What Today's Real ECB News Really Means
Bloomberg has run a story, citing two anonymous central bank officials, stating the ECB may not be ready to finalise its plan to buy government bonds at the September 6th meeting. JPMorgan's European economists note that the story cites two reasons for this: (a) The Governing Council wish to wait until they have seen the German constitutional court ruling on September 12th before proceeding; and (b) The programme is still being worked on staff may not be able to finalize it by then. Critically, JPM, like us, regard (a) as something of a smokescreen.
Very few think there is a high probability that the German Constitutional Court will deem the ESM unconstitutional and prevent its progress into law at this stage. While the Court may express some misgivings about the legislation and suggest modifications as it is put into practise, it is most unlikely to be blocked. We would not expect the ECB to delay its actions on the basis on what remains a low probability event at this stage. Rather, we would expect them to take the German Government at its word that it can deliver on the political undertakings it has made, until it discovers otherwise.
The “excuse” of the ruling on September 12 only has any substance to the extent that (b) is true – that work on the design of the plan is incomplete. The idea that work “is not complete” may also be a euphemism for the fact agreement on the contours of the policy is proving elusive. Even allowing for the summer break in August, an institution with the resources of the ECB has the ability to complete the technical issues in policy design over the period between meetings if it is minded too. Draghi has already “played for time” once with his sketch of policies still to be designed at the last meeting. Ultimately, we suspect Draghi and others at the ECB will recognise that continued delay in finalising its policy decisions contributes to the sense that opinion on the Governing Council is deeply divided, and hence its commitment to any policy intervening in markets will not run deep. That, in turn, could undermine the effectiveness of policy interventions themselves.