Mario Draghi has said that his bond-buying program will be unlimited in principle, but the shop will temporarily close every quarter. The European Central Bank has said that it will hold fire while recipient countries – first of all Spain, maybe Ireland and Portugal – are under the scrutiny of the troika, expected to take two weeks or longer. Critics fear it may make interventions less effective, or boost volatility. But the concerns are overblown.
Some fear that this stop-and-go mechanism will damage the overall effect of the purchase program, dubbed "outright monetary transactions" (OMT). There could be some drawbacks. Markets may stay on tenterhooks during reviews, and yields may rise. Investors may sell when the review period draws near, for fear of losses. Some may try to make a quick buck by buying at the end of a review, and selling just before it begins. Volatility may scare off some investors from buying peripheral government and corporate bonds, and encourage other players to launch speculative attacks.
Yet despite the possible drawbacks, periodic reviews are a sensible idea. For one, they reinforce the notion that countries maintain market access to qualify for purchases. That should help make bond-buying more palatable in northern Europe. Second, it means that the ECB's threat to withdraw purchases if countries flinch on their reform effort is more credible. Stopping purchases will become routine, rather than looking like the nuclear option that would trigger chaos. And it will naturally protect the ECB's balance sheet. The ECB won't be buying vast quantities from investors during periods of uncertainty, so its peripheral exposure will be lower, making it less beholden to governments. The more credible the ECB's threat to withdraw is, the more hesitant governments will be to test its resolve.
While the review process may dampen the "shock and awe" of the OMT, it's not a given that they will lead to greater volatility. The ECB has already managed to bring down spreads since early August, merely through the threat of bond-buying. The key question will be not the mechanics of bond-buying, but the credibility of the reform and fiscal packages that must come with it. The less realistic the programs are, the more the market will fret about the reviews, and the less effective the purchases will be.