So here it is. Mario Draghi did not disappoint with his Outright Monetary Transactions (OMT) programme: no limits, full transparency, a pari passu pledged, pinned down through legislation. The credibility of the conditionality clauses will remain uncertain until tested – which will almost certainly happen at some point. The German media reaction was one of unbridled fury. Financial markets were exhilarated, with stocks, bonds and the euro all up. Die Welt had the best headline of the day: Financial markets cheer the death of the Bundesbank.

The best summary, as is often the case, is not in the media, but in the ECB’s technical note. Here is our summary of the ECB’s summary:

• Conditionality: The ECB will make OMT contingent on an EFSF/ESM programme – either a full macro programme, or a precautionary programme, as long as the programme includes the possibility of primary market bond purchases. This leaves the door open for a lower-level type Spanish programme. The role of the IMF is to design country-specific conditionality, and monitoring. The governing council has full discretion to terminate OMT when it considers that the objectives are achieved or in the case of non-compliance. (And this remains the most problematic part of the entire exercise. We have fully discretionary conditionality)
• Coverage: OMT may also be extended to countries at the time when they regain bond market access. The ECB will mostly buy one-to-three year bonds. There shall be no ex ante quantitative limits.
• Creditor treatment: Pari passu is assured, and, most importantly, to be enshrined in a legal act.
• Sterilisation: He would say that. The operation will be fully sterilised, which is not really a restriction considering the unlimited LTROs.
• Transparency: As now, aggregate holdings and market values will be published on a weekly basis. Average duration and country breakdowns are published monthly.
• Securities Markets Programme: OMT supersedes SMP. SMP holdings will be held to maturity.

The ECB has also announced an important change in the collateral rules, which is somewhat overshadowed by the OMT. It has suspended all rating requirements for all government debt, or credit claims guaranteed by governments subject to the OMT. Dollar, sterling and yen marketable instruments will also be acceptable as collateral.

The reaction from Germany was one of outrage.

At the press conference, Draghi said that one member vote No – no prizes for guessing who. Draghi said different central banks expressed different views, but all converged to this policy. As reported by Frankfurter Allgemeine and others, a Bundesbank spokesman quoted him as saying that he rejected the OMT on the grounds that it was too close to monetary financing, and that they would risks for taxpayers.

The FT’s editorial headline says: Mr Draghi’s audacious gamble. The comment said that the SMP fell short for technical reasons, which the OMT has fixed. But it warned that the heavy lifting has yet to be done. Italy and Spain still have to apply for a programme. And the process of closer integration remains subject to political risks.

While the non-German press seemed mostly impressed, the Germans went on a verbal rampage.

Holger Stelzner writes in Frankfurter Allgemeine that the decision means a formal end of the separation between monetary and fiscal policy in Europe. The southern countries can now continue to amass at low interest rate, without having to worry about financial markets. The northern countries are also happy, not having to keep asking their parliaments for more money. He says the conditionality can never be applied in practice. Will the ECB stop buying bonds because Italy refuses to reforms its dismissal laws? He concludes with a reference to the German constitutional court, and wonders what the courts view on this policy will be?

Marc Beise, writing in Suddeutsche Zeitung, defends the Bundesbank. He said the truly bad aspects of Draghi’s decision was that the ECB left no doubt that it wants the euro to survive (Yes, we, too, had to read that sentence twice.) He writes this is not a statement a central banker should make. This is for politicians. He says the ECB has crossed an important line with its decision, but it is not irreversible. They will not be able to save the euro against Germany.

Note that these are Germany’s two most important newspapers, straddling a wide ranging of public opinion from the right (FAZ) to the centre-left (SZ).

Interestingly, Bild Zeitung was relatively more moderate than the “serious” newspapers. Nicolas Blome dressed up his commentary in a pseudo-factual Q&A, in which he says that inflation will come, of course, but not immediately.

54% of Germans want the Constitutional Court to say No

Most commentators are heavily discounting a Yes, or Yes but vote by Germany’s Constitutional Court on the ESM next week. Spiegel Online reports of a poll showing that 54% of Germans want the court to say No. Only 25% want the Court to reject the case. The poll shows that the German public has become increasingly hostile (a sentiment no doubt whipped by the Bundesbank and comments such as those above.)  53% are against transferring further competences to the EU, while 43% want Greece out of the eurozone. Der Spiegel made the point that a No vote by the Constitutional Court would also automatically killed off Draghi’s OMT.

In another article, Spiegel reports on the political reaction to the decision. Most of it is unremarkable. But we were struck by a comment from Jurgen Trittin, head of the Greens in the parliament, who said that the OMT would greatly increase the risk that Germany’s ESM contribution and credit guaranties would be defaulted on. He said by refusing eurobonds, Angela Merkel has forced the ECB to monetise debt through the backdoor.

And here is some reaction from Italy and Spain. It seems that neither Italy nor Spain are about to apply for a precautionary programme, hoping that the bond rally will not make that necessary. (one of those logical traps European politicians have developed a habit of falling into).

Monti welcomes the plan, but says he does not seek a bailout

Mario Monti yesterday welcomed the OMT according to Il Corriere della Sera. Also with a strong conditionality, these measures could give some kind of relief to Italy on government bond secondary markets. “Today there’s been an important step forward toward a more satisfactory euro zone governance,” Monti said. Speaking at a conference, Monti reiterates Italy does not need a bailout and that the country is “seeking to avoid requiring” an aid request from EFSF/ESM. By the way, the rally on bond markets helps Italy to reduce its borrowing costs for interests.

Italy to be subject of “soft surveillance”

If Italy will apply for the new ECB bond-buying programme, there will be a “soft surveillance” by the Troika, Linkiesta argues. According to Fabrizio Goria’ analysis, the OMT in conjunction with an Enhanced Conditions Credit Line (ECCL), includes strictly conditionality, such as an IMF programme. “The ECCL is based on IMF’s Precautionary Credit Line (PCL), according to EFSF guidelines. That’s is a presage for a soft Troika vigilance,” Linkiesta writes. The ECCL is a credit line for those “countries with sound policies and fundamentals, but with some vulnerabilities that preclude using the PCCL (Precautionary Conditioned Credit Line).” According to Linkiesta, under the ECCL Italy won’t be like Greece, Ireland and Portugal, but in similar position.

Berlusconi is mulling to support Monti after 2012*

According to Italy’s Il Sole 24 Ore, Silvio Berlusconi may support an extension to technical Mario Monti government beyond April 2013. The main challenge is the new electoral law, the so called “Porcellum”. In fact, the electorate cannot choose candidates directly, voting instead for a fixed list selected by Italian party leaders under a proportional system. The preference of the PdL (Berlusconi’ party) is that with the new ECB bond-buying program, structural reforms will be happen in the next few years. Francesco Giavazzi writes in Il Corriere della Sera, “The uncertainty of what happens after the elections is the biggest worry of investors we are asking to buy our public debt.”

Italy seeks resources from offshore drilling

A current ban on offshore drilling could be soon rethought by the Italian government, sources tell to ANSA. The government is working on a new national energy strategy that reconsiders the 2010 ban on offshore oil and gas drilling. According to the government, the ban is not in line with the current Italian growth needs. Later on Thursday, the mayors of such coastal communities as Molise, Abruzzo and Puglia began organizing a series of initiatives to counter drilling in the Adriatic sea. The Monti government has been under pressure to permit more energy projects from foreign investments, which could provide a source for energy as well as tax revenues. With these new measures, there will be over €5bln in new investments, according estimates.

‘Indignados’ stage anti-Merkel demonstration

Under the motto “we don’t owe, we don’t pay” (and #MerkelWirBezahlenNicht on twitter), The Indignados/15M movement organized a protest in the centre of Madrid on Thursday afternoon, marching between the EU delegation in Madrid and the German embassy which was heavily guarded by police.

(The coverage of the demonstration outside of social media has been minimal. See Europa Press in Spanish, the Houston Chronicle (AP) in English and Die Welt in German)

The golden rule à la française

Francois Hollande is to give a speech at the Court of auditors today, according to Les Echos, outlining how the golden rule is to work in France, now it is confirmed that it will not be anchored in the constitution but by simple law. It relies heavily on the credibility of its yet to be created institution, the High Council of public finances. There had been some debate about who will be in this council. Clear is that the president of the Court of auditors Didier Migaud will be head of the council. Its tasks are to validate the growth forecasts and the conformity of the budget with the golden rule. In case of deviations from the rule, the council is to warn about it. Corrective measures become obligatory if the deficit deviation is above 0.5% of GDP per annum or 0.25% of GDP in two consecutive years. The government can evoke extraordinary circumstances for this slippage, which has to be confirmed by the Council. Below the upper limit and without extraordinary circumstances, it is pretty much a political process: If the Council comes to a different conclusion on growth or the budget, it can increase public pressure on the government but there is no legal obligation to follow its recommendations.

Greek Coalition partners want their say over austerity package

Greek government on the edge ahead of troika visit, titles Kathimerini. Tensions in the Greek coalition government are running high over the prime minister’s refusal to discuss the austerity package before the troika sees it. Both Evangelos Venizelos and Fotis Kouvelis of the Democratic Left are reportedly insisting on a meeting with Samaras to sign off on the austerity package for 2013 and 2014 before government officials present the blueprint to foreign envoys.  Officials in the premier’s office had proposed a meeting with coalition leaders on Sunday afternoon when Finance Minister Yannis Stournaras is due to meet with troika officials, but that did not help. Venizelos appeared to take issue on Friday with Samaras’s behaviour, suggesting that the premier was acting without his coalition partners’ endorsement. “This is not a one-party government,” Venizelos said during an interview on Real radio station, adding that PASOK’s role within the government was “encouraging, supporting and monitoring.”

Fascist Golden Dawn comes  third in the polls

Greece’s ultra-nationalist Golden Dawn party has increased its support among austerity-hit Greeks since entering parliament this year, and would emerge as the third largest party (10.5%) if elections were held now, a new poll showed on Thursday, Reuters reports. The poll showed support for the conservative New Democracy, which heads the country’s pro-bailout coalition, had dipped to 25%  from 29.7%  in June, while backing for the radical leftist Syriza party also fell, by nearly 3 percentage points, to 24 %. The PASOK Socialists, junior partner in the ruling coalition, dropped to fourth place with 8% of the vote, while the other government ally, Democratic Left, saw support shrink nearly 2 percentage points to 4.5 %.

According to a survey by VPRC poll for the Ellada Avrio newspaper, SYRIZA is leading the polls with 30%, compared with 28% for the governing conservative New Democracy, while fascist Golden Dawn is polling at 12%.

The jobless rate, meanwhile, rose by a full percentage point to 24.4%  from 23.5% in the previous month, statistics service ELSTAT said on Thursday.

Merkel’s and Rajoy’s Galbraithian no-business mini-summit

Mariano Rajoy hosted Angela Merkel in Madrid Thursday, with their joint press conference scheduled at the same time as Mario Draghi’s in Frankfurt. This allowed Rajoy to dodge questions about ECB bond buying and a Spanish rescue by saying, without losing face, that he hadn’t yet had time to read Draghi’s remarks. El Pais (English edition) quotes Merkel saying she didn’t come to Spain to dictate reforms. She expressed “confidence in the Spanish government” and said she was “impressed by the measures” taken. Merkel also said she and Rajoy hadn’t discussed the terms of a possible Spanish bailout, while Rajoy said there was “nothing new”.

(It is tempting to quote John K. Galbraith’s The Great Crash, 1929:

“… there is the meet­ing which is called not because there is busi­ness to be done, but because it is nec­es­sary to cre­ate the impres­sion that busi­ness is being done. Such meet­ings are more than a sub­sti­tute for action. They are widely regarded as action.

The fact that no busi­ness is trans­acted at a no-business meet­ing is nor­mally not a seri­ous cause of embar­rass­ment to those attend­ing.”)

10-Y Spreads, Forex, ZC Swaps and Euribor-Ois

Spreads now below acute crisis levels.

10-year spreads
	Previous day	Yesterday	This Morning
France	0.804	0.742	0.739
Italy	4.080	3.854	3.837
Spain	4.989	4.534	4.565
Portugal	7.535	6.940	7.115
Greece	20.539	20.267	-1.53
Ireland	4.420	4.313	4.522
Belgium	1.224	1.174	1.164
Bund Yield	1.437	1.515	1.532
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.262	1.2634
Yen	98.950	99.7
Pound	0.793	0.7928
Swiss Franc	1.206	1.2048
Reuters