Mario Draghi, president of the European Central Bank (ECB), may have painted himself into a corner with his London speech on Thursday promising to do “whatever it takes” to rescue the euro. Markets rejoiced at his words, sending yields on Spanish and Italian bonds lower—at least temporarily—but it remains to be seen exactly what Draghi will—or can—do.
Bloomberg reported Friday that a number of policymakers on the council of the ECB remain firmly opposed to one possibility, that of the ECB resuming its bond purchase program, or Securities Markets Program (SMP), which it halted in March. And that could leave Draghi in a tight spot.
“Draghi is damned if he does and damned if he doesn’t,” Carsten Brzeski said in the report. Brzeski, senior economist at ING Group in Brussels, added, “He maneuvered himself into an extremely difficult situation. Expectations are very high.”
Heavy opposition continues from such council members as Bundesbank President Jens Weidmann, as well as from former Bundesbank President Axel Weber, who declined the top post at the ECB over the issue, and ECB Chief Economist Juergen Stark, who retired at the end of 2011. The strength of the opposition makes some economists feel that the ECB will not revisit the policy any time soon.
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“I don’t believe you will see government bond purchases yet,” said Jacques Cailloux in the report. Cailloux, chief European economist at Nomura International in London, continued, “But there are other things they can do that will help, such as lowering the haircut on sovereign bonds they accept as collateral or buying private-sector securities.”
Markets will not be happy if there is no decisive action taken soon. While at first bond buying was effective, it soon developed that it did not go far enough in magnitude or degree to keep yields down. That led to the ECB’s offer of three-year unlimited loans at exceptionally low interest rates. That, too, failed to reassure markets and contain the crisis, and many are critical of the central bank’s efforts.