TheECBkeptinterestratesonhold,butthiswasasideshow。

Thebignewswasalwaysgoingtocomefromthepressconferenceafterwards。

Aswaswidelyexpected,DraghiconfirmedthattheECBwouldbuyan“unlimited”amountofgovernmentbondsviaOutrightMonetaryTransactions(OMT)–butthisdependsonthefiscalpactandtheEuropeanStabilityMechanism(ESMthebigeurozonebail-outfund)beingagreed。

AsI’vealreadynoted,thatputstheballfirmlyinGermany’scourt(literally)nextweek。

Draghialsostatedthatinreturnforanybond-buyingassistancefromtheECB,countrieswouldhavetoagreetocarryouteconomicreformsandtokeeptofiscaltargets。

Tomakethethreatcredible,theECBwillstopbuyingthebondsofanycountrythatdoesn’tdeliver。

Healsoemphasisedthatthedebtpurchaseswouldfocusonshort-termdebt,andwouldnotincludeanexplicitcaponyields。

Finally,anybond-buyingwillbesterilised,sotheECBwillfunditthroughsellingdebttothemarkets。

Thepointofdoingthisistoavoidexpandingthemoneysupply,andthereforeeaseconcernsaboutthebond-buyingcreatinginflation。

TheECBispavingthewayforEuropeanquantitativeeasing

Theeuroslid,thenclaweditswayback,asmarketsdigestedthenews。

However,ItalianandSpanishstocksrosestrongly。

Inpartthisisareflectionoftheambiguity。

Ontheonehand,“unlimited”supportimpliesthattheECB’spurchasescouldbelarge。

However,byrefusingtoputaclearcaponyields,theECBactioncouldjustaseasilyendupbeingverysmall。

Therearealsoconcernsthattheneedforcountriestoagreetofiscalandpolicyconditionswilldelaybondpurchases。

Certainly,iftheECBkeepstotheletterofitspromises,itwillbeveryhardforittotaketheactionneededtokeeptheeurotogether。

TheneedfortheESMtobeapproved,forastart,meansthatanyactionmaybedelayedforamonthortwoattheearliest。

ThefactthattheGermanmemberoftheECBalsoopposestheactiontakensuggeststhatDraghiwillhavetoproceedwithcaution。

Indeed,theGermaneconomicministryimmediatelystatedthatbond-buyingbytheECBcan’tbeasubstituteforreforms。

However,thefactthatbond-buyinghasbeenagreedatallisanimportantstep。

Oncestarted,itishardtoseehowitcannowbestopped。

AsmycolleagueJohnStepekpointsout,eithertheECBprintsalargeamountofmoney,ortheeurobreaksup–inwhichcase,thenationalbankswillalmostcertainlystepintothebreach。

Indeed,theonlydownsidefearistheHotelCaliforniascenario。

Inthiscase,theECBwouldbuyenoughbondstokeeptheeurotogether,butnotenoughtodeliveramajoreconomicboost。

However,aswe’vesaid,thedecisionbytheGermanConstitutionalCourtontheconstitutionalityoftheESM,expectednextweek,mayforcetheECBtobecomeevenmoreaggressive。

StickwithEuropeanshares

AsJohnnotedinthismorning’sMoneyMorning,it’sworthatleastdrip-feedingmoneyintoEurope。

Stocksarecheap,andDraghihasshownacommitmenttoavoidlettingItalyorSpaingobust。

Anotherwaytotakeadvantageofthecomingmoney-printingistobuygold。

Aswe’vesaidbefore,inthepastithasproventobeamongthebesthedgesagainsttheinflationthatislikelytoresultfrombondpurchases。

Andit’salwaysusefultohaveinyourportfolioincaseallthisexperimentalpolicybycentralbanksgoeshorriblywrongatsomepointinthefuture。

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