ECB's plan for debt crisis light on specifics as investors unimpressed

EUROPEAN EQUITY markets fell and the euro weakened yesterday after investors were disappointed by European Central Bank president Mario Draghi’s failure to announce immediate and concrete measures to tackle the area’s sovereign debt woes.

Peripheral bond spreads rose, with Spanish yields blowing out past 7 per cent again, after the ECB kept interest rates on hold and Mr Draghi’s comments fell short of expectations.

Markets had strengthened in the lead-up to yesterday’s ECB news conference as hopes grew that Mr Draghi would unveil a bond-purchase plan to end the debt crisis after he last week pledged to do everything necessary to save the euro.

He signalled yesterday that the ECB intended to join forces with governments to buy bonds. While his proposals went further than the ECB’s market interventions to date, he indicated that the 23-member governing council had yet to reach a final agreement.

“He conceded that the Bundesbank has reservations,” a Dublin broker said. “How you square that circle is what everyone wants to know . . . I think the big issue is that Germany is not convinced.”

Mr Draghi’s failure to reassure investors came after the US Federal Reserve on Wednesday deferred action to stimulate the economy until September at the earliest, while the Bank of England left interest rates unchanged.

The Stoxx Europe 600 index fell 1.3 per cent to 259.28 at the close of trade. However, the gauge has still rallied 3.6 per cent since Mr Draghi promised on July 26th to do whatever it takes to preserve the currency. An index of banking shares was the worst-performing industry group on the Stoxx 600.

“The markets were expecting too much from the meeting and were disappointed,” said Peter Dixon, global equities economist at Commerzbank in London. “There were some ideas brought forward by Draghi [yesterday], but they were sketchy and light on detail, while the markets were looking for a concrete plan.”

The euro strengthened to a four-week high of $1.2405 as Mr Draghi began his press conference, before sliding to $1.22 less than half an hour later. Spanish 10-year yields climbed above the 7 per cent level that triggered bailouts of Ireland, Greece and Portugal.

German, Dutch, and Finnish two-year yields dropped to records as investors favoured safer assets.

“Mario Draghi’s press conference was short on specifics . . . and failed to live up to elevated expectations as peripheral [bond] spreads again moved wider,” Dublin-based Glas Securities said in a note. – (Additional reporting: Bloomberg)