Open Europe Blog

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.

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