Thursday, August 2, 2012

ECB Follows Words With More Words

by Richard Barley

Wall Street Journal

August 2, 2012

The market verdict was clear: Mario Draghi had written a check he couldn't cash.

The European Central Bank president promised last week to do "whatever it takes" to save the euro but the ECB didn't actually do anything at Thursday's meeting. Ten-year Spanish bond yields promptly rose back above 7%, and stock markets and the euro fell.

But the market reaction isn't entirely fair. Mr. Draghi's previous comments may have raised expectations too high, but he has provided the broad outlines of a plan for ECB intervention in government-bond markets. That certainly is a step forward.

In particular, Mr. Draghi made two important points. First, that the ECB would intervene in markets only alongside the euro zone's bailout funds. This is crucial for the ECB because only the European Financial Stability Facility and its successor, the European Stability Mechanism, can ensure binding conditionality. A weakness of the ECB's previous bond-buying programs was that it relied on policy promises that politicians then failed to keep.


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