Don't Expect Much From Draghi On Thursday

Thursday is the next ECB board meeting. Will Draghi be able to do “whatever it takes” to save Spain?

In order for the ECB to start buying Spanish bonds, there are three conditions precedent: (1) the ESM must be inaugurated, which requires the OK of the German constitutional court; (2) Spain must apply for aid from the ESM; and (3) Spain must sign onto a fiscal plan approved by the Troika, including the IMF.

I presume that the German court will OK the ESM. But Spain is not willing to even discuss making an application to the ESM. PM Rajoy says that he doesn’t need to agree to an austerity plan, and that in any case he won’t apply until the ECB agrees to unlimited bond purchases.

Draghi is left with no room for manoeuvre. He can’t agree to unlimited bond purchases, and he can’t do anything at all for Spain until the government applies for aid. Draghi stands ready to buy Spanish bonds, but he can’t do it yet.