European Central Bank president Mario Draghi “overplayed his hand” by failing to offer concrete action to support the eurozone earlier this month, according to Invesco chief economist John Greenwood.
On 2 August, the ECB decided to hold off from making any changes to monetary policy at its monthly meeting, although Draghi said the central bank will revamp its bond-buying programme to stop government borrowing costs on the eurozone periphery rising to unsustainable levels.
The move disappointed the markets, which had expected bolder action after Draghi’s earlier comments that the central bank would do “whatever it takes” to preserve the single currency.
Greenwood says the ECB’s decision to re-activate the ECB’s bond-buying programme for Spain and Italy will ultimately fail to achieve its desired aim of bring down sovereign borrowing costs.
The economist says: “Market participants are looking to the ECB for either large-scale, open-ended purchases of government bonds of peripheral, crisis-affected economies – a kind of quantitative easing – or some assurance that yields on these instruments will not be allowed to rise above some specified level.
“Without these kinds of overwhelming guarantees, any programme of limited or incremental purchases is simply not going to prevent yields from rising further.”
Other problems with Draghi’s proposal include opposition from Germany. The Bundesbank reiterated its opposition to bond purchases immediately after Draghi’s speech, meaning the hurdles implementing any form of QE in the eurozone are still very high.
Greenwood also points out that the ECB’s bond-buying programme will not be activated until troubled nations formally ask for support from the European Financial Stability Facility or European Stability Mechanism rescue funds.
He says: “In other words, the ECB will not step into the bond markets until things have worsened to the point where the country has appealed for a Greek-style rescue.
“Investors looking at Spanish or Italian sovereign bonds will remember the Greek debt haircut.”