Mario Draghi outlined plans on Thursdayfor the European Central Bank and the eurozone’s two bailout funds to go on a bond-buying spree to cut the rocketing costs of borrowing for Spain and Italy, but ran into stiff German resistance to his campaign “to do anything” to save the euro.
In the most keenly awaited performance of his eight months as head of the Frankfurt-based ECB, Draghi reiterated last week’s dramatic statements in London that there was no going back on the single currency.
“It’s pointless to bet against the euro. It’s pointless to go short on the euro,” he said. “It stays. It stays.”
But with financial markets straining to decode the specifics of the Draghi policy amid high expectations he would unveil a “big bazooka” or “unlimited firepower” to defend the euro, the ECB president appeared to play for time, announcing that the “modalities” of the new approach would be studied over the coming weeks.
He made it plain that the 23-strong ECB governing council took no decision on wading into the bond markets on Thursday, but simply issued guidelines that might result in such action by next month.
“The 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,” said Draghi.
The ambiguity allowed him to keep his options open on whether or not to revive a dormant ECB policy of intervention in the secondary markets to buy up government bonds.
The immediate response in the markets was one of disappointment with the euro falling 0.3% against the dollar, Spain’s borrowing costs soaring to 7.18% from 6.724% hours earlier, and Wall Street’s leading Dow Jones industrial average down 150 points, or 1.1%. European stock markets closed down between 0.8% in London and 5.5% in Madrid.
As the central bankers and eurozone political leaders headed for their summer villas and country estates, hoping to put off further deliberations until September, it looked like another hot August was looming for the eurozone.
Although the ECB took no formal decisions, Draghi made clear that Germany, in the form of the mighty Bundesbank, dissented from even the prospect of any ECB bond-buying. It was the only one of the 23 parties in the governing council to do so.
That signalled both how isolated Germany finds itself, but also the problem that Draghi faces if he is determined to push through a more muscular, interventionist campaign by the ECB.
In a sign that he intends to fight for bond-buying, though, Draghi said he would address the concerns of private sector bond-holders about “seniority”, meaning he could re-negotiate the ECB’s privileges in escaping losses on debt holdings while private investors suffer in the event of debt restructuring.
He demanded that the 17 governments of the eurozone, through their two bailout funds, the European Financial Stability Facility and the European Stability Mechanism (still to come into operation), start buying the bonds of struggling countries before the ECB would.
“Governments must stand ready to activate the ESM/EFSF in the bond market when exceptional financial market circumstances and risks to financial stability exist,” he said. This was a necessary if not sufficient condition for the ECB to then act in the markets.
But the bond-buying could only take place if hard-pressed countries first requested help and then were subjected to the kind of intrusive outside scrutiny and tough austerity terms that have accompanied previous bailouts.
Mario Monti, the Italian prime minister, has been touring the eurozone this week demanding that the currency bloc act to cut his borrowing costs, but is deeply reluctant to request a bailout.
Draghi said there could be no such help for Italy unless it asked for aid and accepted the conditions that would go with a bailout.
Spain and Italy are the two key candidates for the bond market interventions suggested by Draghi. Monti was in Madrid to see his Spanish counterpart, Mariano Rajoy. Both prime ministers declined to say whether they would ask for eurozone bailout funds, while arguing that Draghi’s remarks represented progress in the fight to prevent a euro meltdown.
Behind Draghi’s campaign to shift towards more persuasive and interventionist action to end the euro crisis, politicial infighting is intensifying. He notched up a points victory by putting the language about ECB and eurozone bond-buying on the formal agenda. But that remains an intention rather than a decision and the policy arguments pitting France, Italy, and Spain against Germany have yet to be resolved.
“It’s clear and it’s known that the Bundesbank have their reservations about the programme of buying bonds,” Draghi admitted. “We now have the guidance, the [ECB] committees will work on this guidance and then [we] will take a final decision and the votes will be counted.”
Draghi quashed growing speculation that one way of settling the crisis and demonstrating resolve to the markets was to give the main eurozone bailout fund a banking licence, meaning that its €500bn resources could be expanded hugely since it would be able to buy government bonds, deposit them as collateral with the ECB and draw on an unlimited supply of liquidity from the central bank to return to the bond markets.
Draghi stressed that, under the rules, the bailout fund did not qualify as an ECB counter-party for refinancing, but that block only applied “currently”, indirectly suggesting that this could be changed.
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