Every time I talk about Europe I begin by saying “Europe is all better,” because Europe these days operates on big-bang fixes followed by long slow decays, repeated indefinitely, so I guess you should sell the news and buy the quiet. Anyway, Europe is all better, since Mario Draghi announced today that the ECB will be buying unlimited quantities of European government debt, subject to a series of footnotes to which I tip my hat as a fellow connoisseur. Like me, the ECB likes its footnotes suggestive rather than exhaustive,* so the details are a little vague but will include “conditionality” in which the subject governments need to sign up for EFSF bailouts and adhere to their conditions. Without many details you can pick lots of nits; a good one is the ECB’s attitude to the seniority of its purchases, which is ably picked here.
The analyst reaction is mostly of the too-cool-for-this, everyone-expected-it variety but then there’s this:
So either “the market has gotten ahead of itself,” or “expected” comes with some variance, or I guess both why not.
Anyway, this is the internet, you can’t just be like “the ECB is buying lots of bonds,” you need a theory; two worthwhile ones are:
- the ECB is trading monetary help for fiscal power, announcing this conditional program so that Mario Draghi can take charge of Spain’s and Italy’s budgets, which makes sense if you think Mario Draghi** enjoys discipline; or
- the ECB is propping up core European banks, announcing this program to take peripheral governments’ debt off banks’ books at prices not otherwise justified by those governments’ finances, which makes sense if you think Mario Draghi enjoys banks.
Both theories of Mario Draghi make some intuitive sense to me but you probably know better than I do; my only strongly held opinion on Mario Draghi is that he enjoys adjectives.***
One plausible thought is that if you use banks and bank-like things (hedge funds holding sovereign bonds, etc.) to transmit your monetary policy and/or bailouts, then those banks and bank-like things are providing you a service and you pay them for it, and if you are a central bank you have some control over how much you pay them. This is not normally a particularly taxing service to provide – getting paid to transmit monetary policy for the Fed is probably higher quality of earnings than getting paid to like hedge tail risk for hedge funds or whatever – so you don’t have to pay them that much; nobody gets rich off reverse repos with the Fed.****
On the other hand you’d feel pretty good if you bought Spanish bonds at their auction today:
You made 7-10bps of yield, depending on tenor, or about 20bps of dollar price for the 2015, for call it 8 hours of risk. You’d feel even better if you bought them in the open market 3 days ago, never mind if you bought at the last auction in July:
I don’t know, I don’t have much of a theory, I leave you to other peoples’. The ECB’s job is hard and not made easier by, like, Germans and Spaniards and adjectives. But when you have an institutional framework that prevents you from buying government debt directly from governments and forces you to buy it from banks, you could imagine two broad approaches to doing that. In one approach, you make the transmission from your coffers to the governments’ as seamless as possible, so that every euro you pay goes to funding Italy and Spain cheaply rather than paying their creditors for taking eight hours or three months or whatever of WTF-is-the-ECB-up-to risk. I am not smart enough to know how to do so: do you, say, set a target maximum rate for Spanish debt? (Maybe?) Say how much of Italy’s debt you’ll fund? (Probably not?) Coordinate with Spain so they don’t do their auction a few hours before you show off your bazooka? (I mean … right?)
In the other approach – the one you might take if you had a weird dysfunctional love-hate relationship with financial markets, for instance – you do the other thing. You spend some of your money paying financial institutions to take risk on shaky governments, increasing volatility and thus trading profits, rather than fixing expectations and transmitting that money to governments efficiently. You keep everyone guessing as long as possible, and then when you do reveal your program you lard it with uncertainties and general kookiness so that they’re still guessing. I don’t really know what the ECB’s intended approach is, but I can take a guess at its likely result. It’s just a guess though.
* Also to be strictly accurate they are not “footnotes” per se; they are “Technical features,” but the point remains they aren’t very technical and are barely features.
** Or Germans. Probably Germans.
*** Can you imagine the Fed saying something like “A necessary condition for Outright Monetary Transactions is strict and effective conditionality attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) programme”? I couldn’t so I compared this press release to a recent FOMC one; disappointingly the Fed was even more adjective-heavy than the ECB but, I dunno, just feels like the ECB means them more.
**** I mean, not transaction by transaction. In the long run, everyone gets rich off transmitting monetary policy for the Fed. Some people think that banks get paid a negative amount of money to transmit monetary policy for the Fed but I reject that theory on a priori grounds.