Frank Kogan

Well, this is what Draghi said last week, and that the bank reiterated as policy this week:

Then there's another dimension to this that has to do with the premia that are being charged on sovereign states borrowings. These premia have to do, as I said, with default, with liquidity, but they also have to do more and more with convertibility, with the risk of convertibility. Now to the extent that these premia do not have to do with factors inherent to my counterparty — they come into our mandate. They come within our remit.

To the extent that the size of these sovereign premia hampers the functioning of the monetary policy transmission channel, they come within our mandate.

I (he says proudly) picked this out as the key statement even before I realized that Tim Duy had too (had read the Tim Duy piece, but didn't notice the particular significance of what he was putting in bolds and CAPS, might not have taken in that there were bolds and CAPS). I say (less than proudly, but then I'm not an economist) that I nonetheless didn't really make sense of it except to presume that in some way or other Draghi felt the ECB had the authority to buy bonds given certain circumstances. What I wrote was, "This statement has the merit of not being understood by me. It does seem to be saying 'Interest rates on bonds are within our mandate/remit' — assuming my guess as to what 'premia' means is correct, and assuming 'within our remit' actually implies some action (rather than no action)."

My problem was that I had no idea what was meant by "the risk of convertibility." And I didn't have the time or wit to find out. I gather from Cotterill's FT Alphaville piece that it means "risk that what's borrowed in euros will be paid back in lire etc."

What I gather from various articles (this is not my own thinking, and I haven't read the ECB statement) is that:

--The ECB, with only the Bundesbank dissenting, has stated that it's got the clear right to buy bonds in this circumstance, where the euro is at risk. Doing so is not bailing out a government (though that's a possible result), but is rather defending a system of debt and investment of which the ECB is a main part.

--Because of the Bundesbank intransigence, but also 'cause no country has asked the ECB to buy its bonds yet, the ECB has to follow some procedure (or something) before actually buying.

--If it hadn't been for expectations encouraged by Draghi's statement last week, yesterday's announcement would have been seen as a step forward, a significant shift.

--Last week's talk by Draghi was more or less in human language. Yesterday's ECB statement reverted to Opaque Oracular Central-Bank Speak. This is no longer appropriate, when what the markets fear is not rash action but no action. (I'm taking this from Jack Ewing's analysis in the NY Times that "It is just that the giddiest of investors were not ready for a return to technospeak." I'm drawing the conclusion that the ECB has to speak clearly now, whereas the analysis included the idea that speaking at least semi-plainly last week is what set up false hopes for yesterday.)

--And at this point, the markets aren't going to believe it until they see it.

Storbeck says in his post that the markets are panicking. I'm not so sure. Why should they take the ECB's word that it's going to do something, when it hasn't specified when and how it's going to do it, and it faces German pressure not to do it? However you characterize the markets, they're a reality (even if they're not realistic), and they will push Spain into default and thereby threaten the euro unless investors believe the ECB is irreversibly committed to buying Spanish bonds and, if necessary, Italian bonds.