ECB Announcement, Finally!

For weeks, market commentators have been anticipating European Central Bank (ECB) Chairman Mario Draghi’s moment in the sun, which finally arrived this morning.


As expected, Draghi announced a new unlimited outright bond-buying programme aimed at bringing struggling peripheral euro zone government yields, particularly those of Spain and Italy, back down to Earth.


Making good on previous promises, Draghi noted that the programme would serve as a “fully effective backstop” for those governments whose bonds have come under pressure from “unfounded” fears in global markets about the stability of the euro. He went on to mention that, despite being publicly opposed by the German Bundesbank, the new programme is “strictly within” the ECB mandate.


The ECB will drop preferred creditor status for purchases made under this programme, a title that it held when Greece restructured its debt, thereby protecting itself from the write-down losses that private investors were forced to take.

The programme will be fully sterilized, meaning that all liquidity injected into financial markets by way of the purchase of bonds will also be taken out of the market elsewhere.


And crucially, to be eligible for the new programme, governments will first have to request European Financial Stability Fund (EFSF) support and meet its conditions and requirements. This could prove to be a tough pill to swallow for sovereign governments in need of support.


The programme will focus on buying shorter-term instruments, dated one-to-three years. Draghi did, however, note that it will also buy longer-term instruments in the secondary market that are near maturity. For example, the ECB would consider purchasing a ten-year bond with three years remaining until maturity.


Because of the attention this topic has received, and the fact that some details were leaked to markets yesterday, we are seeing a classic “Buy the rumour, sell the news” pattern unfold. In the aftermath of Draghi’s press conference, the euro has actually sold off against many currencies, including the Greenback, Sterling, Loonie, and Aussie.


The only two major currencies that the euro has outperformed since Draghi took the stage are the Japanese yen and the Swiss franc. The EURCHF movement is particularly interesting: For the first time since March, the pair pulled off the Swiss National Bank-enforced 1.2000 floor in a meaningful way, and seems to be holding on to those gains.