Let me admit that in the world of texting I am woefully behind the curve. While relatives and friends punch out acronyms for every day words, I would rather simply email or get on the phone to communicate. But getting past my reluctance to fully embrace the Attention Deficit Disorder-like world of texting, it’s fair to say that I do embrace technology that helps us manage money for our clients. One form of technology that I love is our Bloomberg machine. It keeps us informed with news from around the globe, and this morning it allowed me to watch every word of the European Central Bank (ECB) press conference.
Today’s ECB conference was important, as Mario Draghi outlined a new bond buying program intended to eliminate tail risk in the Eurozone. Out is the securities market program (SMP) and in is an outright monetary transactions program (OMT). Unlike last month’s ECB press conference, which was underwhelming in details following hype that preceded it, at this conference the President of the ECB had three different press statements that outlined the OMT in great detail. Some of the highlights:
- The program will target 1-3 year bonds.
- There is no limit regarding how much the ECB can purchase, nor is there a time constraint regarding how long they can continue to make purchases. I believe this was crucial due to the size of the bonds markets currently in trouble.
- Conditionality will be attached, and the program can only buy bonds in the secondary market, leaving prior mechanisms (EFSF/ESM) to buy bonds in the primary markets.
- The involvement of the International Monetary Fund will be sought in designing bond buying programs, though it isn’t mandatory.
- The OMT will now accept the same treatment as private creditors with respect to the bonds purchased rather then retaining a preferred status over other bond holders.
- The bond buying program will be sterilized, to keep the size of the ECB balance sheet from expanding.
- The ECB suspended the application of minimum credit rating thresholds in collateral eligibility, and decided to allow instruments denominated in currencies other than the Euro.
- There was one dissenting vote… and probably had a German accent.
In coming days analysts will be parsing every word of the new proposal, and the bulls and bears will pick apart what they see. Overall, I believe it was critical for Draghi to deliver a detailed plan of attack to try and backstop the system, and I think the open-ended nature of the buying does exactly that. If Paulson had a bazooka, then Draghi has decided to go nuclear. They never ring a bell at the bottom or a top, but perhaps we’re finally on the road to unlocking some serious value that has built up in European markets.