The ECB is trying to make the markets do its bidding. In essence, it is trying to copy Federal Reserve tactics. That is, tell the markets what you want to do and how far you want to go and hope the market will front run you.
However, in order for this tactic to work, you need to have credibility. Credibility is something that the ECB does not have.
Yes the leaks, rumors and expectations that the ECB will be forced to do something, has lowered yields a bit on Spanish and Italian debt over the past several weeks. However, a bit lower means that the market does not believe the ECB. If the markets believed full-heartedly that the ECB will bring Spanish and Italian yields low enough to really make a difference, then I think we would have seen massive buying in the debt markets.
And talking about credibility, how does the ECB expect to sterilize these operations? Also, why would the ECB want to sterilize these operations in the first place? I mean, isn't the whole QE thing about unsterilized operations? Also, I find it almost impossible to believe they will sterilize these operations offering the markets a 0.10% yield.
Before the Greek PSI, the ECB bought about 50 billion euros of Greek bonds. The only thing it accomplished was to temporarily stop the fall of Greek bonds and to give a break to desperate bond investors, who found a buyer and dumped Greek debt on the ECB.
I think the same will happen this time around. The ECB will start buying, but they will be the only buyers. And assuming they make the mistake and announce a rate cap, then the market will dump on their doorstep all the Spanish and Italian bonds the ECB is willing to purchase. And once that's done folks, look out below, for I think there will be no other backstop in Europe to prevent Italian and Spanish bonds from seeing new lows, as did Greek bonds.
The problems of Italy, Spain and many other countries will not be solved with bond purchases. Yes it might be a short term solution (more for the markets than anyone else), but over the longer term, nothing will change, except maybe for the fact that the market was able to dump Spanish and Italian holdings at a good price.
There are many things Europe needs to do to solve this debt crisis. Among others is to develop an insurance deposit scheme similar to the FDIC. Having a single European bond would also be nice. But yield manipulation will not work, for Europe above all needs political unity, institution unity and lastly, many countries need debt relief.
The market of course knows this and is laughing all the way to the bank. The markets will exploit to the best of their ability policies that make no sense and politicians who think they can manipulate the markets.
So I don't think the markets will do the ECB's bidding. In order for this to happen, the markets have to be persuaded for a long term solution. Speaking for myself, I don't see one yet.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.