02.08.2012
By Simon Miller
European markets appear unimpressed with comments from the president of the European Central Bank (ECB) Mario Draghi after the bank kept interest rates at 0.75%.
Speaking after the interest rate announcement, Draghi said that the euro was “irreversible” but failed to put in place concrete plans to solve the eurozone crisis.
He said that the ECB governing council extensively discussed the policy options to address the severe malfunctioning in the price formation process in the bond markets of euro area countries.
Draghi added: “Exceptionally high risk premia are observed in government bond prices in several countries and financial fragmentation hinders the effective working of monetary policy.”
He continued: “Risk premia that are related to fears of the reversibility of the euro are unacceptable, and they need to be addressed in a fundamental manner. The euro is irreversible.”
The president said that eurozone policy makers need to push ahead with fiscal consolidation, structural reform and European institution building. He added that governments must stand ready to activate the EFSF/ESM in the bond market “when exceptional financial market circumstances and risks to the financial stability exist – with strict and effective conditionality in line with the established guidelines”.
Falling short of definitive action, Draghi added that the governing council “may consider undertaking further non-standard monetary policy measures according to what is required to repair monetary policy transmission”.
“Over the coming weeks, we will design the appropriate modalities for such policy measures,” he added.
Despite a brief jump on European markets, investors remained unconvinced with the FTSE 100 closing down 43.96 at 5,668.86 while the CAC 40 closed down 67.57 at 3,253.99 and the Euro Stoxx closed at 2,269.07, a 64.31 fall.
Lombard Street director of Global macro Dario Perkins said the ECB president had “spectacularly under-delivered”.
He said: “The ECB ‘may’ do something, but the scheme he has in mind seems even more limited than its failed Securities Market Programme. Nothing here to suggest investors should abandon their fear of holding Mediterranean debt.”
Perkins added: “Today, ECB president Mario Draghi revealed his ‘whatever-it-takes’ attempt to preserve the euro. But it wasn’t quite what markets had hoped for. Instead, ‘we’ll do whatever it takes’ has apparently been diluted to ‘we may do something’. I’m struggling to think of a more fluffy word than ‘may’.”
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