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Clear Progress

September 27, 2012

The ECB is trying to address a market fear of euro convertibility and preserve a unity of monetary policy. It's a bold move by historic standards and moves the markets onto the next phase of problem, such as Greece, political union and growth. But the pattern of ECB and EU solutions remains: lots of fiery talk, hugely complicated programs and delayed actions.
-Christian Thwaites, president, Sentinel Investments

Two weeks into a new era of ECB and Fed policy and it is a tie between the gains in equities, with the US and European broad indexes up around 2.2%. But it's the lack of follow-through and opacity of the ECB moves which are perhaps the most disconcerting and so, probably, the more short-lived. While both central banks reported easing in the form of securities purchases they had very different origins and aims. Here's a quick summary:

 

  ECB FED
Name OMT: Outright Monetary Transactions MBS purchases
Goal Correct bond market "distortions" Increase employment
Timing Open, but not for at least 3 months Immediate
Securities Peripheral sovereign bonds MBS
Conditionality Yes, party must sign up for fiscal program None
Sterilized Yes No
Funded Yes, through ESM No
Exit Strategy Yes Not yet
Maturity Less than 3 years Over 7 years
Size limits No, in theory $40bn per month
Inflation Above target Below target
New Issues No, nothing issued after the start date Yes, new pools and secondary
Aimed at Countries in ESM programs Whole economy

 The problem is readily apparent. The ECB is trying to address a market fear of euro convertibility and preserve a unity of monetary policy. It's a bold move by historic standards and moves the markets onto the next phase of problem, such as Greece, political union and growth. But the pattern of ECB and EU solutions remains: lots of fiery talk, hugely complicated programs and delayed actions. It's the same again. This explains why equities and bonds rallied post the September 6th decision then gave up the ghost for most of the last week. The purchase program is not the answer to Europe's problems. The flash PMIs fell again, to their lowest level in three years, and Germany's lead indicators are rolling over as exports fall, tight monetary conditions prevail and austere fiscal policy crushes demand.

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