Skip to main content

Draghi's "conditionality" gamble

From Dr. Nicholas Spiro, for CNN
September 7, 2012 -- Updated 0059 GMT (0859 HKT)
  • At the ECB meeting "Draghi had to walk a technical, political and legal tightrope"
  • "Draghi has placed the bond-buying ball firmly in the court of Madrid."

Editor's note: Dr. Nicholas Spiro is managing director of Spiro Sovereign Strategy, a consultancy specializing in sovereign credit risk.

London (CNN) -- Today's ECB press conference was always going to be about one thing, and one thing only: how the ECB intends to eliminate "convertibility risk" in the eurozone.

Although last month's uptick in inflation was a key factor, the very fact that the ECB kept interest rates on hold amid a worsening of economic conditions across the eurozone shows the extent to which standard monetary policy measures have lost their effectiveness.

The bar was set extremely high for the ECB at today's meeting and Mario Draghi had to walk a technical, political and legal tightrope.

It is noteworthy that Draghi began his presentation of the bond-buying program by underscoring the importance of strict conditionality.

Borrowing costs for poor EU nations high
European Central Bank's 'sterilization'
Get to know the ECB bond-buying program

The Outright Monetary Transactions (OMT) programme, if launched, will be heavily contingent on strict enforcement and external oversight of domestic policy reforms as part of an EFSF/ESM program. This is likely to make Madrid and, in particular, Rome wary of requesting such aid in the absence of severe market pressure.

Draghi has placed the bond-buying ball firmly in the court of Madrid. The risk is that the credibility and effectiveness of the OMT program are undermined by doubts about the willingness of Spain to accept the conditions and adhere to them.

There is an inherent tension between a technical operation to repair monetary policy transmission channels in the eurozone and a heavily conditional aid program aimed mainly at two countries which are already resisting its conditions. The implementation risk of the OMT program is considerable.

Indeed favorable bond market reaction to Draghi's OMT program will, paradoxically, delay its launch.

Last but by no means least, Draghi failed to specify how exactly the ECB intends to eliminate "convertibility risk". This is not surprising given that the ECB itself is unsure about the precise determinants of sovereign spreads in the eurozone.

Part of complete coverage on
August 27, 2013 -- Updated 1943 GMT (0343 HKT)
German Finance Minister Wolfgang Schaeuble says the eurozone's problems are not solved, but "we are in a much better shape than we used to be some years ago."
September 4, 2013 -- Updated 1528 GMT (2328 HKT)
The G20 is held in Russia but, amid disagreements over Syria, can anything be done? John Defterios investigates.
July 10, 2013 -- Updated 1502 GMT (2302 HKT)
Summer could not have come soon enough for Lloret de Mar, a tourist resort north of Barcelona. Despite the country's troubles, it's partying.
June 7, 2013 -- Updated 1750 GMT (0150 HKT)
The euro club has suffered major shockwaves but its newest member has emerged as an economic star. What;s behind Estonia's success?
May 29, 2013 -- Updated 1323 GMT (2123 HKT)
The global recovery has two speeds: That of the stimulus-fed U.S. and that of the austerity-starved eurozone, according to a new report.
May 14, 2013 -- Updated 1326 GMT (2126 HKT)
The flags of the countries which make up the European Union, outside the European Parliament in Strasbourg, France.
The "rich man's club" of Europe faces economic decay as it struggles to absorb Europe's "poor people", according to economic experts.
May 27, 2013 -- Updated 0256 GMT (1056 HKT)
Europe's competitiveness is threatened as manufacturing companies scrambling to find enough skilled engineers.
July 10, 2013 -- Updated 1502 GMT (2302 HKT)
Spain's economic crisis is in its sixth straight year yet tourism, worth 11% of GDP, is holding its own, one of the few bright spots on a bleak horizon.
May 2, 2013 -- Updated 1044 GMT (1844 HKT)
As European financial markets close for the spring celebration of May Day, protesters across Europe and beyond have taken to the streets to demonstrate.
April 26, 2013 -- Updated 1210 GMT (2010 HKT)
As Croatia prepares to enter the 27-nation European Union, the country's Prime Minister says Italy must return to being the "powerhouse of Europe."
April 25, 2013 -- Updated 1656 GMT (0056 HKT)
Spain's unemployment rate rose to a record high of 27.2% in the first quarter of 2013, the Spanish National Institute of Statistics said Thursday.
March 25, 2013 -- Updated 1355 GMT (2155 HKT)
The financial uncertainty in Cyprus is generating images of long lines at ATM machines and anti-European Union protests.
March 25, 2013 -- Updated 1815 GMT (0215 HKT)
Cyprus will "step up efforts in areas of fiscal consolidation." Where have we heard that before? Oh yes. Greece.
March 23, 2013 -- Updated 0139 GMT (0939 HKT)
The Cyprus debt crisis is being felt by the banks but also by the people who work at them. Nick Paton Walsh reports.
March 22, 2013 -- Updated 0010 GMT (0810 HKT)
CNN's Nick Paton Walsh reports on a Russian hotel maid caught up in Cyprus' financial crisis.
March 18, 2013 -- Updated 1608 GMT (0008 HKT)
Never underestimate the capacity of the Eurozone to shoot itself in both feet, says CNN's Richard Quest.
February 21, 2013 -- Updated 1603 GMT (0003 HKT)
Spain has seen hundreds of protests since the "Indignados" movement erupted in 2011, marches and sit-ins are now common sights in the capital.