How does the ECB’s new OMT program differ from previous European Central Bank attitudes towards bond buying?
Well it differs in various dimensions but I think the most important dimension is conditionality. In his press conference, Mr Draghi, the president of the ECB, repeated several times that this is a two-legged affair. The central bank is acting but governments need to act as well. He essentially said that the previous programme had failed and his view was that it had failed for two reasons. One was that central governments had not done enough on their part. There has not been a contract in a sense between governments and the central bank. There has been an implicit contract but he’s really looking for an explicit contract, and that’s the conditionality coming from the fact that countries would need to subscribe to ESM programs with all the conditionalities that go along with it. Including obviously the monetary. On the part of the European institutions probably on the side of the IMF.
The other key element is that they are not announcing ex ante how far they would go. So they may go very far, or they may even cut the program very quickly for a country if it were not to fulfill the conditions. So everything is possible, and they are not announcing, as was the case for the SMP, weekly targets. I think that very rapidly got exhausted and the market lost trust of the capacity and the willingness of the central bank to intervene on sufficient scale. So here it is a bigger scale, but attached to that are the conditions.
What can we expect for Spanish and Italian economies? Bond markets will certainly calm down, but do you expect this ECB action to be only a temporary solution for the crisis?
Well in the case of Spain, it’s more or less a conclusion that they will go for a programme. In exchange for that programme the ECB will intervene, the spreads will be reduced if there is credibility on both sides. Credibility of the governments and the ECB.
A big question mark is what will happen to Italy. It will be relieved to know that there is this programme, especially if it is successful for Spain. Then Italy potentially will be able to escape a programme. It may not be the case in the end. A lot will depend on what will happen in the coming weeks and months with Spain. If it’s really successful for Spain it may mean it will be successful in a broader scale, even in a preventive manner for a country like Italy.