The world is embracing bold action from ECB tomorrow and the expectation is high. Reading news tonight, I noticed that most people are guessing that ECB will take actions to purchase “unlimited” amount of short term (around three years) government bond. Two limitations commonly recognized are 1) concerned governments have to ask for help before ECB starts to buy their government bonds; 2) German central bank does not quite agree with the ECB actions.
Under the current ECB laws, ECB is allowed to buy 1) only government bond, 2) only on limited amount basis, 3) only on short term basis, and 4) only under extraordinary conditions. I am not sure how the new potential policy walks around the restriction of “limited amount”.
If ECB decides to take action to buy unlimited amount of government bond, they have to seek EU approval which will take some times, unless the Ph. D. ECB chairman can figure out a walk-around. I got some feeling that ECB’s announce tomorrow is likely going to disappoint the market and trigger global stock sell off. Indeed the stock market has had a good run in recent months and it might just be looking for a catalyst to “consolidate” a bit.