Thursday, September 6, 2012
The Markets Will Not Do The ECB's Bidding
September 6, 2012
The ECB is trying to make the markets do its bidding. In essence, it is trying to copy Federal Reserve tactics. That is, tell the markets what you want to do and how far you want to go and hope the market will front run you.
However, in order for this tactic to work, you need to have credibility. Credibility is something that the ECB does have.
Yes the leaks, rumors and expectations that the ECB will be forced to do something, has lowered yields a bit on Spanish and Italian debt over the past several weeks. However, a bit lower means that the market does not believe the ECB. If the markets believed full-heartedly that the ECB will bring Spanish and Italian yields low enough to really make a difference, then I think we would have seen massive buying in the debt markets.
And talking about credibility, how does the ECB expect to sterilize these operations? Also, why would the ECB want to sterilize these operations in the first place? I mean, isn't the whole QE thing about unsterilized operations? Also, I find it almost impossible to believe they will sterilize these operations offering the markets a 0.10% yield.
Before the Greek PSI, the ECB bought about 50 billion euros of Greek bonds. The only thing it accomplished was to temporarily stop the fall of Greek bonds and to give a break to desperate bond investors, who found a buyer and dumped Greek debt on the ECB.