ECB walks thin line with a layered message on bond-buying revival in Frankfurt
ANALYSIS:Draghi tightened euro zone suspense with talk of a return to bond markets – but not yet and not as before
WILL HE or won’t he? Analysts, journalists and politicians had a week to chew over a promise from European Central Bank president Mario Draghi in London to do “whatever it takes” within the bank’s mandate to stabilise the euro.
“And believe me, it will be enough,” he added for emphasis.
Analysts assumed the ECB president was hinting at a looming revival of bond-buying to cut borrowing costs for crisis-hit Spain and Italy. Spreads eased as markets watched and waited.
Arriving for his press conference after yesterday’s governing council meeting, Draghi was aware expectations were high. The ECB was, he conceded to journalists, “entering unchartered waters”.
Then he showed his hand: the ECB ship was mulling a return to bond markets, just not yet and not as in the past. The bank president reminded his audience in Frankfurt, and around the world, that his job was to manage the euro zone’s currency, not anyone else’s expectations.
The ECB, he said, “doesn’t act under terror but under a normal, cool analysis of the facts”.
While the facts are clear – Spain and Italy’s unsustainable borrowing costs as proof of the widening euro zone crisis – how to address these facts has left Draghi walking a high wire.
On the one hand, he had to show Frankfurt takes seriously what he called “malfunctioning markets” and an “ominous” rise in some sovereign debt.
On the other hand, a simple reactivation of bond-buying would divide the ECB governing council further and risk damaging the bank’s long-term credibility.
And so he stalled, presenting three messages.
To the markets: the ECB will take its time to come up with a new instrument for bond-buying on secondary markets that “falls squarely within our mandate” and does not breach the ban on state monetary financing. Any such instrument, he said, will be large enough to achieve its main aim – lower borrowing rates – while taking into account concerns of private investors over their own senior creditor status. The timing of the new instrument’s activation is unclear, but it is likely to be used to buy shorter-term bonds to allay fears of northern euro zone members of being burdened with southern European debt for years.
His second message, to crisis-hit countries like Spain and Italy, was loud and clear: if you want us to help drive down your interest rates, apply for a bailout.