ECB Is Ready To Do ‘What Ever It Takes’

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.

Spain

Click to enlarge:

The Euro Crisis – Spanish panic
THINGS are rapidly getting worse in Spain. Bond yields have risen to over 7.5% today, on the back of a shaky government debt auction last Thursday, and the failure of one of its regions (Valencia) that now needs help from Madrid. In line with this bad news on the state of the government coffers, the cost of buying an insurance policy against Spanish default (credit default swap premia) is up, and is increasingly diverging from Italy’s (see chart). Investors’ views of Spanish companies are just as gloomy as of its government finances. The Spanish stock-market—the IBEX 35—is down 30% this year, as any expectations that company profits will lead to decent dividends anytime soon are thin on the ground. Things could get worse as the week progresses, particularly if preliminary measures of output to be released tomorrow are weak.

USA Today – Spain unemployment edges up to 24.6%
The number of people out of work in Spain shows no sign of dropping, with almost one in four people unemployed and half of those under the age of 25 out of work, the National Statistics Institute said Friday. The recession-hit country’s unemployment rate rose 0.19 percentage points in the second quarter on the previous three months to 24.63%, the institute said. The rate is the highest among the 17 nations using the euro currency. The institute said 53,500 people more joined the ranks of the unemployed between April and June, making for a total of 5.69 million people out of work.For those under 25 years of age, the unemployment rate climbed to 53%, up from 52% in the previous quarter. Spain is battling to avoid having to seek a full-blown financial bailout as it struggles to emerge from its second recession in three years and strives to convince investors it can manage its finances.

Source: Bianco Research

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