The Craze That’s Sweeping Europe

by CC December 8, 2011 2:11 pm • Commentary


At a news conference in Frankfurt, ECB President Mario Draghi said Thursday that the European Union treaty prohibits “monetary financing.” Read analysis in MarketWatch First Take: Draghi erases Trichet’s errors but has more to do. 

He was responding to a reporter’s question about why the central bank doesn’t ramp up its bond-buying program. Read more on Draghi and prohibitions on monetary financing.

He also that the ultimate decisions and political responsibility are in the hands of EU leaders, who are to meet in Brussels later Thursday and again on Friday. Draghi also announced several nonstandard measures that the ECB will take to improve access to liquidity for the banking sector and facilitate the functioning of euro-area money markets. See story on Draghi highlighting importance of EU fiscal compact.


On the euro-zone crisis, Mr. Draghi was uncompromising. He expressed surprise about the interpretation given to his speech to the European Parliament last week that appeared to offer ECB action in return for euro-zone advances on fiscal governance. He reiterated the ECB was bound by the European Treaty, which embodied the spirit of the hardline German Bundesbank. He played down talk of the ECB lending through the International Monetary Fund to euro-zone countries. And the ECB is still saying bond-market intervention is a job for the battered European Financial Stability Facility and its successor. Markets reacted violently: Italian 10-year yields fell 0.15 percentage point on news of the rate cut, but then rose a massive 0.45 point as Mr. Draghi’s remarks hit home.

Of course, Mr. Draghi couldn’t possibly announce support before the governments deliver their part of the bargain. This may yet be a high-pressure negotiating position. Markets will now add further pressure. A mass euro-zone downgrade by Standard & Poor’s looms larger. But a euro-zone deal without ECB support seems unlikely to end the crisis.

Credit Writedowns

Further out, we do not think the ECB is done cutting interest rates. The 1% floor was reached previously but there is nothing cast in stone there. The ECB sees the risk to growth significant to the down side, while risks to inflation were regarded as balanced.
The ECB staff offered new forecasts. This year’s growth is now seen in the 1.5%-1.7% area vs 1.4%-1.8% estimate in Sept. This seems to largely reflect the recent data rather than a real new forecast. However the 2012 forecast has been seriously cut. Rather than 0.4%-2.0% growth anticipated in Sept, the ECB staff now sees growth between -0.4% and +1.0%. This is sobering: the prospect of a more prolonged downturn that leads to negative growth for the entire year and the risks are on the down side.

Inflation is expected to be a bit stickier. For policy forward looking inflation is of course more important than contemporaneous readings. The said, this year’s inflation was revised to 2.6%-2.8% from 2.5%-2.7%. Next year’s inflation forecast was revised to 1.5%-2.5% from 1.2%-2.2%.

Lastly, Draghi explained that regarding the sterilization of the ECB bond purchases, that technical glitches may impact from time to time, but this is not QE and will be managed. Draghi also indicated that the ECB will act on behalf of the EFSF if and when it operates in the markets to buy sovereign bonds.