Markets slump after ECB fails to deliver swift action on euro crisis

By GARETH MACKIE
Published on 02/08/2012 19:41

MARKETS across Europe fell sharply today after the European Central Bank (ECB) disappointed investors who had been hoping for quick action to contain the region’s debt crisis.

ECB president Mario Draghi, who last week pledged to do “whatever it takes” to save the euro, said the central bank would gear up to buy bonds on the open market, but would only act once eurozone government have activated bail-out funds to do the same.

He indicated that any intervention would start in September at the earliest, and would depend on distressed countries making a request and accepting strict conditions and supervision.

However, the ECB still needs to persuade Germany to sign up to the measures. Howard Archer, chief UK and European economist at IHS Global Insight, said Europe’s largest economy has “serious objections” to bond purchases.

He said: “As such, there is currently a lot of wariness about the effectiveness of what the ECB will finally deliver.”

Stocks markets had risen today in anticipation that the ECB would reveal bold measures to address the debt crisis, but disappointment at the lack of immediate action led to a sell-off.

The FTSE 100 Index closed down 50.52 points, or 0.9 per cent, at 5,662.3. The CAC 40 in France and Germany’s Dax both fell more than 2 per cent, and in Spain, the Ibex 35 tumbled more than 5 per cent.

CMC Markets analyst Michael Hewson said: “If markets were hoping for some immediate clarity about how ECB president Mario Draghi intended to back up last week’s comments to preserve the euro, they were soon disappointed.

“Having walked markets all the way up the hill this week, Draghi’s lack of a concrete plan has seen him walk us some of the way back down again.”

Italian and Spanish bond yields also spiked sharply higher, with the Spanish ten-year yield once again pushing above the 7 per cent level.

Speaking after the ECB kept eurozone interest rates at a record low of 0.75 per cent, Draghi said: “The governing council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective.”

The Bank of England also kept interest rates on hold at 0.5 per cent today and, as expected, announced no extension of its £375 billion bond-buying programme.

Alpari market analyst Craig Erlam said Draghi looked like a “man defeated” following his meeting with Jens Weidmann, the head of Germany’s central bank.

Erlam 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.”

Ishaq Siddiqi, market strategist at ETX Capital, said investors felt Draghi had failed to deliver on his pledge to safeguard the euro by not unveiling a “big bazooka” initiative.

He said today’s meeting “indicated that there remains a discord between policymakers on future measures”.