Draghi announces start of Outright Monetary Transactions

<p>The ECB kept interest rates on hold at 0.75% today but moved to announce plans to buy stressed sovereign bonds on the secondary market through […]</p>

The ECB kept interest rates on hold at 0.75% today but moved to announce plans to buy stressed sovereign bonds on the secondary market through a new programme called ‘Outright Monetary Transactions.’

In a move widely expected after multiple leaks to the press in the weeks running up to today’s decision, the ECB is prepared to buy short term dated bonds between 1 and 3 years to help contain the risks facing the euro area under the Outright Monetary Transactions. There would be no limit on the amount of outright purchases though Draghi did say that the size would be adequate to meet the objectives of price stability.

However, there was no specific reference to any target levels that would dictate action by the ECB to intervene in the bond markets, despite earlier rumours of potential yield targets for spreads over German bunds.

The emphasis however was put firmly on the role of governments to ask for help through the EFSF and the ESM and it is the shape and size of those requests will dictate the level of action the ECB takes.

The ECB will also seek the involvement of the IMF in the design of country specific conditionality and monitoring as part of any ECB action that is requested by a country.

In reaction to the announcement, equity markets initially sold off somewhat before bouncing back to trade close to whether stock indices were before the announcement. The euro fell against the dollar however, losing as much as 80 pips to trade below the $1.26 level, before finding some buyer support.

As the news was digested however the equity support picked up speed, helping the FTSE 100 to close higher by 119pts or 2.11%.

 

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