The Financial Times – ECB ‘ready to do whatever it takes’
The European Central Bank’s mandate allows it to fight excessive borrowing costs for eurozone countries, Mario Draghi, its president, said on Thursday, sparking a market rally amid hopes the bank would intervene to buy sovereign bonds. The euro strengthened and the bond prices of debt issued by stressed eurozone countries rallied after Mr Draghi said the ECB was “ready to do whatever it takes” to preserve the single currency. “Believe me, it will be enough,” he told a conference in London. Following days of market turmoil and concern that Spain’s high borrowing costs could force it to seek a full sovereign bailout, Mr Draghi suggested the ECB had a remit to intervene if market interest rates were not “inherent” to borrowers and interfered with the central bank’s implementation of monetary policy – its prime tool for fulfilling its core task of maintaining price stability.
The Wall Street Journal – Europe’s Central Bank Signals Action
Mr. Draghi’s resolute comments on Thursday, which sounded more similar to Fed Chairman Ben Bernanke than to Mr. Draghi’s predecessor, Jean-Claude Trichet, suggest the ECB has chosen to take bold action. Unlike politicians who must navigate parliaments and other euro-zone member nations to get things done, the ECB’s ability to print unlimited euros means it can match words with actions almost immediately, if it chooses. One option is for the ECB to start buying bonds again, but on a much larger scale. A more extreme step would be to set a ceiling on interest-rate spreads between weak and strong countries, though that would require an unlimited commitment that officials so far have been unwilling to make. It could also buy bonds of strong and fragile countries alike to jump-start the bloc’s economy. Spanish and Italian bonds strengthened sharply Thursday, and the euro and the British pound each gained more than 1% against the U.S. dollar. Stocks were positive in nearly all European markets, and the Italian and Spanish indexes each jumped more than 5%.Late Thursday, the Spanish 10-year bond was yielding 6.96%, down nearly half a percentage point from Wednesday. Lower yields mean stronger prices. The 10-year Italian bond was at 6.03%, down a similar amount.Shorter-dated bonds strengthened even more.
Comment
Let us repeat what was stated in our chat window above yesterday:
Below are some examples of politicians promising to do “whatever it takes”:
David Cameron July 2012
Nicholas Sarkozy Sep 2011
Gordon Brown Sep 2008
George Osbourne May 2012
Alistair Darling Oct 2008
Angela Merkel Oct 2011
Barack Obama Jan 2012
And Bernanke said the Fed will do “everything possible” to save the world in Feb 2009. This type of phrase is nothing more than rhetoric. If they really knew what needed to be done, they would just do it instead of promising to do it.
Source: Bianco Research
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