We almost feel embarrassed for the European Central Bank. Almost. Its reputation for applying constructive ambiguity in the service of deploying immense firepower is under severe pressure anyway.
A short time ago, right in the middle of President Trichet’s press conference, the ECB had apparently begun buying (or the very least checking prices for) Irish and Portuguese bonds. Not Italian or Spanish bonds so far as we know, even if it seems that trading in shorter-dated Italian debt became very volatile, apparently in anticipation of orders from the ECB.
Trichet certainly dropped a big hint:
RTRS-TRICHET, ON BOND-BUY PROGRAMME, SAYS WOULD NOT BE SURPRISED IF YOU SEE SOMETHING ON MKT BEFORE PRESS CONFERENCE END
Not a surprise really. The ECB has done this before but never has Trichet practically given markets a time and a place so openly. Unfortunately he’s peeled back the ECB’s ambiguity just as the whole endeavour is ever more unbelievable anyway.
It’s ironic to see them buying Irish and Portuguese debt (probably because they’re so illiquid that the ECB’s price-checking alone would have an impact) because Ireland and Portugal are both markets where the ECB failed to prop up liquidity and there were consequently bailouts. It’s a bit like rummaging around in a graveyard.
Walking into the much bigger bond markets of Italy and Spain is a massively different proposition given their size and complexity, as Trichet well knows, hence this ridiculous attempt to feint markets. After all, Trichet claimed that the SMP is ‘totally transparent’ but we don’t know what the actual purpose of the programme is now — whether it’s to stop bid-ask spreads on bonds from widening, or to drive down yields, or what – and what would be an acceptable share of a country’s debt stock that the ECB would be happy buying up. Note that the ECB isn’t buying Greece (where the bank owns 20 per cent of bonds outstanding it seems).
And last of all, how on earth would the ECB sterilise Italian and Spanish purchases if they would have to be of a much bigger scale. Trichet did say ‘we do not do QE’ and we can at least believe that.
Anyway, we’ve got this from one bank rates desk:
Folks we have not been asked by ECB (SMP) for offers on Italy or Spain. We are being told that people are hearing from other banks that BOI, BOS are in buying Italy and Spain – but this is nothing to do with SMP – both these institutions execute on behalf of domestic state security funds and have been buying bonds for at least the last 3 years. Lets not confuse this with SMP. So bottomline – we are NOT seeing ECB (SMP) buying either Italy or Spain SO FAR.
Again the ECBs SMP started buying PGBs and IRISH just after Sylvia Wadhwa from CNBC asked a question about the SMP (their cue?). Thank you Sylvia!
We can only hope there is some sort of planning for transition to the EFSF, improving and scaling up sterilisation — or even in the last resort conducting unsterilised operations — as this isn’t looking sustainable…
Related links:
Trichet, you’re our only hope – FT Alphaville
No, the ECB can’t prop up Italy – FT Alphaville