There has been much disappointment over European Central Bank President Mario Draghi’s apparent failure to initiate another round of bond purchases from the secondary markets to bring down Spanish and Italian 10-year yields.
While Draghi signaled the central bank intends to buy sovereign bonds to bring down borrowing costs, he conceded that differences with the German Bundesbank remain over the ECB’s so-called bond purchase program, the Securities Market Program (SMP).
John Ryding, former Chief Economist at the Federal Reserve Bank of New York and Co-founder of RDQ Economics thinks the markets wanted to hear the ECB announcing restarting its Securities Market Program where the central bank purchases bonds directly from the markets to ‘facilitate the transmission of monetary policies.’
Contrasting the current situation with 2011, Ryding said the former ECB President Trichet didn’t announce any measures to bring down borrowing costs of the peripheral states around same time last year.
When markets melted subsequently in the second week of August 2011, the ECB had to intervene and buy bonds directly from the market through the Securities Market Program to bring down unsustainable borrowing costs.
That being said, the ECB remains divided over restarting the SMP with the Germans opposing it. Austrian central bank governor Ewald Nowotny had called for giving a banking license to the region’s bailout funds, the European Stability Mechanism and its predecessor the European Financial Stability Facility, so that they can borrow from the ECB and leverage their $500 billion reserve to buy sovereign bonds, but Draghi has chosen to remain silent on it.
Apart from bringing down overnight lending rates, Draghi can also initiate other steps to bring down the high yields of Spanish and Italian bonds to ensure the transmission of monetary policies are facilitated for Spain and Italy, Ryding added.
Asked to comment on ECB’s preoccupation with interest rates rather than growth, Ryding said unlike the US Fed’s dual mandate of creating employment and bringing down inflation, the ECB has only the single mandate of controlling price appreciation which is a contentious issue between Germany and rest of Europe.
Since a euro break-up is not an option, as the result would be catastrophic, you can’t be a ‘high church’ of monetary policies, which the Bundesbank is currently practicing, Ryding noted.
The ECB needs to deliver over the next few days and buy Spanish and Italian bonds through its Open Market Operations, ‘walking the walk, rather than talking the talk.’
On the other hand, the problems the US is facing are fiscal in nature and not monetary, though slow growth remains an area of concern. Since the Fed is likely to keep interest rates low at least through 2014 and with over a trillion-and-half dollars in excess reserves on the Fed’s balance sheets, it becomes clear that the US central bank can do very little to offset things.
However, for the ECB, the situation is vastly different, Ryding added. You can watch the video here.