Mario Draghi lifted the euro last week, only to crush it now. While he did discuss buying bonds in the open markets, he limited such a move to conditions and committees. The market wanted action, not words, and didn’t buy this verbal intervention.
The verbal intervention seemed disastrous by itself: Saying that the ECB would buy short term bonds sent long term bonds to the sky. Should markets have listened more carefully to his words last week? Or did he expect too much of other factors?
Draghi limited the action to the ECB’s mandate but clearly hinted on bond buying. Such bond buying was discussed now, and some general details were given. However, these conditions should have been met by the meeting:
- Spanish aid request: As hinted in the presser, Draghi said that usage of the ESM / EFSF is needed as a prerequisite to action, and that the governments need to express their will to use these bailout mechanisms. Spain discussed asking for a full bailout, and discussed cuts. But Spain didn’t deliver prior to the press conference, and Draghi didn’t deliver either.
- Bundesbank approval: Draghi clearly stated that the chief of the German Bundesbank “had reservations” to the decision. But even the decision is very limited: guidance to ECB committees to check the options for intervention in the coming weeks. And only then, the ECB “may” act. Nothing is certain. Committees are great for burying ideas, not for implementing them. The Bundesbank was only generous enough to avoid vetoing this watered down decision, but still had reservations. The Bundesbank was also responsible for the mess.
All in all, Draghi overestimated Spain and underestimated the Bundesbank. His words in London seem like a gamble that failed.
So far, Draghi’s actions and especially his communications were quite good, certainly better than his predecessor Jean-Claude Trichet.
However, by detailing that the ECB would focus (after the committees sit, depending on conditions, etc.) on the short end of the curve just added to the trouble: 10 year bond yields of Spain and Italy are on the rise.
Draghi exacerbated the situation instead of helping.
However, with his statement that it is “pointless to short the euro” while the euro was smashed in the markets shows that Draghi is a drag on the single currency – not Super Mario.
Further reading: Soft Spanish Bailout Would Bypass German Court