Markets dive after European Central Bank fails to deliver on promises to save single currency

| August 3, 2012 | 0 Comments

By
Hugo Duncan

16:43 EST, 2 August 2012

|

16:54 EST, 2 August 2012

Panic tore through the financial markets yesterday after the European Central Bank failed to fire the ‘big bazooka’ required to save the single currency.

ECB president Mario Draghi last week vowed to do ‘whatever it takes’ to shore up the eurozone and added: ‘Believe me, it will be enough.’

It sparked speculation that the central bank would resume its government bond-buying programme and bring down soaring borrowing costs in troubled countries such as Spain and Italy.

Dithering: Financial markets and the euro dived after ECB's Mario Draghi failed to give details on how to save the single currency

Dithering: Financial markets and the euro dived after ECB’s Mario Draghi failed to give details on how to save the single currency

But Draghi struck a far more cautious note yesterday and – having left interest rates at 0.75 per cent – said the ECB would come up with ways to help struggling countries ‘over the coming weeks’.

Nobel Prize-winning economist Paul Krugman said: ‘European leaders have once again failed to rise to the occasion.’

Stock markets across Europe slammed into reverse and the FTSE 100 index lost more than 100 points in a matter of minutes. It closed down 50.52 at 5662.30.

The crucial 10-year bond yield in Spain – the interest rate the Government pays to borrow – lurched back above the 7 per cent level to 7.4 per cent. Italian borrowing costs hit 6.3 per cent.

Marchel Alexandrovich, an economist at investment bank Jefferies, said: ‘Draghi’s words are pushing the market into outright meltdown.’ 

Vague: Mario Draghi said the ECB would come up with ways to help struggling countries 'over the coming weeks'

Vague: Mario Draghi said the ECB would come up with ways to help struggling countries ‘over the coming weeks’

Michael Hewson, an analyst at City firm CMC Markets, said: ‘Draghi came to London last week and said, “believe me, it will be enough”, so everyone has been expecting the big bazooka. But he’s turned up today and left the firing pin at home.’

Draghi insisted the euro was ‘irreversible’ and warned traders that ‘shorting the euro is pointless’. But the single currency tumbled against the pound and the dollar.

David Buik, an analyst at Cantor Index, said: ‘That was so disappointing. In fact, it was dreadful – just rhetoric, platitudes and veiled promises – exactly what the market was not prepared to put up with. The reaction was violent.’

Bond yields above 7 per cent are considered unsustainable and proved a tipping point for Greece, Ireland and Portugal, forcing them to beg for international bailouts.

Cyprus has also been rescued by its European neighbours and it is feared that Spain and Italy will be the next dominos to fall, leading to a chaotic break-up of the eurozone.

Reservations: Jens Weidmann, head of Germany's central bank Bundesbank, opposes the bond-buying programme

Reservations: Jens Weidmann, head of Germany’s central bank Bundesbank, opposes the bond-buying programme

Spain has already been granted £80billion of aid to prop up its broken banks but that is widely seen as a prelude to a full-blown state bailout.
The ECB was under pressure to wade back into the bond market and snap up Spanish and Italian debt to cap borrowing costs.

But Draghi said there would be no immediate intervention amid opposition to bond-buying from Germany and Jens Weidmann, head of its central bank, the Bundesbank.

‘It’s clear and it’s known that Mr Weidmann and the Bundesbank have their reservations about the programme of buying bonds,’ said Draghi.

Analysts said the failure to deliver on its promises seriously undermined the credibility of Draghi and the ECB.

Craig Erlam, a market analyst at Alpari, said: ‘What he said last week was they’ll do whatever it takes. Today it was more like they’ll do whatever the Bundesbank allows them to.

‘Draghi looked like a man defeated in the press conference, which came shortly after his meeting with Jens Weidmann. Today’s conference really has shown who is king.’

Azad Zangana, European economist at Schroders, said: ‘After building up market expectations to near euphoric levels, Draghi failed to deliver the policy to back up his promises of “doing whatever it takes to save the Euro”.

‘If the ECB does not follow up with some meaningful action in the near future, then there is a risk that markets lose all faith in Draghi’s ability to tackle this crisis.

‘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.’

Here’s what other readers have said. Why not add your thoughts,
or debate this issue live on our message boards.

The comments below have not been moderated.

“What ever it takes ” = If anyone thinks we have been kicking the can down the road – you ain’t see nothin yet.

They are stupid enough to print unlimited amounts of money to lend, which as we all should know will cause runaway inflation ……idiotic!! destroying peoples lives and savings just to save some politicians bad idea.

The only way that Germany will agree to bail out the failing Eurozone countries is if they are given complete control of their economies. Which, of course, has always been part of the plan. The second stage follows soon after, political control of the whole EUSSR. France always thought they would end up in overall command, but, as usual, they went belly up when the German Shepherd barked.

Sounds about right for a Kommissar of the Soviet EU
All words and no action as ever, not the I wanted any action.

Gawd! Get this over with. The Mediterranean countries are not sustainable. Believe me, I would love to have been born there, as I used to live there, lovely people, but the difference in cultural expectations are too great. Of course, if Germany wants to continue to subsidise them, I will look forward to moving there, though not until the ink is dry.

What a surprise, the fat cats are full of big words but always NO ACTION.

I can’t understand why the markets dive because of the euro ups n downs ! The countries all have a proper currency that they have used for years and can quite easily revert to in the case where the euro is finally ditched as unworkable and uncontrollable, so why all the ups n downs ?

“Do whatever it takes”. That’s about the most frightening thing I’ve heard about the Euro so far. Does that mean he’s prepared to bankrupt every member state? drive every Spaniard into unemployment (it’s 50% already)? Force the Greeks to eat grass? If the man really will absolutely stop at nothing, then be ready to accept anything and everything. How can the Euro be worth so much sacrifice by so many? It’s the idealogy of madness. Economic fascism.

It’s about time the plug was pulled on the Euro. What a waste of time and money. Just glad Britain didn’t join. Britain should now refuse to help bail out anymore Countries and start looking after its own finances.

“said the ECB would come up with ways to help struggling countries” i think what that actually means is that we will pump billion and trillions in to save it.. paid for by you and me.

The views expressed in the contents above are those of our users and do not necessarily reflect the views of MailOnline.

Leave a Reply

You must be logged in to post a comment.

Get Adobe Flash player