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A promise by European Central Bank President Mario Draghi to “do whatever it takes to preserve the euro” remains the hot topic of investor debate this morning.Analysts immediately interpreted Draghi’s statements as a commitment to do something big, in particular either return to purchasing Italian and Spanish bonds (known as the SMP program) or offer new, even more potent long-term refinancing operations that would pump new liquidity into the system. Draghi had qualified that he would have to work within the confines of the ECB’s mandate, and such measures have been among the bank’s most potent actions so far.
Nonetheless, there is good reason to doubt that even these measures are forthcoming, or that they would be truly significant if implemented:
- Yesterday, officials at the ECB played down the importance of Draghi’s comments, arguing that he has said similar things before.
- This morning, a spokesman from the German Bundesbank told reporters that it continued to believe that ECB purchases of sovereign bonds would be “problematic,” and that it would prefer that the EFSF—Europe’s current bailout fund—purchase such bonds if necessary. The Bundesbank is thought to provide the ideological and practical leadership for the ECB. The EFSF is influenced by European countries, some of whom say they are opposed to bond purchases, making the prospect of bond purchases much less likely.
- Further, the Bundesbank says it opposes giving the ESM—Europe’s future bailout fund, set to go into effect later this year—a banking licence, according to Bloomberg, refuting comments by ECB Governing Board member Ewald Nowotny earlier this week saying that the ECB would consider such a proposal. In fact, the Bundesbank argued that this was prohibited by European treaties. A banking licence would dramatically increase the ESM’s firepower, which most analysts consider inadequate.
Draghi has indeed made similar comments before, to much less market fanfare. Further, he and other ECB officials have repeatedly expressed regret about their bond-buying program, which they felt was ineffective when they used it last year.
That said, Draghi has played a delicate game of keeping pressure on EU leaders to make more radical changes and also averting financial crisis. However, so far he has delivered on promises to keep the system alive temporarily when it mattered most. If he believes bond-buying or a stronger LTRO will do the trick then his past behaviour suggests that he will take such action—though only when the eurozone reaches the brink.
That said, another round of bond buying or stronger LTROs really aren’t the solution here, and would avert crisis only momentarily. Indeed, EFSF bond purchases would avoid some important investor concerns (in particular, the explicit promise to subordinate private sector debt in the case of default) and would demonstrate EU leaders’ dedication to fixing Europe’s problems.
The real problem remains that this dedication still isn’t there. Even if Draghi delivers on his promises yesterday, monetary policy only goes so far. The problems of the eurozone are structural and deep, and with the pressure off Northern Europe, there’s little incentive for this perspective to change.
Investors are beginning to remember that we’re still a long way from a solution here, no matter what the ECB President says.
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