LOTS OF FROTH, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

A brand new development in the history of the ECB has occurred: leaks yesterday revealed the broad outlines of its new sovereign debt securities’ purchase programme. One cannot help thinking that it was necessary to prepare the ground in advance, with the ECB decisions falling well short of some of the mounting speculation.

According to Mario Draghi, there will be no limit to the amount of bond purchases on the secondary market – but the scope of the announcement needs to be put into perspective. They will in fact be decided on a case by case basis, and not as soon as a specific threshold has been crossed: based on interest rates or spread for example. It has also been confirmed that it will concern securities with a maturity of between one and three years, something already anticipated recently by the market, judging by the result of the issues which have occurred.

A rather more sensitive issue is that Mario Draghi has confirmed that if any country benefiting from these purchases (which are intended to stabilize the interest rates for its debt), deviates from its rescue plan – a plan to which it must have agreed beforehand – the ECB purchases would immediately cease. Which when it comes down to it, is a lot easier said than done, especially if one considers the current prevarications with regard to Greece. In addition, the ECB is going to ‘sterilize’ these purchases so as not to further increase the monetary mass, but this measure needs to be looked at in more detail ( we will come back to it later). When all is said and done, relatively formal guarantees have been given to those who fear that this kind of intervention might dissuade the States from being sufficiently rigourous, or that it might prove to be inflationary.

Two other decisions have been taken, which must not be overshadowed by all that has just been mentioned. The first is the abandonment of the principle of “seniority”, the priority of the ECB over any other investors in the event of a repayment, which means that these investors will be afforded equal treatment in the event of a default or a restructuring. That this has been accorded such importance is a reflection of the anxiety which investors continue to exhibit. The other decision is the suppression of any kind of threshold for accepting assets put forward by banks as collateral. This last measure turns the ECB into the bad bank of their dreams and is going to allow the banks to continue borrowing funds from it without having to worry about the quality of the collateral – which had been starting to pose them problems. A by-product of this is that it will also be guaranteeing the purchase of State securities threatened by the markets, since they will then be able to use them as collateral to the ECB (except for Greek securities, it was specified).

The Spanish and the Italians, who seem the most likely to be concerned by the new programme, have not yet made any comment. The issue of what conditions will be asked of governments in return for any ECB intervention has for the moment been left entirely open. Mario Draghi has only mentioned that the ECB would ask for support from the IMF, which can be understood in a number of different ways in the current climate, bearing in mind that the IMF has on a number of occasions advocated flexibility in the manner in which the strategy of budgetary discipline is implemented. For the time being, the markets have reacted well, but experience has taught us that this is not to be trusted.