Economists, analysts and market participants continued on Friday to digest the assurances made by the president of the European Central Bank that he was willing to resume the purchase of sovereign bonds sometime in the future in concert with the euro zone’s rescue fund.
Despite the initial negative market sentiment, some analysts say the announcement by the central bank chief, Mario Draghi, lays the groundwork for a potentially more coherent and sustainable solution than the instant resumption of limited bond-buying that some had craved.
“It’s a better outcome with one caveat: the delay,” said Kenneth Wattret, chief euro zone economist at BNP Paribas in London.
“Markets have a very short impatience threshold.” Stocks and the euro dropped on Thursday but rallied sharply on Friday, with the Euro Stoxx index of blue-chip stocks rising nearly 5 percent.
“The E.C.B. is under pressure to buy more sovereign debt, but the worry is doing so without any conditionality,” Mr. Wattret said.
“The E.C.B. needs to deal both with the stress in the markets and with the underlying economic problems, and you deal with both better with conditionality.
It avoids the issue of moral hazard, whereby the E.C.B. buys a bucketload of government debt and the governments do not deliver on reform.”
The central has been stung before, when it bought Italian bonds only to see the government, then led by Silvio Berlusconi, postpone reforms. European politicians hope that while Mr. Draghi’s plan disappointed financial markets in the short term, it may lead to a more durable solution in the medium term.
“The E.C.B.’s decision is important,” President François Hollande of France told reporters in Paris after the announcement, according to Bloomberg News.
“It allows the E.C.B. to intervene when it’s necessary.” Under the emerging plan for the euro zone, its temporary or permanent rescue funds would buy bonds in government debt auctions while the central bank would intervene in the secondary market.
That approach could help curb the sorts of borrowing costs that threaten the finances of the Spanish and Italian governments in the medium term.
But for this to happen, the governments would need to apply for aid from the euro zone rescue funds, which would then be entitled to impose conditions in exchange for support.
Such a move again raises the issue of the size of the temporary rescue fund, the European Financial Stability Facility, which is already financing bailouts for Greece, Ireland and Portugal — and is prepared to help Spain’s banks — and its permanent replacement, the European Stability Mechanism, which has yet to enter into force.
The most pressing issue now arises in Spain, where bond yields are hovering around 7 percent. To benefit from new help, it will have to make a formal application for aid from the euro zone.
This should not present a large technical obstacle, because the government has already agreed to terms under which it will be able to secure support for its struggling banks worth up to 100 billion euros, or $122 billion.
But it does present a political difficulty for the government of Mariano Rajoy, because there is stigma attached to seeking help, even if not a full bailout.
The previous government undertook stringent measures to reduce the budget deficit to avoid seeking a full-scale bailout, only to be ejected by the voters anyway. A large employer in Europe said on Friday that it had begun examining how it would cope if Spain left the euro zone.
The company, International Consolidated Airlines Group, which owns the Spanish airline Iberia as well as British Airways, said it had set up a crisis management group to make contingency plans for further economic shocks to the euro zone. In Italy, no decision has been announced, either, as to whether to apply for help.
Talks between the Italian prime minister, Mario Monti, and Mr. Rajoy in Madrid on Thursday ended without any announcement, and with few bond auctions scheduled to take place over the summer, the Spanish government has some weeks of breathing space.
In one respect, a request for help from Rome would reduce the political discomfort for Madrid. It would, however, also place a more direct focus on the resources of the euro zone’s bailout funds since Italy’s debts are huge.
“The resources of the E.F.S.F. are clearly sufficient only for a very short time,” Mr. Wattret of BNP Paribas said. One solution to that problem, to grant the European Stability Mechanism a banking license, allowing it to draw liquidity from the E.C.B., is being resisted by Germany and the Netherlands — a potentially fatal obstacle.
But Mr. Wattret said that other ways of leveraging the euro zone’s bailout funds were under consideration. He added that if the new plan were put in place, it would be a significant departure for the central bank, which would abandon its insistence that intervention in the bond markets should be limited, temporary and sterilized.
nytimes.com
Despite the initial negative market sentiment, some analysts say the announcement by the central bank chief, Mario Draghi, lays the groundwork for a potentially more coherent and sustainable solution than the instant resumption of limited bond-buying that some had craved.
“It’s a better outcome with one caveat: the delay,” said Kenneth Wattret, chief euro zone economist at BNP Paribas in London.
“Markets have a very short impatience threshold.” Stocks and the euro dropped on Thursday but rallied sharply on Friday, with the Euro Stoxx index of blue-chip stocks rising nearly 5 percent.
“The E.C.B. is under pressure to buy more sovereign debt, but the worry is doing so without any conditionality,” Mr. Wattret said.
“The E.C.B. needs to deal both with the stress in the markets and with the underlying economic problems, and you deal with both better with conditionality.
It avoids the issue of moral hazard, whereby the E.C.B. buys a bucketload of government debt and the governments do not deliver on reform.”
The central has been stung before, when it bought Italian bonds only to see the government, then led by Silvio Berlusconi, postpone reforms. European politicians hope that while Mr. Draghi’s plan disappointed financial markets in the short term, it may lead to a more durable solution in the medium term.
“The E.C.B.’s decision is important,” President François Hollande of France told reporters in Paris after the announcement, according to Bloomberg News.
“It allows the E.C.B. to intervene when it’s necessary.” Under the emerging plan for the euro zone, its temporary or permanent rescue funds would buy bonds in government debt auctions while the central bank would intervene in the secondary market.
That approach could help curb the sorts of borrowing costs that threaten the finances of the Spanish and Italian governments in the medium term.
But for this to happen, the governments would need to apply for aid from the euro zone rescue funds, which would then be entitled to impose conditions in exchange for support.
Such a move again raises the issue of the size of the temporary rescue fund, the European Financial Stability Facility, which is already financing bailouts for Greece, Ireland and Portugal — and is prepared to help Spain’s banks — and its permanent replacement, the European Stability Mechanism, which has yet to enter into force.
The most pressing issue now arises in Spain, where bond yields are hovering around 7 percent. To benefit from new help, it will have to make a formal application for aid from the euro zone.
This should not present a large technical obstacle, because the government has already agreed to terms under which it will be able to secure support for its struggling banks worth up to 100 billion euros, or $122 billion.
But it does present a political difficulty for the government of Mariano Rajoy, because there is stigma attached to seeking help, even if not a full bailout.
The previous government undertook stringent measures to reduce the budget deficit to avoid seeking a full-scale bailout, only to be ejected by the voters anyway. A large employer in Europe said on Friday that it had begun examining how it would cope if Spain left the euro zone.
The company, International Consolidated Airlines Group, which owns the Spanish airline Iberia as well as British Airways, said it had set up a crisis management group to make contingency plans for further economic shocks to the euro zone. In Italy, no decision has been announced, either, as to whether to apply for help.
Talks between the Italian prime minister, Mario Monti, and Mr. Rajoy in Madrid on Thursday ended without any announcement, and with few bond auctions scheduled to take place over the summer, the Spanish government has some weeks of breathing space.
In one respect, a request for help from Rome would reduce the political discomfort for Madrid. It would, however, also place a more direct focus on the resources of the euro zone’s bailout funds since Italy’s debts are huge.
“The resources of the E.F.S.F. are clearly sufficient only for a very short time,” Mr. Wattret of BNP Paribas said. One solution to that problem, to grant the European Stability Mechanism a banking license, allowing it to draw liquidity from the E.C.B., is being resisted by Germany and the Netherlands — a potentially fatal obstacle.
But Mr. Wattret said that other ways of leveraging the euro zone’s bailout funds were under consideration. He added that if the new plan were put in place, it would be a significant departure for the central bank, which would abandon its insistence that intervention in the bond markets should be limited, temporary and sterilized.
nytimes.com
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