(From THE WALL STREET JOURNAL EUROPE)
By Richard Barley
The market verdict was clear: Mario Draghi had written a check he
couldn't cash.
The European Central Bank president promised last week to do "whatever
it takes" to save the euro but the ECB didn't actually do anything at
Thursday's meeting. Ten-year Spanish bond yields promptly rose back
above 7%, and stock markets and the euro fell.
But the market reaction isn't entirely fair. Mr. Draghi's previous
comments may have raised expectations too high, but he has provided
the broad outlines of a plan for ECB intervention in government-bond
markets. That is a step forward.
In particular, Mr. Draghi made two important points. First, the ECB
would intervene in markets only alongside the euro zone's bailout
funds. This is crucial for the ECB because only the European Financial
Stability Facility and its successor, the European Stability
Mechanism, can ensure binding conditionality. A weakness of the ECB's
previous bond-buying programs was that it relied on policy promises
that politicians then failed to keep.
Second, Mr. Draghi said investor concerns over ECB seniority would be
addressed. The ECB's old Securities Markets Program has been
effectively unusable since the central bank refused to take losses on
its Greek bonds, leading to even bigger write-downs for private-sector
bondholders. But how the ECB will structure any new program to avoid
this problem is unclear.
There still are plenty of other unanswered questions, too. Mr. Draghi
said any intervention would be of a size "adequate to meet its
objective." But what form will any future intervention take? How will
the ECB define its objective? Is the ECB's commitment open-ended? Mr.
Draghi hinted that any new program would focus on the shorter part of
the yield curve, which would appear to have put a constraint on the
scale of any ECB operation.
Mr. Draghi said these details would be discussed in coming weeks. But
a concern for investors is whether the ECB can deliver on these plans
given the clear opposition of Germany's central bank, the Bundesbank.
Mr. Draghi acknowledged that one country opposes bond-market
interventions. The Bundesbank has only one vote out of 23 on the ECB's
Governing Council so has no formal right of veto. But in practice, Mr.
Draghi will be wary of defying his biggest shareholder.
Spain will now come under great pressure to ask the euro-zone bailout
funds for help with lowering its borrowing costs, something it has
been desperate to resist. That, in turn, will reignite questions about
the capacity of these funds. Worse, ratings firms may decide that
asking for aid is enough to justify further downgrades, causing more
problems. Mr. Draghi's credibility is on the line. At the very least,
the euro zone faces a long hot summer until his plans become clearer.
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(END) Dow Jones Newswires
August 03, 2012 00:30 ET (04:30 GMT)
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