Tuesday, July 31, 2012

Time for something different from the ECB

by Ralph Atkins

Financial Times

July 31, 2012

Like a whodunit writer, Mario Draghi is good at building suspense and a “yikes, how will he solve this one?” sensation. In December, when the eurozone last faced meltdown, the European Central Bank president wrongfooted markets by providing unlimited three-year loans to the eurozone financial system: the pundits had expected a revamped government bond-buying programme.

Eight months later, the uplifting effects of the longer-term refinancing operations, which saw the ECB pump more than €1tn into banks, have faded. Last week, Spanish two-year bond yields at one point climbed above 7 per cent, a euro-era high.

A day later, Mr Draghi gave a strong hint that he was planning another twist in the eurozone debt crisis. “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough,” he told a London conference.

Once again the ECB’s existing bond-buying instrument is unlikely to be his weapon of choice, at least in its current form. After taking over the ECB presidency in November, Mr Draghi concluded that the “securities markets programme” – launched in May 2010 by Jean-Claude Trichet, his predecessor – was seriously flawed. Although the ECB acquired €212bn in crisis-hit eurozone governments’ bonds, investors were far from overawed. Instead, opposition to the programme from Germany’s conservative Bundesbank called into question the ECB’s commitment to bringing down bond yields.


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