Given the anticipation that is now built-in for next week's ECB meeting, we hope that Draghi has a little more up his sleeve than reviving the Treaty-testing, bondholder-subordinating SMP. Presented with little comment is the market's reaction during the last two periods of buying as it seems that Italian and Spanish bondholders are more than happy to know that there will always be a buyer no matter how much they keep selling their exposure down.
Lower pane is the weekly purchases of bonds by the ECB and the upper pane is the now all-important spread between Italian and Spanish bonds and the German Bund - higher being more risky.
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Well that plan didn't work so well eh? It would appear that during the 2010 period spreads doubled from 100bps to 200bps and once again during the 2011 period, spreads almost doubled from 260bps to over 500bps in Spain.
From Goldman:
A reactivation of the SMP would be one possibility to change, at least temporarily, market sentiment. ...can be implemented rapidly and the chances of this happening have increased after Mr Draghi’s comments today. The reference of Mr Draghi to the malfunctioning monetary policy transmission mechanism could be seen as a preference for a re-activation of the SMP. However, it is noteworthy that a damaged transmission mechanism has been the justification for all non-standard measures the ECB has taken.
and for an interesting anology, here is Morgan Stanley's comparison of dealer inventory (liquidity) relative to high yield bond yields. As the inventories are sold down (in the case of the ECB, as they buy more and more and remove those bonds from the market) then the high yield bond market (think sovereign bonds in Europe) will 'adjust' to the new liquidity regime (i.e. reprice considerably lower - higher in yield)...
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Chart: Bloomberg