The Economy

Draghi’s Soothing Words Fail to Calm Euro Fears

The European Central Bank president’s attempts to provide reassurance about the future for the euro has sent market players scurrying for cover.
Andrew SawersJuly 24, 2012

Soothing comments from European Central Bank (ECB) president Mario Draghi have done nothing to calm the markets, as yields on Spanish 10-year bonds hit record highs, German yields turned negative, and the euro hit new lows against the U.S. dollar.

In an interview with French newspaper Le Monde, Draghi said the euro was “absolutely not” still in danger. He insisted that “the euro is irrevocable.” While analysts may be “imagining scenarios in which there is an explosion of the euro area,” such thinking “underestimates the political capital that our leaders have invested in this union, as well as the support of European citizens,” he said.

Whether Greece remains in the euro is, said Draghi, “a matter for the Greek government. It has stated its commitment [to remain in the euro]; now it must deliver results.” Germany’s vice chancellor, Philipp Roesler, has since said, however, that he is “very skeptical that Greece can be rescued.”

Draghi refused to accept that there was even a risk of a euro zone recession. While acknowledging that the economy had “worsened,” he was adamant that “We still expect a very gradual improvement in the situation by the end of the year or the beginning of next year.”

The ECB cut its main policy rate from 1% to a historic low of 0.75% at the beginning of July. It also cut the rate on its deposit facility to zero in a move designed to encourage banks to lend to each other by removing the incentive to place deposits with the central bank instead.

Yesterday the euro fell below $1.21, taking it to a two-year low against the U.S. dollar amid concern that, despite all the rhetoric, European leaders are not making progress in supporting the economy.

Yields on 10-year Spanish bonds have topped 7.5%, up more than 50 basis points in a day, reflecting worries that Spain, and not just its banks, may need a bailout. Germany’s parliament approved a €100 billion bailout of Spain’s banks just as the Spanish government was lowering its own economic growth forecasts for 2013 and 2014.

Germany, meanwhile, has issued €4.2 billion of two-year notes at a negative yield of 0.06%. The rate is a measure of the flight to quality within the euro zone but probably also reflects expectations of deflation. Earlier this month, France sold short-dated notes (3–6 months) at rates around -0.005% to -0.006%.

Andrew Sawers is editor of CFO European Briefing, a CFO online publication.


4 Powerful Communication Strategies for Your Next Board Meeting