By Johanna Treeck
FRANKFURT (MNI) – European Central Bank President Mario Draghi on
Thursday outlined his much-awaited plan to save the Eurozone, which may
include sizable government bond market interventions.
But investors do not appear to share his view that this “will be
enough.” Markets’ disappointment over the lack of detail quickly pushed
Spain’s 10-year bonds above 7% and sent the euro to a one-week low.
Draghi announced that the ECB may stand ready to buy government
bonds in secondary markets should a country ask for primary bond market
intervention by the Eurozone bailout fund and stick to the conditions
attached to such support.
While Draghi said that bond buys would primarily address the
shorter end of the curve and promised that the “the concerns of private
investors about seniority will be addressed”, he fell short on detail.
Draghi stressed that this program would be “very different” from
the ECB’s current, but dormant bond buying program, but he did not
commit to setting official ceilings on borrowing costs. Nor did he say
whether bond purchases would still be sterilized or whether private
assets might be targeted as well.
The ECB president acknowledged that his announcement “was not a
decision. It was a guidance. It was a determined guidance for the
committees to design the appropriate modalities for these policy
measures.” He did not offer any precise timeframe for details the
Council has asked committees to work out.
Given the vagueness of the Draghi’s pledges and his reliance on
governments’ to kick-start any ECB interventions, a negative market
reaction is understandable. At the same time, the president sent a clear
message that should not be underestimated.
In an unusual move, Draghi disclosed that there had been only one
opposing vote on the Council to the plan – rather deploying the typical
ECB-speak of an “overwhelming majority”.
The opposing voice, as Draghi divulged, was Bundesbank President
Jens Weidmann. By clearly singling out Weidmann, Draghi highlighted that
he had managed to rally behind him traditional Bundesbank supporters
such as Dutch National Bank’s Klaas Knot and Luxembourg’s Yves Mersch.
This overwhelming support raises the odds that Draghi could push
through radical measures in the months ahead to back up his pledges.
This might go beyond the reactivation of bond market intervention.
The option of granting the Eurozone’s bailout fund access to ECB
liquidity cannot be fully ruled out. While Draghi stressed that “the
present design of the ESM” would prevent it from becoming a counterparty
for ECB refinancing, he twice dodged the question on whether the design
of the ESM could be changed to allow it access.
Draghi said that the central bank’s committees are also reviewing
other policy options, noting that longer-term refinancing operations and
looser collateral rules had been considered in the past.
While Draghi said that the Council had discussed cutting interest
rates this month and did not fully exclude the option of taking the
deposit rate into negative territory, he was careful not to fuel further
market expectations for a rate cut in September.
“We have discussed possible reduction in interest rates but the
Governing Council in its entirety decided that this was not the time,”
he said, cautioning that negative deposit rates are “largely unchartered
waters.”
Still, by highlighting downside risks to growth and inflation due
to market tensions and heightened uncertainty, Draghi left the door open
for a further rate cut, possibly as soon as next month.
Should these downside risks continue to materialize even after
interest rate leeway has been exhausted, the ECB could still embark on
quantitative easing in the face of deflationary pressure.
Today’s Council decisions suggest the Bundesbank alone will not be
able to stop Draghi.
–Frankfurt newsroom +49 69 72 01 42; Email: jtreeck@marketnews.com
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