The European Central Bank (ECB) said yesterday that it will buy an unlimited amount of near-term sovereign debt from countries selling treasuries on the secondary market. And it gave up its status of being the preferred creditor.
This news was expected, and its effect was immediate. The risk premium dropped to 447 basis points, Spain's ten-year treasury notes fell to 6.3% and the Ibex jumped 4.91%. All European stock markets celebrated the ECB's decisive action to bail out Europe, and the decision echoed on Wall Street as well. The US stock market hit yearly highs. Draghi's program gives some breathing room to Spain and Italy. For a long time they could not access credit markets and get financing at reasonable interest rates.
Soon the imbalance between weak and strong euro zone nations will decrease now that Draghi has won support from every ECB board member except for the representative from Germany's central bank. In exchange, Spain and Italy need to formally ask for a bailout, make the sacrifices that the bailout requires and possibly succumb to IMF monitoring. Draghi was clear when demanding structural reform policies and changes to fiscal and financial policy in struggling European countries in hopes of restoring confidence in the euro.
For that reason, Draghi ties his willingness to colaborate with Spain and Italy's ability to comply with their commitments and he reserves the right to suspend debt purchases for those that cannot. While Draghi spoke, Rajoy met with Merkel in Madrid. Rajoy already has all the information that he needs from the ECB, Merkel and other European national leaders. Yesterday Draghi spoke up, and now Rajoy has the floor. The only thing left for him to do is ask for a bailout.
