A few months ago we commented that Draghi had to threaten to use a bazooka in a similar way to how the SNB does to keep the CHF at acceptable levels for Switzerland. As it happens Draghi wasn’t able to get the Germans to agree to a Swiss style ‘red line’ on yields, but by pledging unlimited firepower, he has made the first real and solid attempt at keeping the Euro zone together since the crisis started.
Also worthy of note is the fact that he has compressed the BTP/Bund and Bono/Bund spreads probably without any meaningful purchase for the time being, but rather relying on the ‘announcement’ effect. Should he need to make sizeable purchases in the future, when the markets will test him (note, when, not if…) he will sterilise the creation of money supply with bill sales, thereby comforting the Bundesbank on the inflation front.
We all know that the Euro zone’s definitive solutions must be political, but by using an umbrella first, with his August pronouncement of ‘we will do all that is necessary’ and with his September unlimited bond purchases pledge, Draghi has gone as close as he could to the bazooka effect. Bravo!
This article was written by Emanuel Arbib – check out the Google+ profile for more updates.