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Aug 06, 2012, 06.21 PM IST
As the ECB hinted at buying bonds to bring down the borrowing costs of Spain and Italy, Sarah Hewin, Senior Economist at Standard Chartered told CNBC-TV18, there are a lot of grey areas and it is not known how much the ECB is prepared to buy in terms of supporting bonds.
However, the ECB's stance about restarting bond purchases is a positive move, believes Hewin. But, it may take longer to get a clear picture, she added.
Q: It seems to have been a one day wonder the way in which the European markets muscled up on Friday. What's the next step? Is it that we are not going to get the ESM money, get the ECB to buy some bonds? There were murmurs that you don’t need a complete consensus before buying bonds.
A: The problem is that there are lots of grey areas. We don't know precisely how much the ECB is prepared to buy in terms of supporting the bonds. It is not clear how far governments have to act before the ECB will be prepared.
We know, any country that wants support would have to request aid and would have to agree on memorandum of understandings. So they would be imposing austerity measures. But, in terms of support, it will be through the European financial stability facility (EFSF) currently because we don’t have the ESM operational yet. Again it is not clear whether that would need to be a unanimous decision or not.
In the past we have had problems with countries like Finland requiring collateral. Overall, there are a lot of unanswered questions here. Now it is positive of course that the European central bank has said that they are willing to restart bond purchases and they recognized that there is a need for that.
But, we are still waiting for some more details and those details may not emerge in the coming days. It may take longer before we get more clarity on that.
Q: The best I could make of what happened on Friday, about the late rally was that Rajoy indicated that he is willing to ask for aid from the EFSF and ESM. Do you think that's likely in the near term, him approaching the EU for aid? And the other side of the story seems to be that Germany wasn't too opposed to bond buying. Do you think that as factually right? Do you think Merkel is softening her stance, you could have her allies actually allow the ECB to go ahead with its plans?
A: Yes, Germany has been very resistant in the past and I think the Bundesbank is still reluctant to see the European Central Bank straying from its mandate of targeting inflation. So we are seeing something of a split between what the government is saying in Germany and Merkel has been more conciliatory. But, the Bundesbank still is somewhat fearful about the ECB expanding its balance sheet, taking on board assets which may lose their value in time.
I don't think it is quite clear cut. As you pointed out, the markets were taking some comfort last week from the German position. But, we have to bear in mind that's the German government's position.
Now Spain actually is requesting for aid. That is something that could come in time. We are quite surprised that they have been making these moves because they have the support for the banking sector. To the extent that Draghi has already achieved low yields, that of course drops the borrowing cost without Spain actually having to go for a big program.
I think the problem for the Spanish sovereign is that they still have about 30% of their medium to long term debt issuance remaining for the rest of this year. It means that they can't really afford to miss too many auctions. They have to go to the market at a time of extreme market stress.
For this reason alone I think it is wise of them to really think about or consider perhaps asking for support from the EFSF and getting support from the ECB as well.
Q: What is the sense you got from the non-farm payroll numbers? Does that postpone any potential quantitative easing (QE)? How should markets read that data piece?
A: The Fed has always been quite clear that they are going to be pragmatic if they see a need to embark on further QE. Then they will do that. They are going to be following what is happening to the data. Payrolls data of course was better than expected.
But, we continue to see quite high unemployment rates and that really detracted from the good news that we had through the payrolls. Our view is that we probably need to wait and see what data comes out of the odd term. As I said, the Fed will be willing to ask if there is a need to do so.
I think we are going to be following what happens to the manufacturing ISM and additional payrolls data will also be important. But, certainly on the number that we had on Friday, anything is possible. We don't see an urgent need for them to move to more QE but, they will certainly leave that option open if the data deteriorates further in the coming months.
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