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Sep 07, 2012, 01.10 PM IST
Robert Parker of Credit Suisse AMC expects the court to rule in favour of establishing a long-term bailout program. But if the decision imposed with some conditions then the whole process of bond buying might slowdown.
The European Central Bank’s bond buying plan announced by President Mario Draghi on Thursday cheered global markets and triggered a rally. Robert Parker of Credit Suisse AMC told CNBC-TV18 that just announcing a programme would be of no use , unless some action is taken by the ECB in the next few weeks.
With the ECB meeting out of market’s way, all eyes would now be set on German Constitutional Court decision next week.
Parker expects the court to rule in favour of establishing a long-term bailout program. But if the decision imposed with some conditions then the whole process of bond buying might slowdown.
Further, he pointed out that Germany’s opposition to ECB's plan and subdued growth in the European Union pose risk to current rally.
Below is the edited transcript of Parker’s interview with CNBC-TV18.
Q: Did Mario Draghi meet your expectations or even beat them yesterday?
A: The first point to make is the market reaction initially in the first few minutes was one of disappointment, but then as the Draghi Press Conference progressed, the market reaction became very positive and that’s reflected in two ways. The first way is the jump that we have seen in global equity markets and that is led by very distressed equity markets of Italy and Spain, which have seen major gains subsequent to the press conference.
The second market reaction has been in the further fall in bond yields of Spain and Italy. For example, Spanish bond yields which just six weeks ago were trading close to 7% are now trading under 6% and 10 year Italian bonds are trading towards 5%.
We have seen dramatic falls in short maturity bond yields, because the ECB has said its bond buying program will focus on purchases of bonds up to three years. So, it is the short end of the yield curve which has benefited most from the yield drop.
Q: There were issues like conditionality which Draghi also led out. Do you see the bond purchase program become a reality in the near-term? Do you expect it to commence shortly?
A: You could argue that the market has done the job for the ECB, because we have seen a significant fall in bond yields particularly at the short end of the yield curve. You have to argue whether at these levels the ECB should intervene.
The ECB would be much more comfortable if we saw 10 year bond yields for Spain well under 5% and 10 year bond yields for Italy well under 4%. Clearly, there has to be some action by the ECB in the coming weeks, because there is no point in ECB announcing a program and then subsequently doing nothing, but having said that the urgency of the ECB action is less. There is less pressure on the ECB at the current time.
Q: The next potential hurdle could be the German Constitutional Court decision? Do you expect any hiccups at all there next week?
A: Our central case is that the court will rule in favor of the establishment of the long-term bailout program, the European Stability Mechanism (ESM). There is a risk that if they do rule in favor they may impose conditions, for example one condition which could slowdown the whole process would be to say that if the ECB intervenes in bond markets they can only do that with German parliamentary authority.
I certainly hope they don't do that, but if they did they, that could slowdown the whole process. If they vote against, which is not my central case then we have the EFSF and just to be clear, the temporary mechanism is the EFSF and the whole idea is that that would translate into a longer term mechanism the ESM. If they vote no, frankly the European Union can say, well the EFSF just becomes temporary for a bit longer. So it's not a deal blocker.
Q: Do you see German opposition being a problem? They are the only ones who seem not to be too enthused by the plan Draghi put forward yesterday?
A: You have seen a German opposition, because in the ECB Council meeting there was one dissenter. Now Draghi obviously in public would not say who that dissenter was, but it is pretty obvious that the dissenter in terms of voting was the German Bundesbank.
In terms of German politics, here, there has been a shift in policy by Mrs. Merkel to support the ECB. Now the Bundesbank is independent of the German Government, but you have had an interesting shift because if we have had this discussion two months ago, one would have had the German political seen against this bond buying program plus the Bundesbank and now you have the German political body shifting in favor.
To some extent the Bundesbank is isolated. That’s a problem that can be addressed.
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