Germany gets the blame as ECB fails to soothe eurozone worries

Aug 3, 2012

Analysts line up to denounce ECB's failure to flesh out plans to buy Italian and Spanish debt

ITALY and Spain's borrowing costs rose sharply yesterday as international investors showed their displeasure at the European Central Bank's failure to provide a concrete plan to rescue weaker eurozone nations from their debt crises.

Analysts had hoped that, having promised at an appearance in London last week to do "whatever it takes" to save the eurozone, ECB chief Mario Draghi would flesh out plans to buy the debt of Italy and Spain at below-market rates when he appeared at his monthly press conference yesterday.

In the event, Draghi said the ECB was prepared to buy government debt but gave few concrete details, the BBC reports. Investors were left to guess when such an operation might start, how much would be spent, and how long it would go on for.

To make matters worse, Draghi suggested that the German Bundesbank was against bond buying. What details of bond buying plans he did reveal appeared designed to soothe German fears that it will be forced to fund weak single currency members for many years.

Draghi said the bonds the ECB planned to buy will be of short duration - two to three years - and any government helped by the scheme would have to officially request assistance. This last measure would mean Italy and Spain opening their books to EU officials and subjecting themselves to the kind of spending rules imposed on bailed-out countries such as Greece and Ireland - an obstacle that could prove insurmountable.

Italian PM Mario Monti said he had "no intention" of requesting assistance, The Times reports, while Spain has previously indicated its own resistance.

Carl Weinberg, chief economist at High Frequency Economics, gave an indication of analysts' disappointment, saying: "Once again, we have no commitment to action from the ECB, and no execution of promises previously made.

"Traders and investors who expected immediate action are, and should be, disappointed. More scolding of governments, but no ECB action, is the bottom line."

Azad Zangana, European economist at Schroders, told the Daily Mail: "Draghi warned investors not to bet against the euro, but the trouble is those that are doing so have done rather well so far this year."

Former Bank of England rate-setter David Blanchflower told The Independent: "The three lessons of the 1930s depression are that monetary policy is powerful, you should act sooner rather than later and do more rather than less. Draghi has failed on all three counts."

Marchel Alexandrovich of Jefferies was scathing about Draghi's insistence that governments request help before their bonds will be purchased.

"What Draghi has basically indicated is that the problem in the bond markets has to get considerably worse before the ECB steps in to help," Alexandrovich told the BBC's Stephanie Flanders.

"This is an incredible turn of events. Forget pre-emptive action... Prior to today, the markets hoped a bailout would not be necessary, now they have been told it is inevitable!"

But the most damning verdict came from Italy, where government borrowing costs are now reaching unsustainable levels thanks to inaction by the ECB.

In a front-page editorial headlined 'Fourth Reich' (above), the right-wing newspaper Il Giornale was clear with whom the blame lies.

"During the first Reich, the German sovereign also owned the title of Roman Emperor, and the ways they subjugated the European states are well known," said the editorial. "Two World Wars and millions of dead are clearly not enough to satisfy Germany's hegemonic aims."

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A lovely bit of completely one-sided Germany-bashing, quoting one hysterical newspaper and a bunch of analysts calling for the printing of mind. Never mind the law prevents the ECB from financing government debt, which is a bailout through the backdoor. Like it or not, there already is a bailout mechanism – the EFSF and the ESM – stricken countries can apply to if they're unable to meet their obligations. But to do this would come with conditions – something Spain and Italy wish to avoid. Never mind the loss of face. After all, "Spain isn't Uganda".

correction: *printing of money*

I'm not surprised that the ECB cavils - Greece's travails and the associated Teutonic worries will be like a rehearsal if Italy goes under, let alone Spain.