Speaking ahead of today’s important German hearing on the legality of his proposed OMT bond-buying programme, ECB President Mario Draghi announced that the scheme would only be used to save the Euro, rather than to save failing nation states.
Just over a year ago the European Central Bank Chief vowed to do “whatever it takes” to save the Euro and shortly after that he unveiled a radical new plan to help maintain sustainable borrowing costs in the currency bloc: Outright Monetary Transactions. Draghi’s celebrated OMT programme aims to stop Eurozone sovereign debt yields from soaring out of control by allowing the ECB to purchase bonds in the secondary sovereign market for countries that have requested financial assistance.
No nation has asked for help so far and the OMT programme has remained a very effective backstop, without actually being called into use.
Since last August when Draghi released the blueprint for the programme the Pound to Euro exchange rate (GBP/EUR) has declined by over 10 cents from around 1.2800 to 1.1745.
Perhaps the most important indicator of the positive influence of Draghi’s bond-buying programme is the performance of Spanish and Italian sovereign debt. The interest that Spain has to pay to borrow money for 10 years has fallen from 7.62% on July 24th to just 4.60% now, whilst the yield on Italian 10-year paper has declined from 6.60% to 4.29%.
However, despite the palpably positive effect of the OMT, the Bundesbank object to the scheme under the grounds that it is tantamount to the direct financing of governments – something that is forbidden in the European Central Bank’s remit.
In order to calm the waters ahead of the potentially bruising encounter Mario Draghi released a speech defending the purpose of the OMT programme. Draghi said that:
“If there is a confidence crisis in the Euro area which is threatening the solvency of the countries…we are ready to intervene.
But we will not intervene to ensure the solvency of countries if they are profligate”.
Pound Sterling to Euro exchange rate (GBP/EUR) slid by around -0.25
The Pound to Euro exchange rate (GBP/EUR) slid by around -0.25 cents in response to Draghi’s quotes as markets priced-in the possibility that the bond-buying programme will make it through the German constitutional court. However, an official ruling is not expected until after the German general elections in September.
In other Eurozone news, Greece failed to find a buyer for its natural gas corporation, which shrouded the embattled Hellenic nation’s fiscal consolidation efforts in uncertainty and French President Francois Hollande claimed that the “crisis in the Eurozone is over”.
There is little on the agenda today so GBP/EUR should continue to trade between 1.1700-1.1800 unless the UK Industrial Production and Manufacturing Production prints throw-up any significant surprises.
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