The ECB's "Unlimited, Open-Ended" Bond Purchase Program Gets A €524 Billion Limit
One year ago, the ECB faced with an imminent collapse of the house of peripheral cards literally made up a bazooka: one so big and loud the market had no choice but to assume Draghi and company were not joking and actually knew what they were doing - it was the Outright Monetary Transactions (OMT), the successor to the SMP program, which was unique in that it was open-ended and unlimited. It was literally, "the kitchen sink" conceived to put a halt to the relentless selling which last July sent peripheral bond yields to record wides by instilling the fear of god, or in this case his monetary messenger on earth, Mario Draghi into the hearts of bond sellers.
Unfortunately, like everything else in Europe, this was merely the latest ad hoc made up rescue mechanism, and which as Mario Draghi reiterated on Thursday, still has no legal term sheet (but one is coming out "shortly", as he said in March and every time before that).
However, as we got closer to June 11/12, the date when the German Constitutional Court will conduct a public hearing on the various challenges to the ESM and OMT, the ECB would have no choice but to disclose more details about the real terms of the OMT to assure smooth passage of the OMT, and not to jeopardize the tenuous balance in Europe where things are once again going bump in the night with bond yields suddenly blowing wider on fears the Japanese bond carry trade is set to unwind. And if the validity and credibility of the OMT is also suddenly questioned, then Europe will go right back to imploding right before our eyes all over again.
The first such notable detail comes courtesy of the FAZ this morning, which reports that "in fear of the judgment of the Federal Constitutional Court, the European Central Bank (ECB) has revealed for the first time the boundaries of their controversial bond buying program... ECB President Mario Draghi announced last year, if necessary, that unlimited government bonds of distressed euro countries would be monetized to save the euro. Meanwhile, however, the central bank has limited this program to a maximum volume of €524 billion and also communicated this to the court." This is the maximum allowable purchases of Spanish, Italian, Irish and Portuguese bonds.
Why is the ECB revealing that the open-ended program in fact has a very set end now? "Apparently, to make the program legally less vulnerable the ECB has now said that it has commissioned legal opinions boundaries. Central bankers described the process as "containment."
Further details revealed that only short-end bonds with a maturity between 1 and 3 years would be permissible, which is as had been previously disclosed.
Naturally, the ECB in keeping with the facade of one set of truth for legal authorities, and another set of lies for the not so free market, immediately came out with its refutation.
First it was Joerg Asmussen, whose idea the OMT was in the first place, who told German Bild in an interview that the ECB is not being "accused" in next week's hearing, and that it provides a "good chance to clarify program details." Great - maybe it will also mean finally getting that legal term sheet which has been in the works for a year, and without which the OMT effectively does not exist!
Then Joerg suddenly gets very sensitive, saying the ECB last year was "only European institution fully capable of acting" when euro zone was "at danger of falling apart" and that the ECB had to get the message across that market participants "should not mess with the ECB" as it would defend the euro. Markets “got the message” without the ECB needing to buy bonds.
In other words, the ECB lied (just like everyone else seems to these days). And by the way Joerg, this is also known as crying wolf - soon the very same bond threat will reemerge, and this time nobody will believe you. Meaning that the ECB will have no choice but to do what it has threatened to do. The only problem is once the ECB does embark on open-ended unsterilized monetization, then the legal impossibilities of doing that in a fiscal disunion, where every nation has its own set of bankruptcy laws, without a common banking resolution law, and without joint Eurobonds, this is impossible. And the ECB knows it very well. This is doubly so now that the IMF's reputation has been thoroughly destroyed. How long until the markets questions the credibility of those two other Troika members: the European Commission (already a joke) and the ECB itself?
And sure enough, just to hopefully avoid this out of control spiral, the ECB was quick to deny everything.
Moments ago, via Reuters, a spokesman for the bank said that "there is no limit to the European Central Bank's (ECB) bond-buying program," denying the FAZ report.
"The report is incorrect," an ECB spokesman told Reuters.
"As indicated on various occasions, there are no ex-ante limits on the amount of Outright Monetary Transactions. Their size would be adequate to meet their objectives."
Germany's top court will consider whether the OMT infringes the constitution's insistence on sovereign parliamentary control over budget matters.
No ruling is expected until after national elections in September, and legal experts say the court may for the first time defer to European judges in the euro zone crisis.
We'll find out in two days who is lying. In the meantime, Europe better hope and pray that the recent unwind in the Japan carry trade, which has been the primary driver for the unprecedented surge in peripheral bonds does not accelerate, and force not only the marginal holders of peripheral bonds, but everyone else to start dumping. In that case not even the threat of unlimited purchases will be enough.
Especially when one considers the chart we put up in April of last year showing that the funding needs of the periphery keep growing and growing and growing, and that sooner or later, neither guarantees, nor threats, nor actual purchases will have any impact at all.
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