After weeks of Spanish shocks and contradictorily reports about the possibility of a Grexit, there is finally some positive news for the euro-zone.
A week before the European Central Bank’s next policy meeting, President Mario Draghi has made his most definitive statement throughout his nine months in office. During a speech given in London Draghi offered key signals that in order to safeguard the euro the ECB is ready and willing to produce the funds needed to buy government bonds. With their power of printing unlimited amounts of euro’s the ECB has the ability to really affect the crisis, which is currently at a tipping point.
Draghi asserted that ‘Within our mandate, the ECB is willing to do whatever it takes to preserve the euro and, believe me, it will be enough.’
After Draghi’s comments Spanish Finance Minister Luis de Guindos stated: ‘I am totally convinced that Mr. Draghi knows that the European Central Bank has an essential role to play in the future of the euro and that the situation was becoming very difficult.’
But the ECB adopting this essential role could potentially damage relations with Germany. The euro-zone kingpin takes a dim few of purchasing government bonds and has tellingly refused to comment on Draghi’s remarks.
However, French Central Bank head Christian Noyer was keen to issue his support of Draghi’s comments; ‘It is very clear that we will do everything so that the transmission of our monetary policy takes place in the best possible conditions for our economies.’
The ECB has adopted a cautious approach since the beginning of the Greek debt crisis in 2009 and its current President has demonstrated previous reluctance when it comes to dragging the bank into a more prominent crisis-fighting position. ECB officials initially felt that if they implemented a more aggressive approach there would be less governmental urgency to overhaul stagnant economies and cut deficits.
Only three weeks ago the ECB appeared to have ruled out taking new action. Draghi’s turnaround is a significant indication of the severity of the situation attending European markets. This new stance also does much to confirm that previously implemented governmental policies, like austerity, have come up short.
The strong hint that if the crisis worsens the ECB may deploy its power to make substantial purchases in euro-zone bond markets has bolstered investor hope. Markets were also reassured by the connection Draghi highlighted between yield spreads and the transmission of the ECB’s interest-rate policies into the economy.
In light of Draghi’s comments Spanish and Italian bonds strengthened sharply whilst both the EUR and GBP gained more than 1% against the USD. In nearly all European markets stocks were positive. Asian currencies also received a boost and Asian markets opened higher today. Some are urging caution however. If small or non-existent measures come out of the ECB meeting next Thursday there is every possibility that markets will be plunged back into chaos.