The European Central Bank's controversial plan to offer unlimited support to bond markets will not resolve the region's sovereign debt crisis, according to a report published by Moody's Investors Service Monday.
The plan, announced last week by ECB President Mario Draghi with the support of all but one of his Governing Council colleagues, effectively trades bond purchases (which hold down borrowing costs) for political commitments on austerity and budget discipline from the respective countries whose debt is targeted. Bundesbank President Jens Weidmann has consistently opposed the idea which he calls "tantamount to financing governments by printing banknotes."
"The ECB may hope that the announcement alone will sufficiently reassure investors and remove the need for substantial purchases, but the evolution of the crisis suggests this is unlikely and that the markets will test the ECB's resolve," wrote Moody's analysts Alastair Wilson and Colin Ellis in their weekly CreditOutlook review.
Market reaction has been definitively supportive of Draghi's plan to date, referred to by the ECB as "Outright Monetary Transactions", or OMTs. Spain's benchmark 10-year bond yields have tumbled more than 200 basis points since Draghi first alluded to it on 26 July and fell the most in more than 20 years last week alone. It's currently being quoted at around 5.58 percent on the electronic dealing platform Tradeweb.
Written and presented by Martin Baccardax.