The long awaited ECB press conference came and went but offered little new after all the leaks we have been getting in the days and weeks preceding it. The Euro closed the day practically unchanged up only 10 pips from its pre-ECB press price. The pair had a roller coaster session, the single currency first fell 60 pips from its pre-release price of 1.2620 to 1.2560, only to surge 86 pips from that point, reaching a high of 1.2646. The EUR/USD closed the day at 1.2630. See the chart below for the crazy price action.
Like we mentioned earlier the conference itself offered little new. ECB’s President Mario Draghi gave great emphasis to the conditionality of the program, he even started with speech with it. Like expected the program called OMT (Outright Monetary Transactions) will only become active after a country formally asks for a bailout from Europe’s bailout funds EFSF/ESM. The ECB will also ask the IMF for help in designing country specific plans and in the monitoring of such plans, so any country asking for a bailout will likely face an IMF monitoring, something that lot of governments want to avoid.
Merkel who meet with the Spanish Prime Minister Rajoy today said that the ECB is acting within its mandate in order to insure monetary stability. When asked if his country will ask for a bailout, Rajoy again reiterated his earlier statements saying that he will have to analyze Draghi’s comments and added that “when I have anything new to tell you, I will say so”. Few months ago the Italian and Spanish PM were putting big pressure on the Central Bank to act and buy their bonds but have become lot less enthusiastic after the Bank added conditionality to its program, which was not the case with the previous bond buying program, the SMP.
The ECB will purchase bonds on the secondary market after the bailout funds act on the primary market and it will buy bonds with “maturities of one to three years, including longer-dated debt that has a residual maturity of that length”. This is an interesting twist as this will mean the Central Bank may purchase longer-dated bonds like a 10 year bond if its maturity date is less then 3 years away. The purchases will be “unlimited” but completely sterilized, again we already knew this from the leaked plan yesterday. The Bank also left its interest rate unchanged at 0.75% as widely expected.
The German Bundesbank was the only dissenter to the new bond buying plan. Contrary to Merkel, the Bank doesn’t think that the program is within the ECB’s mandate. Bundesbank’s President Jens Weidmann released a statement after Draghi’s conference slamming the plan, saying that the program is “tantamount to financing governments by printing banknotes and may encourage them to postpone necessary reforms”.