The European Central Bank went on hold at its monthly meeting in every sense of the word. It did not change interest rates, had little to say about its new sovereign bond purchasing program and gave no hint that it was on the verge of offering assistance to Spain, even though a bailout seems virtually certain as its economy stays stuck in reverse.
But ECB president Mario Draghi assured the markets once again that the euro was "irreversible" and that the ECB's bond-buying program, known as Outright Monetary Transactions (OMTs), could swing into action quickly if a financially distressed country were to ask for help. "We are ready and have a fully effective backstop in place," he said after the regular monthly ECB governing council meeting, which was held in Slovenia.
His comments delivered some momentum to the stock markets and sent the euro up almost half a percentage point to $1.296 (U.S.).
At the press conference after the meeting, Mr. Draghi was asked repeatedly if Spain was on the verge of a bailout or could avoid one. He would not comment directly, reiterating the ECB's stance that it is up to governments to request assistance, not for the ECB to offer it in the absence of a request. "That's up to Spain to decide, and the other euro area governments to decide," he said.
Even though the OMTs have yet to start, and theoretically may never start, their mere presence appears have had a positive effect on the sovereign bond markets. On Thursday, shortly before the ECB meeting, Spain raised €4-billion of debt in a sale that met with strong investor demand. A three-year bond went out the door with a yield of 3.95 per cent, up slightly than the 3.84 per cent paid in the sale of a similar bond on Sept. 20 but well below the lofty yields demanded by investors in the summer, when the country seemed on the verge of getting shut out of the debt markets.
The OMT plan, Mr. Draghi said, has "helped to alleviate tensions over the past few weeks."
But since the OMT's existence on paper has not delivered a sustained and deep reduction in bond yields in the weakest euro zone countries, investors assume that the program will eventually be triggered by Spain. The program cannot be started in isolation. A country must first seek assistance from the new bailout fund, the €500-billion European Stability Mechanism, which would attach conditions to the any assistance, which would range from its own bond purchases to emergency credit lines. Only then would the OMTs start.
Spain fears that any ESM-ECB assistance would come from onerous, sovereignty-robbing conditions such as doubled-up austerity commitments. But Mr. Draghi said the conditions for any bailout do not "necessarily have to be punitive."
While Mr. Draghi praised Spain and Portugal, which received a bailout early last year, for making progress on their budget deficit controls and economic reform program efforts, he made it clear that the sagging euro zone economy would do no country any favours.
Euro zone gross domestic product fell 0.2 per cent in the second quarter and there is no sign of an upturn. "Economic growth in the euro area is expected to remain weak, with ongoing tensions in some euro-area financial markets and high uncertainty weighing on confidence and sentiment," Mr. Draghi said.
The ECB last month predicted the euro zone would contract by 0.4 per cent this year, against its earlier forecast of a 0.1 per cent fall. Against this recessionary backdrop, the bank must be tempted to drop interest rates from its already record low. But it has little room to maneuver on that front because inflation remains stubbornly high, running at 2.7 per cent in September, up from 2.6 per cent in August, in good part because of high energy prices. The target rate is 2 per cent or less.
Mr. Draghi said inflation will drop next next year.
Overall, the ECB meeting lacked the fireworks of the September meeting, when the OMT program was unveiled. The impression given by Mr. Draghi as that the ECB had done all it could do to save the euro, at least in the short term, and that the onus was firmly on national governments to save their economies. If Spain is incapable of doing that, the ECB's bond-buying program is a phone call away.