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Thursday, August 02, 2012

Super Mario lets the markets (and maybe not just them) down - for now

Italian Prime Minister Mario Monti and his Spanish counterpart Mariano Rajoy would have done well not to choke on their working lunch in Madrid while listening to ECB President Mario Draghi's press conference. In fact, in spite of last week's remarks that the ECB would do "whatever it takes" to save the euro (indeed, without overstepping its mandate), Draghi has today effectively said that the ECB is not going to do anything at all - at least for the moment.

As usual, some 45 minutes ahead of the start of Draghi's press conference, the decision on interest rates was made public and...nothing. They were all left unchanged. But interest rates were the side-show today, after all. Everyone was expecting an announcement on the purchases of eurozone debt on the secondary markets. And this is what Draghi told the press in his opening remarks,
[Eurozone] governments must stand ready to activate the EFSF/ESM in the bond market when exceptional financial market circumstances and risks to financial stability exist – with strict and effective conditionality in line with the established guidelines. The adherence of governments to their commitments and the fulfilment by the EFSF/ESM of their role are necessary conditions. 
 And then,
The [ECB's] Governing Council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective. In this context, the concerns of private investors about seniority will be addressed. Furthermore, the Governing Council may consider undertaking further non-standard monetary policy measures according to what is required to repair monetary policy transmission. Over the coming weeks, we will design the appropriate modalities for such policy measures.
Which, in practice, means:
  • If Spain (or Italy) believe they need help to bring down their borrowing costs, they should tap the eurozone's bailout funds and accept the conditions attached to an EFSF/ESM bond-buying programme - rather than just waiting for the ECB to intervene;
  • The ECB may consider buying bonds in coordination with the eurozone's rescue funds, if and when these have already been triggered following a request by a eurozone country. However, as Draghi stressed, the EFSF buying bonds is a "necessary", but not in itself a "sufficient" condition for the ECB to resume its purchases;
  • On a more positive note, though, Draghi left open the question whether potential ECB bond purchases would, in future, be limited or unlimited. 
Not quite what Madrid and Rome were hoping for. Interestingly, Draghi also said that the very cautious outcomes of today's meeting - which the ECB President himself described as mere "guidance", and not "decisions" - had failed to obtain unanimity within the ECB's Governing Council, as one member (Bundesbank Chief Jens Weidmann anyone?) had expressed reservations.

Needless to say, the impact of Draghi's words on the markets has been immediate, and huge. Spain's stock markets index, Ibex, went down by almost 5% while the press conference was still under way, while Italy's FTSE Mib index has gone down by 3.4%.

But most importantly, the interest rate on Spain's ten-year bonds is now again worryingly close to 7% - a level widely seen as unsustainable. Monti and Rajoy are due to hold a joint press conference shortly, we will keep you up to date on our Twitter feed @OpenEurope.


Rik said...

First of all the 'only conditional buying' was leaked. Eg WOL this morning.

Btw the same source mentioned 6 or 7 (if I am not mistaken, but certainly not 1) against: 2 Germans, Dutch, Finnish and Let at least (other one(s) probably Slovakian and/or Lux).
Furthermore difficult to see how one of the Germans as well as the Dutch and Finnish guy could have approved. So 1 only looks rather weird.

Well as expected it was Draghi on a one man mission (and he clearly isnot Rambo, no knife you could have seen it directly and more important no bazooka or RPG (very popular these days by rebels with or without a cause)). And the Germans never could let him get away with that.
And clearly didnot.

Makes approving rescues in future more difficult. As all that has to be approved will carry this as extra weight with it.

As said earlier the 'transmission' reason looks bogus. Seen the demand for a rescue request and ESM/EFSF action. That has nothing to do with transmission, simply purely undiluted state financing.
Market reaction bit weird but expected. They had talked this up without any foundation. Not given notice to the fact that it was likely a one man show etc. Simply wishful thinking.
As usual back to earth in a couple days, like so many times before. Apparently they never learn.

Anyway, with Greece coming up a rescue of Spain and very likely Italy as well, let's hope your Dave is not too busy with the Olympics and keeps an eye on the situation when it is so far that the Treaty anyway has to be renegged. Could not be too far from now. Looks the endgame. The South is moving to desperate measures so likely it will come down to the German people deciding if they want to transfer say close to 100 Bn a year down South for the foreseeable future or call it a day.
The German Constitutional Court might also have something to say. As this has made one thing very clear is that Germany can be forced into solutions it doesnot want and that certainly circumvent the budget right of its parliament. Apparently the Euro-thing is set up this way that via the backdoor not only the German government might circumvent the budgetright but also a combination of other EZ countries or an undemocratic institution like the ECB.

End of this act, curtains down, next one to start not to far from now. Probably a summit, the mother of all summits type, we havenot had on this week.

christina Speight said...

Draghi has completely loused this up and destroyed any trust the markets might have had in him. Having promised the earth he had the nerve to offer absolutely nothing - not even his resignation.

They all claim that the the euro will survive and it's irreversible and then bring ots demise even nearer!

Anonymous said...

Why do central banks refer to their lack of accountability as "independence" to create and operate monetary policy?

They are NOT independent.

They do not have penny that does't come from the respective taxpayers in the region/nation that they are "central" banks to.

What they ar really saying when they cite "independence," is their self-appointed license to steal taxpayer money for their private owners.

Why do outfits such as Open Europe publicly go along with/not call them on their criminal claims of "independence"?