- 02 августа 2012, 17:58
Mario Draghi seeks to reassure over future of euro, but financial markets left disappointed
Mario Draghi pledged that the European Central Bank would buy up the bonds of the weaker members of the 17-nation single currency, as he sought to make good on his pledge to do "whatever it takes" to safeguard the future of monetary union.
The ECB's president said the governing council of the central bank would also consider other exceptional – but non-specified – steps to ease pressures that have led to speculation about a break-up of the euro.
In a press conference following an ECB council meeting, billed as one of the most crucial since the creation of monetary union in 1999, Draghi provided more details on how to bring down bond yields, as promised in a speech in London last week.
He said: "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."
This was seen by markets as a sign that Draghi will reactivate the ECB's Securities Market Programme, under which the bank buys up government bonds from financial institutions.
Private bond holders have voiced fears that a big bond-buying spree by the ECB would potentially leave them suffering bigger losses in the event of any sovereign default, because the Frankfurt-based central bank has insisted in the past that it will not take a "haircut" on its bond holdings. Draghi said these concerns would be addressed.
In addition, he said: "The governing council may consider undertaking further non-standard monetary policy measures according to what is required to repair monetary policy transmission."
The ECB will also think about providing fresh cheap funds for European banks, following two injections of liquidity through long-term refinancing operations in December 2011 and February 2012. Relaxation of collateral rules for banks will be discussed next month.
Financial markets were left confused by Draghi's comments. An initial rally in the euro against the US dollar quickly petered out, while in the bond markets yields of Spanish and Italian bonds moved higher after falling initially. Shares also moved erratically – having been about 45 points higher as the ECB president started speaking, the FTSE 100 later reversed that to show a 50-point loss on the day, a fall of almost 1%, as analysts were at odds about whether the ECB president would be able convert his tough talk into action.
Jason Gaywood, director at currency specialist HiFX, said: "Markets were disappointed today as the ECB fell short of taking action to rescue Spain. Instead, Mario Draghi merely stated that the euro is irreversible."
Jeremy Cook, chief economist at foreign exchange company, World First, said: "The most important thing about the ECB press conference is the statement about the fact that they may undertake outright open market operations, ie buying of peripheral debt to reduce yield pressures, which were described as unacceptable.
"This is almost what the markets wanted, but the emphasis is on the fact that things 'might happen'. The fact that they will have to discuss 'modalities' and 'seniority' suggests that they know what they want to do, but they're really not sure how to do it."
But Nick Parsons, head of strategy at National Australia Bank, said: "I think he means it. He has said he will intervene in unlimited size.
"The bazooka has yet to be fired, but Draghi hinted at its design this afternoon."