Mario Draghi is doing his best to reassure the financial markets that all will be well and the ECB will put its should to the wheel in order to avert a financial crisis, according to Bloomberg
THE EUROZONE FUNDS TRANSFUSION UNIT IN ACTION
European Central Bank President Mario Draghi has gone on the offensive as he seeks a game changer in the battle against the sovereign debt crisis.
Draghi, who sparked a global market rally last week by pledging to do whatever it takes to preserve the euro, is trying to build consensus among governments and central bankers for a plan to ease borrowing costs in Spain and Italy before ECB policy makers convene on Aug. 2. He meets with U.S. Treasury Secretary Timothy Geithner in Frankfurt today and is also attempting to win over Bundesbank President Jens Weidmann, a critic of ECB bond purchases.
Berlin, Paris and Rome have already endorsed Draghi’s approach, echoing his language in saying they will do what’s needed to protect the 17-nation euro. Draghi must now deliver or face a renewed selloff on bond markets, where soaring Spanish and Italian yields have fueled speculation that the monetary union could fall apart.
Draghi “put his personal credibility on the line” and “would not have done so without being confident about his key constituency,” Erik Nielsen, global chief economist at UniCredit Bank AG in London, wrote in a note to clients yesterday. “The ECB under Draghi does not like to mess around in the market, but if it sees a need, it will come with overwhelming force.”
Draghi’s proposal involves Europe’s rescue fund buying government bonds on the primary market, buttressed by ECB purchases on the secondary market to ensure transmission of its record-low interest rates, two central bank officials said July 27 on condition of anonymity. Further ECB rate cuts and long- term loans to banks are also up for discussion, one of the officials said. While Draghi reaffirms ECB’s willingness to buy time, the central bank can’t solve the debt crisis alone, Moody’s Investors Service said today.
The euro fell 0.2 percent to $1.2292 at 12:26 p.m. in Tokyo today. The shared currency gained 1.4 percent in the two days after Draghi’s July 26 pledge to do whatever is necessary, ending the week at $1.2322. Spain’s bond market staged its biggest rally in seven months, sending the 10-year yield down to 6.74 percent from a euro-era record of 7.75 percent reached on July 25.
“We have reached a decisive point,” Jean-Claude Juncker, who heads the group of euro-area finance ministers, told Germany’s Sueddeutsche Zeitung in an interview. “The world is talking about whether there will still be a euro zone in the next few months. We have to make abundantly clear with all available resources that we’re completely determined to guarantee the financial stability of the currency.”
Juncker confirmed that the temporary bailout fund, the European Financial Stability Facility, is working with the ECB on a plan to reduce borrowing costs, adding “we have no time to lose,” the newspaper reported yesterday.
The biggest hurdle may be the Bundesbank, which last week reiterated its opposition to ECB bond buying, saying it blurs the line between monetary and fiscal policy. The ECB shelved its bond-purchase program in March. Draghi has scheduled talks with Weidmann, the two central bank officials said on July 27.
A Bundesbank spokesman declined to say yesterday whether a discussion has taken place. An ECB spokeswoman reiterated that it’s not unusual for Draghi to speak with council members and declined to comment further.
“I’m skeptical that Weidmann would be easily convinced,” said Clemens Fuest, an Oxford University economist who sits on an advisory panel for the German finance ministry. “I would certainly think that Draghi will try to reach some consensus here rather than go against Weidmann.”
While the ECB’s commitment to preserve the euro is necessary, it’s not a sufficient by itself to resolve the sovereign crisis, Moody’s said in its Credit Outlook today.
“These conflicting remarks illustrate the diverging views that have dogged the euro area authorities’ policy development and significantly contributed to the depth of the crisis,” Moody’s said, citing Bundesbank’s opposition to bond purchases.
Europe’s political landscape has nevertheless changed since French President Francois Hollande defeated predecessor Nicolas Sarkozy in May, introducing a more confrontational line with Germany. Draghi has also worked with Juncker, European Commission President Jose Manuel Barroso and European Union President Herman Van Rompuy in drafting a blueprint for the future of the currency union.
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