Today the ECB left interest rates unchanged and hinted at future bond purchases but also warned “Governments must stand ready to activate the EFSF/ESM”.
The Financial Times has details in Draghi prepares for fresh bond buying
Draghi admitted to Bundesbank reservations about bond-buying and made clear that governments would first have to apply to the eurozone’s rescue funds – the European Financial Stability Facility and the European Stability Mechanism – and accept “strict and effective conditionality”.
“First of all governments need to go to the EFSF; the ECB cannot replace governments.”
Mr Draghi also said the ECB “may consider” further non-standard measures but declined to elaborate.
Mr Dragi indicated there would be no immediate intervention. “In the coming weeks we will design the appropriate modalities for such policy measures,” he said.”
He said that all members of the ECB’s governing council had endorsed the framework of measures “with one exception.”
“It’s clear and it’s known that Mr Weidmann and the Bundesbank have their reservations about the programme of buying bonds,” he added.
He also ruled out giving the eurozone’s rescue funds a banking licence, a move that could vastly increase their firepower but which is firmly opposed by the Germany and other core eurozone members. “The current design of the ESM does not allow it to be recognised as a suitable counterparty.
Text of Draghi’s Press Conference
I cannot find some of the direct quotes the Financial Times mentions, but the gist of the Financial Times’ translation seems accurate.
Here are some snips from ECB President Draghi Statement to Press Conference
Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged, following the decrease of 25 basis points in July. As we said a month ago, inflation should decline further in the course of 2012 and be below 2% again in 2013.
Exceptionally high risk premia are observed in government bond prices in several countries and financial fragmentation hinders the effective working of monetary policy. Risk premia that are related to fears of the reversibility of the euro are unacceptable, and they need to be addressed in a fundamental manner. The euro is irreversible.
In order to create the fundamental conditions for such risk premia to disappear, policy-makers in the euro area need to push ahead with fiscal consolidation, structural reform and European institution-building with great determination. As implementation takes time and financial markets often only adjust once success becomes clearly visible, 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. The 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.
Draghi’s statements sent the Spain 10-year bond yield soaring back above 7%, currently 7.13, up 40 basis points.
Yield on Italy’s 10-year government bond is up 30 basis points to 6.23%.
Clearly the market was expecting far more after Draghi’s statements last week that the ECB would do “whatever it takes”.
Mike “Mish” Shedlock
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