European Central Bank President Mario Draghi signaled European governments can’t expect much more help from him until they make the next move.
Draghi said nine times during a 54-minute press conference in Slovenia yesterday that the ECB won’t start intervening in bond markets until governments like Spain request a bailout and agree to conditions. He also ruled out allowing the ECB to take losses in any further Greek debt restructuring and damped speculation of another ECB interest-rate cut.
“Draghi’s message to governments was that he’s not going to do any more for the time being,” said Jacques Cailloux, chief European economist at Nomura International Plc in London. “The ECB is ready, if needed, but their preference is probably not to have to intervene at all.”
That message puts the onus firmly on Spain to request aid from Europe’s bailout fund and sign up to conditions -- a pre-requisite for the ECB to consider bond purchases. The prime ministers of Italy, Spain, and France may have Draghi’s imperative on their minds when they meet at a summit of Mediterranean leaders in Malta today.
Draghi said his bond-purchase plan, called Outright Monetary Transactions, has already lowered borrowing costs for sovereigns across Europe. “Today we are ready with our OMT,” he said. “Now it’s really in the hands of governments.”
Onus on Spain
Spain might not be able to avoid a ceding control of its economic fate to European partners much longer. Already tapping 100 billion euros ($130 billion) in aid to overhaul its banks, Spain is under pressure to seek a broader European support package to shore up the government’s finances.
The government of the euro area’s fourth-largest economy was told by the European Commission that its plan to cut the deficit to 4.5 percent of gross domestic product next year is overly optimistic, two people familiar with the issue said yesterday.
Draghi praised Spain for making “significant progress” in addressing its problems and said the conditionality involved in a rescue package doesn’t necessarily need to be harsh.
“There is a tendency to identify conditionality with harsh conditions,” he said. “Conditions don’t need to be necessarily punitive.”
That may appease Italian Prime Minister Mario Monti, who cautioned last week that aid shouldn’t hinge on more austerity.
Rates on Hold
Draghi indicated the ECB isn’t planning to lower interest rates again in the near future after it kept the benchmark at 0.75 percent yesterday. Policy makers didn’t discuss a rate cut, he said, adding inflation won’t drop below the ECB’s 2 percent limit until next year.
“The risk that lower ECB rates take longer to materialize than we have been expecting, or do not materialize at all, has risen,” said Ken Wattret, chief euro-area economist at BNP Paribas in London.
A majority of economists surveyed before Draghi spoke forecast that the ECB will cut its benchmark rate in December.
Draghi instead underlined the positive impact that the announced bond-buying program has had as an example of how “non-standard monetary policies are being designed and implemented when the standard ones aren’t fully effective.”
The yield on Spain’s 10-year government bond was at 5.9 percent yesterday, down from more than 7 percent three months ago.
Draghi also pushed back against pressure to extend the repayment terms on its Greek government bond holdings, saying it would “qualify as monetary financing.” Greek Prime Minister Antonis Samaras yesterday called on ECB to roll over any Greek debt it holds.
“Draghi dismissed any idea that the ECB would take a hair-cut on its holdings,” said Marchel Alexandrovich, senior European economist at Jefferies International Ltd. in London. Still, that “does not preclude the ECB from transferring its Greek paper” to Europe’s rescue fund, “which then could take a write-down,” he said.
That would imply government agreement on the bailout fund buying the ECB’s Greek bonds.
Draghi “keeps on repeating that the ball is now in the court of the governments,” said Carsten Brzeski, an economist at ING Group in Brussels. “He probably really hopes now that it sticks and governments get moving.”