Thursday, August 2, 2012

ECB Disappoints Investors with No Euro Action

August 2, 2012

Investors had been hoping for a clear signal from Mario Draghi that the European Central Bank was ready to take action to prop up the euro. But in his press conference following the ECB monthly meeting on Thursday, all he offered was more promises. Markets plunged as a result.

Anticipation ahead of Thursday's European Central Bank (ECB) meeting was high. Last week, ECB head Mario Draghi had pledged that the bank would "do whatever it takes to preserve the euro." The comments set offa mini rally on stock markets the world over, and even the euro began gaining back some lost ground. Investors were eager to find out what exactly he intended to do.

Draghi, it would seem, was unable to live up to their expectations. "The Governing Council … may undertake outright open market operations of a size adequate to reach its objective," the ECB president said. "We will consider further non-standard monetary policy measures according to what is required to repair monetary policy transmission. In the coming weeks, we will design the appropriate modalities for such policy measures."

Markets plunged before he was even finished with his press conference. Germany's blue chip stock index DAX plummeted immediately by 1.88 percent, and the euro cratered in value from $1.24 to below $1.22. American stock futures, which indicate how stock markets in the US might perform on a given day, slumped as well, signalling a potentially rotten day on Wall Street.

"After the strong recovery since the middle of last week, the market wanted to hear something other than that modalities will be designed in the coming weeks," one frustrated trader in Frankfurt told German newswire DPA.

Draghi's comments were consistent with a report in the Thursday edition of the daily Süddeutsche Zeitung, which indicated that Draghi intends to resume the ECB's controversial program of buying sovereign bonds from struggling euro-zone member states on the secondary market. The report also indicated that Draghi backs a proposal whereby the euro zone's permanent bailout fund, the European Stability Mechanism (ESM), would buy sovereign bonds directly from crisis-stricken countries. On Thursday, Draghi said that euro-zone bailout funds "must stand ready" to intervene in bond markets.


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