There was a weight of expectation upon the shoulders of the ECB chief today and overall he appears to have modestly disappointed. The price action on both the single currency (lower), in bond markets (yields higher in Spain and Italy) and stocks (Spain down more than 4% in 30 minutes) reflects this. To sum up, the notable points were that Draghi expects governments to get stuck in with regards to buying bonds via the EFSF and ESM (the temporary and permanent rescue mechanisms), but it’s worth noting that this can only happen for countries that have requested formal assistance (plus the ESM has yet to be fully ratified). For its part, the ECB said that the issue of seniority will be addressed in the coming weeks, this being the preferred creditor status that ECB bond-holdings have vs. the private sector. Or in other words, the central bank is talking about this and other ‘non-standard’ measures, but that nothing has been decided.
Draghi was also taken aback by the reaction to his comments of last week, which is a surprise for one so seasoned in the field of policy and markets. But when it comes to a 23-member Governing Council, coupled with 17 finance ministers and a layer of EU decision-makers, then it should not surprise that Draghi could not follow up on his words in the space of seven days. After today’s announcement, markets have lost faith in the ECB’s ability to step up to the plate, even though they probably over-stepped the mark by thinking this was going to happen anytime soon. This perception has been enhanced by Draghi’s admission that there was one member who had reservations with the statement today. In sum, Draghi has probably shortened the time-frame in which Spain will formally ask for a bailout.