After weeks of keeping the world waiting, has the ECB finally found a way out of the eurozone crisis?
It would be a mistake to call the ECB’s Outright Monetary Transactions (OMT) plan another time-buying, can-kicking exercise. It is more than that. Whilst the Securities Market Program (SMP) was temporary, limited and senior, the OMT will be unlimited and pari passu. There will of course be no free lunch, but the “conditions” are a step towards the eurozone eventually reaching a fiscal union.
While the worst may be over, it would also be careless to call this the final solution. Difficulties remain, not least the ability to enforce the conditions of the package. Should the ECB refrain from further OMT purchases because of recalcitrant governments, peripheral bond yields will simply spike again. How high the yields spike will depend on each government’s pain threshold, which in turn will depend on how much prefunding they manage to get away with. Therefore, the current risk-on rally is likely to continue, but not indefinitely, and we should prepare for more alternate risk off, risk on phases.
Does Bundesbank opposition matter? Yes. But not as much as it used to since they ultimately have only one vote. They have lost the last couple of battles, even if they still have a chance to win the war. A Weidmann resignation would matter, but it is a nuclear option that wouldn’t be used lightly.
The Enhanced Conditions Credit Line (ECCL) facility will allow large countries like Spain and Italy to be in a programme and yet claim they are not. There will still be Troika (ECB, EU and IMF) officials on the ground to ensure that countries deliver the fiscal consolidation they promised.
While this latest development did not disappoint, the three-year eurozone drama looks set to continue.