ECB comments put Spain back on the brink
European Central Bank President Mario Draghi, on Aug. 2, 2012, in Frankfurt, Germany. / Mario Vedder/dapd
(MoneyWatch) European Central Bank President Mario Draghi dashed investor hopes for immediate action today when he announced the ECB would do little more prepare to intervene in bond markets. U.S. and European stock exchanges all dropped on the news, and interest rates on Spain's 10-year bond shot over the critical 7 percent level.
Speaking at his monthly press conference, the ECB chief said, the bank "may undertake outright open market operations of a size adequate to reach its objective." He added that European Union officials should "stand ready" to also use their bailout fund in the bond market.
Draghi said the ECB was prepared to act but only after governments had first applied for emergency capital from the EU rescue funds - the European Financial Stability Facility and the European Stability Mechanism. He also said they would have to accept the same type of budget controls which have been required from Greece, Ireland and Portugal. The Spanish government has been saying for weeks that it wouldn't agree to those controls.
The ECB president also made it clear that the head of the Bundesbank, Germany's central bank, was still not ready to go along with a bond-purchasing plan. "It is clear and it is known that Mr. Weidmann and the Bundesbank have their reservations about programs that buy bonds," Draghi said. The ECB must get Germany to sign on to the plan if it is to go ahead.
The major stock indexes in the U.S. and Europe all retreated when the announcement came. While the Dow, S&P and NASDAQ were down only a fraction in trading immediately after the press conference, European exchanges were hammered. The EURO STOXX 50 and the German Boerse were both down by nearly 2 percent and the FTSE was down nearly 2.5 percent.
In a more troubling sign of investor disappointment, interest rates on Spain and Italy's 10-year bonds both shot up. The Spanish bond erased all the gains it had made in the past week, closing at 7.1 percent in trading -- a half percentage point higher than where it began the day. The Italian bond jumped to 6.3 percent after opening at 5.8 percent.
Draghi's comments echoed yesterday's announcement from the Federal Reserve that it would do no more than continue the same policies it has used for the past three years. Using the oblique language favored by central bankers, the Fed's Open Market Committee said it "expects to maintain a highly accommodative stance for monetary policy" to address the slowing U.S. economy.
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