The euro debt crisis threatens to rage on as deep divisions within the European Central Bank hold its firepower in check.
ECB president Mario Draghi promised last week to safeguard the euro, but he failed to translate that vow into concrete action at Thursday’s policy meeting, dashing investor hopes, triggering fresh turmoil in global markets, and driving up Spanish and Italian bond yields.
Mr. Draghi did signal possible intervention in coming weeks to calm markets and lower borrowing costs for Spain and other fiscally battered euro-zone members, including "further non-standard monetary policy measures."
But it will be September before the central bank meets again, promising continued strife for the euro zone, the 17-member group that has been plagued by a crippling debt crisis for more than two years. It also threatens further volatility in the markets as the central bank struggles to bring Germany's powerful Bundesbank onside with a scheme to buy the debt of stressed countries and, in turn, push down their bond yields.
Mr. Draghi announced no immediate steps after the monthly gathering of the bank’s policy-setting governing council. The ECB also left interest rates unchanged at 0.75 per cent, despite deteriorating economic conditions and the absence of visible inflationary pressures.
Mr. Draghi said the ECB would only resume buying bonds in the secondary market, which it suspended in March, if Europe’s rescue fund is allowed to intervene in the primary market first and if troubled countries formally seek assistance.
That would require governments to accept tough controls and supervision over their fiscal policies, something Spain has so far rejected.
But the key hurdle to a more activist role for the ECB remains German opposition, led by Bundesbank president and ECB governing council member Jens Weidmann.
The indication that the central bank may launch open market operations in coming weeks “tells us that the ECB wants to intervene but they haven’t figured out how best to do it while keeping the Bundesbank on board,” said Michael Hewson, senior market analyst with CMC Markets in London. The tone of the press conference “suggests we remain a long way from a credible solution to the long-running crisis.”
One possibility is for Mr. Draghi to assemble enough votes to counter German opposition.
“The idea is we now have the guidance,” Mr. Draghi said. “The monetary policy committee, the risk committee and the markets committee will work on this guidance and then [we] will take a final decision and the votes will be counted.”
Some observers were less than kind in their response.
The ECB “did the least amount possible in saying it could potentially buy sovereign debt only under certain preconditions,” Benjamin Reitzes, a senior economist with BMO Nesbitt Burns, said in a note. “With inflation expected to fall below 2 per cent in 2013 and downside growth risks, the ECB’s lack of bold action to boost the [crisis-racked] region borders on irresponsible.”
It was the second day in a row that a major central bank disappointed the markets, following a stand-pat decision by the U.S. Federal Reserve Board. Both cases underscore the limits of monetary policy, as well as changing political winds.
Spanish and Italian government bonds took a severe drubbing after the ECB announcement. Yields on benchmark Spanish 10-year bonds shot up 44 basis points to 7.13 per cent, while Italian 10-year yields rose 39 basis points to 6.30. (A basis point is 1/100th of a percentage point.)
Mr. Draghi told a London investment conference last week that the single currency is “irreversible” and that “the ECB is ready to do whatever it takes to preserve the euro" as long as it falls within the bank's mandate, sparking a market rally.
After the policy meeting Thursday, he told a news conference that high bond yields “related to fears of the reversibility of the euro are unacceptable, and they need to be addressed in a fundamental manner.”
In response, the ECB may “undertake outright open market operations [in the bond market] of a size adequate to reach its objective.”
But he made it clear more work needs to be done behind the scenes.
“The battle about the ECB is far from over,” said Kurt Huebner, professor of European Studies at the University of British Columbia. “Not much reason, therefore, to expect a quiet summer for the euro zone.”