Some things are scarier when they are unknown — monsters under the bed, mysterious lumps, and Draghi’s monetary policy toolkit. As such, unveiling an ABS purchase programme without revealing any concrete details was a masterstroke.
As with doing whatever it takes (in the form of circumscribed up-to-three year government bond purchases of initially questionable legality), the risks and payoffs are asymmetric. Nobody wants to stand in the way of the central bank, and everyone wants a piece of the rally, whether they believe in it or not.
If the ECB can “intensify preparatory work" in June, establish details in July, confirm legal basis in August, target assets in September, and be ready to roll in October, it can make great strides towards its goal of a well functioning monetary policy transmission mechanism without spending any money.
The market will be strung along, never doubting the central bank enough to give back its gains, floating along on a sea of easy money, sanguine about spread levels. Being long and wrong, not short and caught, will be the order of the day.
By the final months of the year, the ECB’s Asset Quality Review (AQR) and the European Banking Authority stress tests will be finished and their results published. If European bank balance sheets receive a clean bill of health from the ECB, that, combined with all the forced capital raising of the first half of the year, should have done plenty to improve the credit flow to the periphery, rendering a full fat ABS purchase programme unnecessary.
If the AQR does throw up any nastiness through the summer, the ECB, if it spins out its preparations, can have its own backstop ready to go, sidestepping any need to rely on capricious eurocrats, obstinate national governments, or a recapitalisation and recovery mechanism that has yet to be tried. However, if it fires its weapon too early, there is the risk that the programme will be judged inadequate at the very point that it is needed.
Running monetary policy based on talk, rather than action, has its advantages. For one thing, it is cheaper. For another, it is easier to unwind. The longer the ECB delays (but keeps talking about) ABS purchases, the better the chance that private sector credit will recover to an extent the ECB finds acceptable.
If the ECB manages to cajole the insurance and banking regulators into easing capital requirements for securitization, this will have a long term effect on the securitization market — not immediately comparable to an outright purchase programme, but much more in line with the ECB’s guiding principle to “act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources”.
An ABS purchase programme that never arrives is the best option. If the market in four or five months can support continued lack of action, that raises far less complication than adding yet another exotic instrument to the ECB’s ever expanding list (and ever more sprawling mandate).
The only casualty could be Draghi’s credibility, but as economist John Maynard Keynes (may have) said: “When the facts change, I change my mind. What do you do, sir?”