Recent comments from Mario Draghi and Ewald Nowotny have got the markets all aflutter and struggling to understand how policymakers are going to keep the eurozone together in the next weeks and months.
JPM’s David Mackie has complied a list of possible actions, in descending order of likelihood as he sees it:
1. EFSF/ESM purchases in primary and secondary bond markets.
2. A reactivation of SMP program on the basis of constructive ambiguity.
3. A decline in the ECB’s interest rate corridor, pushing the deposit rate into negative territory.
4. More LTROs with significantly less aggressive collateral haircuts, with the financing rate linked to the pace of bank lending.
5. A precautionary credit line from the EFSF/ESM for Spain.
6. A statement removing perceived seniority of EFSF/ESM and ECB interventions.
7. A full EFSF/ESM bailout for Spain.
8. An ECB commitment to buy EFSF/ESM debt in the secondary markets.
9. Large scale asset purchases along the lines seen in the US and UK.
10. A reactivation of SMP program with yield targets for Spain and Italy.
11. ECB taking a write down on holdings of Greek debt to reinforce pari passu status of official interventions.
12. Giving the ESM a banking license.
Mackie reckons items one to eight are within the ECB’s comfort zone. The other four are either some way away or would only become options if the crisis significantly deteriorates.
But the idea of giving the ESM a banking license may never get into the central bank’s comfort zone, given the legal opinion it issued last year. He adds:
Of course, legal opinions can change, and maybe Nowotny was signalling that this is happening. But, as we have argued in recent weeks, policymakers do not need to give the ESM a banking license. ECB purchases of ESM debt in the secondary markets would be enough to help the ESM do more if needed.