Draghi will do what it takes (give or take)

Mario Draghi Markets were unimpressed by Mr Draghi's comments

Financial markets got some clarity from the European Central Bank (ECB) president today on what the bank was prepared to do to help troubled eurozone economies. There was also some genuine news in what Mario Draghi said on the issue of seniority.

But - as Mr Draghi said himself - there are plenty of details still to be filled in. As I suggested in my blog on Saturday, he's going to make sure that governments get their act together first.

The ECB president confirmed that the bank was willing to buy government bonds in the secondary market, but there were three key conditions.

First, the country concerned must have already applied for support from the European rescue funds - the European Financial Stability Facility (EFSF) and/or the European Stability Mechanism (ESM).

Second, that support would need to have strings attached - conditionality. In other words, the beneficiary government would need to have made appropriate promises on fiscal policy and structural reforms.

And third, the ECB governing council would itself have to decide that central bank bond purchases are also needed. Here, Mr Draghi was very clear that "monetary policy remains independent": conditions one and two are necessary for the ECB to act, but there's no guarantee that it will.

Will this be enough? The early response of financial market analysts seems to be that it will not be: the head of Pimco, Bill Gross, for example has already said the market will be disappointed.

They will be especially disappointed, probably, by the lack of detail on how, exactly, the ECB plans to go about any bond purchases - and the lack of a time frame.

The ECB president said the relevant committees would need to work on the "modalities" of any ECB intervention over the next few weeks.

Talk of committees makes investors' hearts sink. It sounds bureaucratic and slow, when the one thing the ECB is supposed to have over governments is that it can act quickly, without all those bloomin' meetings.

He also said that one member of the governing council had objected to today's statement. The assumption is that it was the head of the Bundesbank.

But, as Mr Draghi himself said, at the moment there is no country that has applied to the EFSF or ESM - so even if the ECB were ready to act, "there would be no case for doing so".

And in some areas, the lack of detail was interesting in its own right.

Crucially, Mr Draghi explicitly left open whether the new bond purchases would be sterilised - i.e. whether the ECB would sell other assets, to leave the total money supply unchanged.

To translate: if the bond purchases are not sterilised, then they would come under the heading of genuine quantitative easing, like the Bank of England and the US Federal Reserve.

This, and the talk of "new modalities" is significant. It means that future bond purchases - if they happen - will not involve the Securities Markets Programme (SMP). They will be qualitatively different, and perhaps quantitatively different as well. Mr Draghi said they would involve short-dated debt - not the longer term government bonds included in the SMP. And they will be "of a size adequate to reach its objective". That could be a lot bigger than the "limited and finite" purchases we saw under the SMP.

My reading of all this is that Mr Draghi wants to bring the bond purchasing programme back into the fold. He wants it to form a coherent part of the ECB's monetary policy machinery, rather than an awkward add-on, like the SMP.

That is important for the future - even if the "modalities" are vague, and the conditionality for governments is a necessary first step.

It is also important that the ECB has promised to address investors' concerns about seniority (for an explanation of which, see my Saturday blog). It's news, even if it is completely unclear, right now, how the ECB could take a hit on its future bond holdings when it had previously suggested this was not legally possible.

The bottom line is that the ECB has not offered as much as many in the markets had hoped for. But Mr Draghi has laid down some important markers for the future which should not be ignored.

Posterity might judge the ECB's performance more kindly than investors do today. Then again, for most in the financial markets, posterity is not exactly a big concern.

Update 1850: The markets are indeed deeply disappointed by what the ECB has done.

The euro is down and the interest rate on Spanish and Italian 10-year government bonds have each risen by around a third of a percentage point since Mr Draghi first opened his mouth.

Dario Perkins, at Lombard Street Research, says the ECB "spectacularly under-delivered".

Marchel Alexandrovich, at Jefferies, is even more damning. He thinks the insistence on a country applying for formal support sends a dangerous signal to the markets.

"What Draghi has basically indicated is that the problem in the bond markets has to get considerably worse before the ECB steps in to help.

"This is an incredible turn of events. Forget pre-emptive action, instead Draghi had just presented a clear vision of how the crisis is now set to intensify.

"Draghi is playing a very dangerous game here. Prior to today, the markets hoped a bailout would not be necessary, now they have been told it is inevitable!"

Others are not quite so depressed about Mr Draghi's performance. That might be because they had lower expectations to begin with. But he has certainly hit the ball back into the government side of the court.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 20.

    @19 Shipwright
    No need to look that far when there is a good example already in te EU.

  • rate this

    Comment number 19.

    It's pointless blaming greedy bankers etc for the problems of the Euro. The banking crash merely showed up the weakness of the currency (so called). If the EU want the Euro to work look across the Atlantic at the USA and copy the system. One Country, one currency. Otherwise forget it.

  • rate this

    Comment number 18.

    Too late. They have already done so.

    That probably means that the dodgy Euro debt is held by equally dodgy European & US banks ...

    ... and we are left keeping our cash in leaky buckets.

    UK govt needs to get a move on. Cuts alone are not enough; fiscal reform, savings & pension reform, getting & holding inflation at negative nos. are all imperative.

  • rate this

    Comment number 17.

    What we are witnessing is the economic equivalent of the slow bicycle race.
    Bernanke and Geithner are beholden to Wall St, and make solemn statements regularly telling the US it is the fault of the Eurozone.
    King and the BOE sit in perpetual paralysis telling the British it is the fault of the Eurozone.
    The ECB says it is Actionman reinvented, and does nothing.
    Who will fall off the bicycle first?

  • rate this

    Comment number 16.

    Expecting the ECB to act decisively was, for the markets, a triumph of hope over experience.

  • rate this

    Comment number 15.

    At what stage of the global financial farce do the the players realise that no one is ever going to get back any of the money they have lent?
    USA, UK, Eurozone all pretending not to be broke and up to their necks in debt but, all in the same situation, debt levels that can barely be serviced never mind paid back. Austerity measures? bailing out the Titanic with a thimble more like it.

  • rate this

    Comment number 14.

    The ECB have a Eurozone inflation target of just below 2% BUT their forcast for next year and the year after is 1.8%. Is this the opportunity for the ECB to inject capital into the system to meet their inflation target.? Surely the Bundersbank cannot object to the ECB doing what they are mandated to do? And if the ECB overshoot their target for a couple of years, well it wont be the first time.

  • rate this

    Comment number 13.

    wrong....the rich will convert and move their assets to safe havens because they have the information and they can. Time to follow their lead?

  • rate this

    Comment number 12.

    The greedy bankers have got us here.
    All because they cannot work.
    ~ ~ ~
    Dont see why I should have to defend greedy bankers.

    But for the sake of balance I wouold point out that behind it all (and them) were the greedy lawyers.



  • rate this

    Comment number 11.

    Two things need to happen. Either the middle & working class accept a lower standard of living on par with the slave driven asian economy, or the rich who have milked the system dry give some back.

    The latter won't happen, thet are pathalogically programmed for greed. The former wont happen without riots and social breakdown.

    Result...we will end up with both outcomes and everyone loses.

  • rate this

    Comment number 10.

    Quoting Reuters


    “Council members who have voted with Weidmann in the past, such as the Dutch and Luxembourg central bank chief and the German member of the ECB's executive board, did not side with him this time, suggesting the Bundesbank chief was isolated.“


    Bye Weidmann bye.

  • rate this

    Comment number 9.

    Quoting Reuters

    Draghi: "It's clear and it's known that (Germany's) Bundesbank have their reservations about the programme of buying bonds. The idea is we now have the guidance, the monetary policy committee, the risk committee and the markets committee will work on this guidance and then (we) will take a final decision and the votes will be counted."


    Bye Weidmann bye.

  • rate this

    Comment number 8.

    The system used to be connected top to bottom with positive feedback. Now their is a massive disconnect between the rich and the rest with built in negative feedback and a locked system that is incapable of change. Can one man fix it? Of course not. This requires a step change in perspective which at the moment is sadly lacking in the powers that be. There is (sadly) worse to come.

  • rate this

    Comment number 7.

    And the much vaunted ECB statement was

    "Watch this space"

    And the markets reaction

    "Look at that Black Hole - and its headed this way"

  • rate this

    Comment number 6.

    Until the' markets' are tamed through fair means or foul the erratic ride will continue so that the money men can make their short term gains on the back of long term hardship for many. Ban short selling equity, repos, stock loans and the disaster that was securitization. Give the bond holders a haircut and string up the hedgefunds... then you might get somewhere.

  • rate this

    Comment number 5.

    Looks like the race to the bottom is coming to its conclusion.

    Shortly central banks will allow such a free for all that their currencies will all fall in line with the new reserve currency.

    The bottom everyone is yearning for is the standard of living of the Chinese peasant.

    The renminbi will be the new reserve currency.

    The greedy bankers have got us here.
    All because they cannot work.

  • rate this

    Comment number 4.

    Why exactly would the Bundesbank and Germany in general be more receptive to Money Printing by the ECB now than before?

    After all, last time the ECB made (sterilised) buys of Italian bonds against the promise of reforms, the Italian Government turned around and "postponed" those reforms.

    Things are quickly getting to the point where the optimal move for Germany becomes leaving the Euro.

  • rate this

    Comment number 3.

    Waiting for Godot--


  • rate this

    Comment number 2.

    More words, no action, continued uncertaintity - but more profits to be made during wild market fluctuations - meanwhile people in Greece and Spain are eating out of dustbins.

    Self serving political empire - quite quite disgusting

  • rate this

    Comment number 1.

    Perhaps it is time for regions to live within their means.

    For ever borrowing is not sustainable, hopefully the Finns and Germans will put EZ on the right road.


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