26 August 2012

Wolfgang Münchau: The ECB must still do its bit to help solve the crisis

I would consider three goals, subject to two constraints. The first and most important is to get rid of market expectations of a eurozone break-up. Whatever the ECB’s governing council decides on September 6, it must be big enough to squash expectations that Spain or Italy will leave the eurozone. A Greek departure is different. This programme is not about Greece.

Second, it must be part of an overall resolution strategy. Mario Draghi is right to say that ECB support should depend on an official application for support. But this is when it gets tricky. How will the president of the ECB adjust his programme if a country fails to meet the criteria? And who decides?

Third, he has to address the issue of investor subordination. If the ECB’s holdings are considered senior to those of other investors, it may never be possible to get private investors back into those countries.

I suspect the ECB will endorse a conditional purchasing programme, targeted at Treasury bills, perhaps also at bonds with a short maturity. There will be no explicit or implicit interest rate targets, but a promise of unlimited intervention. There will be a pari passu pledge of uncertain credibility. Unless I have misjudged the ECB’s room for manoeuvre, the programme is going to be more modest than markets had hoped for.

Since the ECB is rightly concerned about the eurozone’s broken monetary transmission mechanisms, it might also consider the purchase of other debt instruments, including corporate bonds. A broadening of the programme would have two advantages: it would help parts of the private sector directly and it would be less suspect legally. A broad-based programme of quantitative easing would also be warranted because the economy has fallen back into recession.

An ECB bond purchasing programme would form an important staging post in the resolution of this crisis, but it would be wrong to regard it as a magic bullet.

The eurozone crisis may look less acute once the bond purchases start but we have been through phases in the past where the crisis appeared to be receding, only to come back a few weeks later. Unless the programme is accompanied by a swift move towards banking and fiscal union, it will not make a difference.

And that means it probably won’t.

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