The European Central Bank is ready to make purchases of government bonds in league with Europe’s bailout fund, the bank’s president, Mario Draghi, said on Thursday.
But stocks fell after he said it would take several weeks for the central bank to work out how a bond-buying programme would work. The ECB also left its benchmark interest rate unchanged at 0.75 per cent. With the interest rate already at a record low, intervening in the bond market may be a more effective way for the central bank to lower borrowing costs in the troubled Euro zone countries that need it most.
“Once again, we have no commitment to action,” Carl Weinberg, chief economist of High Frequency Economics in Valhalla, New York, said in an email. “Traders and investors who expected immediate action are, and should be, disappointed.”
| PAUSE MODE Central banks across the world dampened market expectations in the last two days by not announcing new stimulus measures at their respective meetings |
| European Central Bank |
|
| Bank of England |
|
| People’s Bank of China |
|
| US Federal Reserve |
|
| Source: Agencies |
In late afternoon trading in Europe, the Euro Stoxx 50, a benchmark of euro zone blue-chip shares, was off nearly 1.5 per cent. In Germany, the DAX was off 1 per cent. The benchmark IBEX 35 in Spain plunged 2.7 per cent. In early trading on Wall Street, the Standard & Poor’s 500-share index and the Dow Jones industrial average were both 0.6 per cent lower; the Nasdaq Composite was flat.
Draghi, who raised market expectations last week when he said the ECB would “do whatever it takes to preserve the euro,” may also have disappointed investors when he characterised his remarks on Thursday on bond buying merely as “guidance,” backed by all 23 members of the ECB governing council except one: Jens Weidmann, president of the Bundesbank, the German central bank.
Dissent by the powerful Bundesbank, which tends to be in tune with German public opinion, could make investors doubt the ECB’s resolve and undercut any attempts to lower borrowing costs for countries including Spain and Italy.
High borrowing costs for some countries are interfering with the ECB’s ability to influence interest rates, Draghi said on Thursday, adding that these are “unacceptable and they need to be addressed in a fundamental manner.”
Initially, Draghi’s statement seemed to fulfill expectations that the ECB was preparing a forceful intervention in bond markets. But Draghi left some key questions open, such as whether the bank would stop treating itself as a preferred creditor and absorb losses on Greek bonds that private investors have had to accept.
Draghi also said that the ECB would only buy bonds if governments kept promises to restructure their economies, and only after the European bailout fund bought bonds first. In addition, a country such as Spain would have to request relief, which none have done yet.
Given European leaders’ record of slow decision making, those conditions may have led investors to doubt whether ECB bond buying would be decisive enough to influence borrowing costs.
Many analysts had warned of a market backlash if the ECB did not deliver a major new initiative Thursday.
The decision comes a day after the US central bank, the Federal Reserve, disappointed many by declining to make any immediate moves to stimulate the economy.
Market pressure had all but compelled Draghi to act, Jacques Cailloux, chief European economist at Nomura, said in a note ahead of the decision. Having raised market expectations, Draghi was “now cornered and will need to push through a policy response to avoid renewed tensions,” Cailloux wrote.
Draghi also faced pressure from outside the Euro zone to act, because of the threat the crisis poses to the world economy.
US President Barack Obama spoke by telephone late Tuesday with Mario Monti, the Italian prime minister, and “reiterated his support for decisive action to resolve the crisis,” the White House said in a statement after the call.
The Euro zone economy has been showing further signs of recession, with data this week pointing to slumps in manufacturing and business sentiment, along with and continued high unemployment.
Meanwhile, Greek leaders have been struggling to find enough budget cuts to satisfy international lenders, qualify for additional aid and remain part of the Euro zone.
The ECB has spent euro 211 billion, or $259 billion, buying government bonds on the open market since 2010, but that has not been enough to lower borrowing costs for Spain and Italy across the long term. If the countries’ borrowing rates are too high, the interest payments could eventually become unbearable and make it impossible for them to service their government debts.
By acting in concert with the bailout fund, the ECB can argue it is not violating a prohibition on using its resources to finance governments.
The European Financial Stability Facility could buy bonds directly from governments, while the ECB would buy bonds on the open market to help further hold down borrowing costs for Spain and Italy.
Still, the ECB decision threatens to open a political divide in the Euro zone. German public opinion remains deeply averse to any plan that would effectively make their country, the Euro zone’s richest, responsible for the debts of others. As a result, Draghi must navigate between market expectations and German fears.
© 2012 The New York Times News Service
