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.
Nothing but a Reiteration
The two measures, it is hoped, would be enough to bring down borrowing costs for those countries having difficulty accessing international financial markets. Spain, in particular, has been running into trouble recently, with interest rates on 10-year bonds periodically spiking above the 7 percent level economists say is unsustainable on the long term. On Thursday, Madrid was forced to pay 6.64 percent on €1 billion worth of 10-year bonds.
But Draghi's comments on Thursday did nothing to indicate when, or even whether, such a plan might become reality, and they amounted to little more than a reiteration of his promise from last week. The ECB took no concrete action on Thursday -- also opting to leave the main interest rate unchanged at 0.75 percent.
Furthermore, a final decision on the ESM's participation in bond purchases is not likely to be made before the middle of next month, when European leaders are set to gather once again. And Germany remains opposed to both prongs of Draghi's attack. Germany's central bank, the Bundesbank, has been particularly wary of the bond-buying program, which has already resulted in €211 billion worth of shaky bonds on the ECB's books. Bundesbank head Jens Weidmann is concerned that the program rewards countries without requiring them to take any consolidation measures in return.
Draghi's plan could also put German Chancellor Angela Merkel in an uncomfortable position. Many conservative politicians in the country are opposed to aid that does not come paired with either additional austerity measures from the countries in need or further steps toward greater EU oversight of both national budgets and Europe's banking system. Already faced with signs that the euro crisis is weakening her government, the chancellor is not likely to be interested in angering coalition lawmakers further.
Indeed, several parliamentarians from her center-right Christian Democrats (CDU) criticized the plan on Thursday. Wolfgang Bosbach, a notorious skeptic of efforts to save the euro, said that "the problem is constantly climbing sovereign debt" in an interview with German public broadcaster ARD. "If we take away the pressure provided by high interest rates, then the willingness to make needed reforms disappears as well," he added.
Hans Michelbach, the senior conservative member of the German parliament's Finance Committee, demanded in an interview with the financial daily Handelsblatt that the ECB be explicitly forbidden from buying sovereign bonds on the secondary market. "The central bank under the leadership of Mario Draghi has pursued increasingly adventuresome contortions to get around the prohibition against state financing," he told the paper.
Alexander Dobrindt, general secretary of the Christian Social Union, the Bavarian sister party to Merkel's CDU, likewise criticized Draghi's idea. "If the ECB buys sovereign bonds, it would be akin to state financing through the back door. The ECB would be leaving the path of monetary stability," he told the mass-circulation daily Bild.
The influential tabloid also launched a campaign of its own to convince Draghi not to pursue his bond-purchasing plans. Earlier this year, the paper gave the ECB president a Prussian spiked helmet from 1871 to encourage him to impose Prussian-style discipline on the central bank. In an article on Thursday, however, the paper wrote: "Even more ECB billions for indebted countries? Then Bild wants its helmet back!"