Prior to yesterday’s press conference, weeks of speculation saw expectations surrounding European Central Bank action reach fever pitch. Economists forecast a damaging, chaotic market response if all the hype should end in disappointment so the pressure was really on ECB Chief Mario Draghi to deliver on his promise of doing ‘whatever it takes’ to save the self-destructing euro.
For many investors Draghi’s announcement has met with or exceeded expectations. Yesterday he confirmed that the ECB would indeed purchase up to three-year maturity bonds from floundering euro-zone nations in unlimited amounts. Draghi also reiterated that this action (to be known as the Outright Monetary Transaction plan) would only be taken to aid countries that requested a European bailout and adhered to strict policy conditions.
When outlining his proposal Draghi was keen to reassert that government support would be the power behind positive steps forward. He said: ‘We need two legs. Governments have to undertake policy reforms. There is no intervention by the central bank, by any central bank, that is actually effective without concurrent policy action by the governments.’
Some industry experts have commented that the ECB announcement is still very much a work in progress. Although the size and timing of the bond-buying (and the conditions attached to it) remain undefined, markets have so far reacted positively to the optimistic view that this scheme will offer struggling Spain and Italy a lifeline and help ensure the continued unity of the euro-zone.
The euro was buoyed by the news, and hit a new two month high against the dollar of $1.2677 this morning. All prominent Asian markets also responded positively to the news.
However, confirmation that the plan will go ahead has not received universal applause. The vote for the action fell 22-1. Although the overwhelming majority voted in favour of the proposal the dissenting voice belonged to one of the most important members of the company, Head of Germany’s Bundesbank Jens Weidmann.
Weidmann has made no secret of the fact that his nation stands in solitary opposition to the plan. Even after he was outvoted he argued that central bank bond-buying could lead to the postponement of essential governmental reforms. Weidmann then also stated that this concept could result in considerable sovereign risks being redistributed among countries taxpayers – without being sanctioned by democratically placed governments and parliaments. Despite German Chancellor Angela Merkel originally cautioning against such a move for very similar reasons, she has now lent Draghi her conditional support out of determination to bring stability to the euro-zone.
The response coming from Germany this morning has been far from impressed. As the euro-crisis has trundled along conservative German newspapers have become increasingly disenchanted with the common currency and it appears that this latest development has confirmed their fears.
Best selling paper Bild had the scathing headline ‘Help without end for crisis countries’. The article went on to state that Draghi had essentially signed a ‘blank cheque’ which could significantly damage the independence of the ECB. Conservative daily paper Die Welt was equally pessimistic about the move asserting that ‘Draghi sets off Germany’s alarm bell.’
Analysts have also questioned just how The ECB will halt bond purchases if a country is not acting in accordance with the conditions. To terminate the measure could speed the country towards bankruptcy and add a potentially irreparable tear to the fabric of the euro-zone. Draghi will be attempting to calm these fears by buttressing the more fragile members of the currency bloc, but investors were warned by Gary Jenkins of Swordfish Research that: ‘The ECB’s ‘control’ position is a bit like putting a gun to its own head and threatening to pull the trigger.’
The ball is now firmly in the court of Spanish Premier Mariano Rajoy and Italian head honcho Mario Monti. Whether they chose to pick it up or kick it back is the new subject of speculation.
The Pound to Euro exchange rate is currently trading at 1.2599
The Pound to US Dollar exchange rate is currently trading at 1.5972
The Pound to Australian Dollar exchange rate is currently trading at 1.5458
The Euro to US Dollar exchange rate is currently trading at 1.2672
The Euro to Pound exchange rate is currently trading at 0.7936
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