Positions in Europe: Long German Bonds (BUNL)
After ECB President Mario Draghi made his big central bank splash in September by introducing the Outright Monetary Transactions (OMTs) program to buy “unlimited” sovereign bonds of Eurozone members at the Bank’s discretion, little has been indicated about its use. And today’s conference provided no further color.
There were no major changes to the economic outlook versus the October meeting. In December, the Bank will release new economic projections. Here we think GDP, in particular, will be revised lower, in step with the European Commission’s autumn Eurozone growth projections released yesterday: -0.4% in 2012; -0.1% in 2013; and +1.4% in 2014.
You can find Draghi’s Introductory Statements to the press conference related to inflation, growth and monetary outlook here.
The ECB governing council decided that the interest rate on the main refinancing operations, the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.75%, 1.50% and 0.00% respectively.
The Q&A was filled with questions on if and when Spain should ask for a bailout and how the OMTs could be coordinated with such an announcement. Draghi was once again tight lipped on both fronts, saying that it’s up to the individual Eurozone governments to request a bailout and that the Bank stands ready to use OMTs (of course under conditional requirements).
Overall, Draghi once again demonstrated a comfortable position with the sheer announcement of the OMTs program to reduce risk across the region. While peripheral yields have come in over recent weeks versus summer highs, we still see broader risks from the sovereigns and banks of Spain, Italy and France and view the weak credit lines to households and corporations as evidence of a very clogged credit environment that should prolong a return to real growth.