Thursday, August 2, 2012

Draghi’s Inaction Is a Blow to Traders and Obama

by Paula Dwyer


August 2, 2012

He talked the talk but, well, you know the rest. Mario Draghi said today that he may use the European Central Bank's balance sheet to resume buying government bonds in the open market to ease the euro area's debt crisis.

The high yields that countries like Spain and Italy must pay to borrow in capital markets are “unacceptable and ... need to be addressed in a fundamental manner,” Draghi, the ECB president, said at a press conference in Frankfurt. “The euro is irreversible,” he added, while also urging euro-area countries to begin using a rescue fund they control to purchase sovereign bonds as well.

It's what Draghi didn't say that disappointed traders, investors and surely President Barack Obama, whose reelection may rest on Europe's ability to stop its recessionary slide. Draghi didn't say the rescue fund should get a banking license so that it could borrow from the ECB and leverage its firepower. He didn't present a plan spelling out how coordinated bond intervention would work. He didn't lower the benchmark interest rate, now 0.75 percent. He didn't address bond-market fears that the central bank would demand seniority to other investors on any bonds it purchases. He didn't even promise to intervene in sovereign debt markets -- he said only that he may. Add it all up, and Draghi failed to deliver on last week's pledge to do “whatever it takes” to save the battered euro.


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