the ECB still hasn’t spent a single penny on bonds (since then) and it’s not even clear when this will happen.
Spain still needs to request aid for the ECB to get involved, and there’s no clear timeline. Oh, and Spanish politics are a mess, complete with independence movements and mass anti-austerity protests. But despite all that, yields have fallen to close to their lowest levels of the year. Even yesterday, when European markets got hammered, Spanish yields were pretty much unmoved.
All we have is the commitment of action at some point in the future from an entity with an unlimited balance sheet, and the market remains behaved. That’s power.
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