Last week ECB boss Mario Draghi vowed to do “whatever it takes” to keep the euro together, sending markets soaring.
But yesterday he failed to deliver on the pledge, telling governments that they had to act first before he will even consider buying their bonds.
He also poured cold water on the idea that the European Stability Mechanism (ESM) could be given a banking licence – which would boost its firepower by allowing it access to ECB funds – arguing such a move would be illegal with the ESM’s current structure.
Hopes were high that the ECB would announce another round of bond buying in the secondary markets, bringing down borrowing costs for struggling Spain and Italy, giving their governments more breathing space to implement the economic and budgetary reforms which Draghi says are so vital to the economies’ long-term success.
But instead he said the governments have to act first and seek help from the bailout funds.
“Governments must stand ready to activate the EFSF/ESM in the bond market when exceptional financial market circumstances and risks to financial stability exist,” said Draghi.
Only then may the governing council choose to “undertake outright open market operations of a size adequate to reach its objective.”
And in any case Draghi revealed the ECB has not yet decided on how any bond purchases would work. He expects reports to be published in the coming weeks explaining exactly how senior the ECB’s credit will be, and so how far down the pecking order private creditors will be.
However, if countries do act and the ECB joins in, economists said the two actions could be a powerful short-term aid to governments.
“Draghi stated the ECB will not necessarily sterilise future purchases by taking offsetting deposits from the region’s commercial banks,” said Capital Economics’ Jennifer McKeown.
“This would mean that the ECB was conducting full-blown quantitative easing.”
Nonetheless, analysts were disappointed that no real actions were announced yesterday, despite the positive speech last week.
“Draghi spectacularly under-delivered. The ECB ‘may’ do something, but the scheme he has in mind seems even more limited than its failed Securities Market Programme,” said Lombard Street Research’s Dario Perkins. “There is nothing here to suggest investors should abandon their fear of holding Mediterranean debt.”
The Spanish government’s 10-year borrowing costs jumped 0.433 percentage points to 7.165 per cent, while the Italian government’s shot up 0.396 percentage points to 6.327 per cent.
Stocks plummeted, with the Euro Stoxx 50 falling three per cent, the French CAC 40 dropping 2.68 per cent and the FTSE 100 falling 0.88 per cent.