Financial Times
September 17, 2012
From the moment in late June that Mario Draghi vowed to do whatever it took to save the euro, investors flocked back to risky assets. The reaction to the European Central Bank’s outright monetary transactions (OMT) announcement, reinforced by the now validated expectations of American QE3, was the icing on the cake.
To the markets’ delight, Mr Draghi’s plan is technically strong, and a smart, if covert, way of doing something that’s been rejected formally, namely leveraging the EFSF/ESM eurozone bailout funds. Unfortunately, the plan is also economically unsound. The Pavlovian market response to monetary financing will again falter because the ECB alone can’t resolve the euro-crisis.
For now, world equity markets are on a roll, returning about 6 per cent since midyear, with comparable returns to European bonds and energy markets. The next best performers include European investment grade corporate bonds, global listed real estate, and even the industrial metals and mining markets.
The ECB can take much, but not all of the credit. QE3, and the recent sudden confirmation by China of 1tn yuan of infrastructure spending spurred the biggest local stock market rally for more than eight months.
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