Markets Take A Dive On Draghi's Seeming Backtrack That The ECB Would Do Whatever It Takes To Support The Euro

Friday, August 03, 2012 00:50
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Markets Take A Dive On Draghi's Seeming Backtrack That The ECB Would Do Whatever It Takes To Support The Euro

Tags: European crisis | European zone | world economy

The high hopes markets across the globe had on Wednesday, August 1, from European Central Bank (ECB) president Mario Draghi were short-lived. Draghi seemingly backtracked on Thursday, saying the ECB would wait until after individual governments had begun employing their own rescue funds before resuming the bond buying program.

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Draghi announced on Wednesday that the ECB would do whatever it takes to keep the euro intact, indicating the possibility of a new round of bond buying. Markets soared.
Draghi made the announcement while German Chancellor Angela Merkel was on vacation. Merkel voiced similar support for the euro on July 27 in a joint pledge made with French president François Hollande.
 
But officials of Germany’s Bundesbank reiterated their opposition to the type of support Draghi announced. Draghi positioned the objections of Bundesbank president Jens Weidmann made to future bond purchases as isolated.
 
The ECB rarely reveals such details and the revelation this time shows the growing tension between the ECB and the Bundesbank. Markets pulled back sharply after hearing the news.
 
Draghi claims that markets misinterpreted his comments on Wednesday. His comments on Thursday mirrored comments by the US Fed that it would step up if it deemed more stimulus action is needed. But that it would wait to make that decision after seeing additional economic reports.
 
Now, the ECB’s stance is that no aid will be given unless countries ask for it. This places more pressure on Spain and Italy to formally request aid, which would probably require even deeper cuts in spending and other economic reforms. If more aid is given, Draghi has indicated it would be with short-term bond maturities because they have the greatest impact on the broader economy.

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