ECB Bond buying program is a co-ordinated race to devalue currencies

ECB boss Mario Draghi asserted his leadership forcefully yesterday with an ECB bond buying program, something the market has wanted for a couple of years. You can argue the merits and de-merits of money printing, the markets don’t care. They have their fix. And now, its off to the races. The Bernanke Put has officially given way to the more potent Bernaghi Put. If you ever wondered what this means, both central bankers hold Put Options to protect the downside in the markets. This creates a floor. The S&P 500 trades at 1435 today, I’d say the floor is around 1350, a drop of about 7% or so. With the bad jobs number today, the call for QE3 is going to get louder. This is bullish for the markets for now.

The details of the ECB program –

1)   The ECB will buy PIIGS bonds (mostly Spain and Italy at this time) with maturities of 1 to 3 years

2)   Countries must “formally request” for a bailout…. er, bond buying request. ECB will not purchase the bonds unless this request is made (must have that European flavor…)

3)   If a country makes the request, then it must subject itself to austerity measures and take major steps to reform

4)   If a country gets a bailout, and later decides to abandon its commitments, no further bond buying will occur

5)   ECB will “sterilize” any bond purchases (how do they come up with these terms). Sterilization involves selling (different) bonds of equal value in the market. So net-net the ECB balance sheet will not be affected. It also means no additional money supply into the markets. We’ll have to see how this plays out in reality.

The only caveat to this deal is Germany – its Parliament must rule this move as constitutional on Sept 12^th. Germany has always opposed any bond-buying programs because it gets itself deeper into the quicksand with every one of these moves. Barring an undesirable outcome in the German Parliament, 98% of the developed world is now officially on the money-printing program. Genius Ben has indeed started a worldwide movement, which began in earnest in 2009. The UK followed suit immediately, Japan has been silently doing it for 20 years, and Europe is now squarely on board. China announced a 1T Yuan stimulus package yesterday (perfect timing – more on that in a different post). So the race to devalue currencies is on. Let’s see where this all leads us, but for now its party time for the markets.