European Central Bank head Mario Draghi insisted yesterday that the embattled euro was “irreversible” but markets sold off sharply on disappointment he announced no immediate measures to tame the debt crisis.
“The euro is irreversible,” Mr Draghi told a press conference, noting that speculative financial market bets against the euro surviving were pushing government borrowing costs up to unacceptable levels.
Last week, Mr Draghi had promised he would do everything to save the euro, raising hopes the ECB would intervene directly on government bond markets to force down borrowing costs for the likes of struggling Spain and Italy.
He reiterated yesterday the ECB was ready to do this – but not just yet.
In face of growing pressures, the ECB “may undertake outright open market operations of a size adequate to reach its objective”, he said, but added that the details would be worked out “in the coming weeks”.
But whatever the circumstances, Mr Draghi said it was “pointless” to bet against the euro. “It stays. It stays. It stays,” he insisted.
Mr Draghi was speaking after the ECB left its key benchmark interest unchanged at 0.75 per cent but that had been largely expected and markets sold off sharply as his remarks came through with no new specifics to provide a lead.
Madrid stocks slumped more than five per cent as investors there looked in vain for the measures they had hoped would help stabilise Spain’s borrowing costs while other European markets were down as well, reversing early gains.
The euro briefly topped $1.24 after Mr Draghi spoke of possible ECB market intervention but then plunged on concerns that he announced no concrete measures. At about 1235 GMT, the euro hit $1.2404, the highest level since June 5, but then quickly pulled back to $1.2220.
“As markets digest the fact the ECB has done nothing concrete to sort out Spain’s problems, $1.20 comes back into view,” said research director Kathleen Brooks at trading site Forex.com.
Mr Draghi also said the idea of reducing the rate commercial banks earn for depositing money with the ECB to below zero was off the table for now.
Such a move was in “largely uncharted waters,” Mr Draghi said, adding the ECB had discussed a possible cut in its main benchmark interest rate but “in its entirety, decided this was not the time and that’s it”.
If commercial banks had to, in effect, pay the ECB to deposit money there, they might prefer instead to lend it out, thereby helping stimulate economic activity in a slowing Europe.
Mr Draghi insisted the ECB was firm in its determination to preserve the euro.
“The endorsement to do whatever it takes to preserve the euro as a stable currency has been unanimous,” Mr Draghi said, acknowledging however that Germany’s central bank had “reservations” on buying government bonds as one way of tackling the eurozone debt crisis.
Meanwhile, the leaders of two of the countries’ most badly-hit by the crisis, Italy’s Mario Monti and Spain’s Mariano Rajoy were to meet in Madrid to discuss solutions to the turbulence that has crippled their economies.
In a speech in Finland earlier yesterday, Mr Monti warned the crisis was bringing a “resurgence of some prejudices or stereotypes” to the continent and feared the return of “old phantoms (of) mutual scepticism”.