Mario Draghi’s fighting words fail to stop markets falling
European Central Bank president Mario Draghi has followed up on his comments the bank would “do whatever it takes” to rescue the euro by suggesting a bond buying program to relieve pressure on the bloc’s struggling governments.
But he has largely failed to convince markets, which rallied after his initial robust comments last month, but fell today as Draghi (pictured) addressed the press.
He had to acknowledge Berlin’s Bundesbank has reservations about his plans, which will be revelaed in coming weeks.
By 1600 CET today, Germany’s Dax index was down 1.4%, while France’s Cac 40 was 1.5% lower.
Bill Gross, head of fixed income giant Pimco, told Bloomberg Television: “It is less powerful than we had hoped for. To this point, the ECB and other policy makers have been all about promises and inviting others to take the first step and it appears that we are seeing much of the same thing this morning.
“Draghi is saying Spain and Italy should take the first step, make a request, and then something might happen. He is not exactly sure how much he would buy or the ECB would buy, whether it would be sterilized or unsterilized. This is a game of promises, a kick the can type of moment and yes, we’re disappointed.”
Stephanie Kretz, strategist at Lombard Odier, said: “Monetary policy alone cannot solve the underlying structural debt issues underpinning this crisis. Draghi created unrealistic expectations among investors but has failed to announce concrete measures significant enough to reassure investors, given the restraining scope of the ECB’s mandate.
“One unintended consequence might be that next time the ECB wants to calm markets, his words won’t carry the same effect.”
Draghi had, at least, tried, in saying today “risk premia need to be addressed in a fundamental manner”.
The ECB kept the main interest rate used across the Eurozone unchanged today at 0.75%.
Azad Zangana, European economist at Schroders, said Draghi had “built up market expectations to near euphoric levels, [but] failed to deliver the policy to back up his promises of ‘doing whatever it takes to save the Euro’.”
Zangana said, on first reading of the comments today, Draghi seemed to be announcing the start of quantitative easing, “closer inspection of his opening statement and follow-up comments show that the ECB is merely considering the idea of creating a framework that could allow such action.”
Zangana expressed disappointment Draghi would not comment on the potential size of any bond purchases, nor the timing, “suggesting that the Council may still be some way from agreeing how best to proceed, if at all.
“Oddly, Draghi did state that any ECB purchases would be done using short dated government bonds, hinting that the ECB would avoid buying longer dated debt. This suggests a sort of reverse operation twist, whereby the ECB’s purchases would only help governments raise finances in the short-term, ensuring that they are kept on a tight leash with higher long-term interest rates. Indeed, Draghi stressed the need to deal with the moral hazard problem of supporting governments in such a way.
“He stated that any intervention would only be done in the secondary market, and only after governments are meeting the conditionality set by European leaders and the IMF.