Politicians back Draghi’s aggressive stance
The eurozone’s most senior politicians appeared to give their assent to the more aggressive firefighting posture taken this week by Mario Draghi, the European Central Bank chief, even as officials privately warned no short-term action was imminent.
In a joint statement after a conference call between Angela Merkel, the German chancellor, and her French counterpart François Hollande on Friday, the two leaders said that “European institutions … must fulfil their obligations”, the closest political leaders are likely to get to urging action by the independent central bank.
Still, senior eurozone officials cautioned market hopes that the ECB was preparing to restart its long-dormant bond-buying programme as soon as next week, when the ECB’s governing council meets in Frankfurt, were likely to be disappointed.
Critically, several senior officials said the ECB was unlikely to dip back into Spanish and Italian bond markets unless it was preceded by action from the eurozone’s €440bn rescue fund, the European Financial Stability Facility, which last year was given the power to purchase bonds both on the open market and at auction.
Wolfgang Schäuble, the German finance minister, hinted at that unspoken bargain on Friday, releasing a statement saying that while he welcomed Mr Draghi’s commitments, there were “preconditions” to any ECB action.
“The precondition is that politicians take the necessary measures to address the financial and confidence crisis,” Mr Schäuble said. “First and foremost are the reform efforts of the member countries themselves,” he added, mentioning recent efforts by both Spain and Italy.
Mr Draghi sparked a global rally on Thursday when he signalled his readiness to restart the ECB’s securities market programme in a speech in London.
The relief rally continued on Friday, with borrowing costs on Spanish 10-year bonds dropping to 6.75 per cent, the lowest levels in more than a week. Italian 10-year bonds also rallied, with yields closing below 6 per cent, and the euro rose to $1.24.
But several eurozone officials cautioned against expectations of imminent action.
One senior eurozone official noted the ECB had repeatedly insisted political leaders must take action first. The official said this was widely understood to mean a new memorandum of understanding with Spain as part of an EFSF bond purchase programme would have to come before it was supplemented by ECB bond purchases.
“The bank will want some guarantees now,” said the official. “They will want to see the governments are willing to act and that the Spanish government is committed to reforms.”
The ECB attempted to secure such conditions last year in Italy through an exchange of letters with then-Italian prime minister Silvio Berlusconi, but the tactic led to only fitful reform efforts in Rome. The move came before the EFSF was able to purchase bonds, a move that would only come after the beneficiary enters into a legal agreement committing to reforms.
An EFSF bond purchase programme was raised in meetings in Paris and Berlin this week with Luis de Guindos, the Spanish finance minister, according to people briefed on the meetings. But senior officials cautioned the €100bn Spanish bank bailout plan took priority and that no other assistance was expected until the financial system overhaul was completed in September.
“There are no plans in the pipeline,” said a second senior eurozone official. “One needs to remember that what Schäuble and Merkel really, really do not want is to get the Bundestag out of summer recess.”
ECB bond buying, which has fallen silent since March, will also run into objections from the Bundesbank, which has long cautioned against using central bank funds to finance national governments – a process known as “monetary financing”.
On Friday, the Bundesbank said “there have not been any changes” in its opposition to bond purchases, the latest sign of tension between Mr Draghi and Jens Weidmann, the Bundesbank head, who also sits on the ECB governing council.