Forex Flash: Substantial risk that Draghi will be unable to fully deliver on his promise - BBH

Share | (Córdoba) - After Draghi's comments last week, prospects the ECB will resume the Securities Market Program ( SMP ), under which the ECB buys sovereign bonds in the secondary market that are not satisfactorily reflect the its policy stance, increased.

Regarding this subject, the BBH team explains why this policy didn't work in the past and why giving the ESM banking license could represent a better choice but it is premature. "Part of the reason the SMP program did not work in the 2010 and 2011 efforts in terms of pushing yields down is that the market understood that they were both half-hearted and limited in scale", BBH explains. "The EFSF has limited funds available given its commitments. What would be a game changer is if the ESM was granted a banking license so it could borrow theoretically unlimited amounts from the ECB".

"Yet the creditor nations, especially Germany cannot sanction this because this represents nothing less than an open-ended financial liability", they say. "Not only is a decision on a banking license premature in the sense that the ESM does not exist today, other decisions, like a cut in the deposit rate or official sector involvement in the adjustment of Greece's program, do not have to be addressed this week and therefore won't be".

"There is substantial risk that Draghi will be unable to fully deliver on his promise for shock and awe", they add.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Forex and Currencies

Referenced Stocks: SMP

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