ECB inaction sends Spanish markets into tailspin

Spain’s financial markets fell sharply on Thursday after European Central Bank President Mario Draghi failed to follow last week’s pledge to “do whatever it takes to preserve the euro” with concrete action.

Speaking after the ECB’s monetary policy committee meeting, which opted to keep interest rates on hold at 0.75 percent, Draghi said the ECB would only buy euro-zone sovereign debt in the open market after distressed countries had requested the European Financial Stability Facility (EFSF) and the permanent European Stability Mechanism (ESM) rescue fund to do likewise.

At 4.20pm, the yield on the benchmark Spanish 10-year government bond had climbed back above 7 percent to stand at 7.027 percent, pushing the spread with the German equivalent to 574 basis points, up 38 basis points from Wednesday’s close. The blue-chip Ibex 35 was down 3.01 percent at 6,517.50 points.

“Governments must stand ready to activate ESM/ESF in the bond market when exceptional financial market circumstances and risks to financial stability exist,” Draghi told a news conference.

“There is a lack of action so he [Draghi] has basically passed the buck back onto the politicians,” Reuters quoted Knight Capital strategist Ioan Smith as saying.

Draghi has been under intense pressure to move to ease the strain on Spanish and Italian debt in the markets. The United States sent Treasury Secretary Timothy Geithner to Europe this week to meet with Draghi and other top European financial officials to discuss ways out of the euro crisis.

However, Germany has made known its objections to the ECB exceeding its core mandate, which is to ensure price stability in the euro zone. In remarks published just a day before the ECB meeting on Thursday, Bundesbank President Jens Weidmann indicated Germany was prepared to use its weight to prevent the ECB renewing its now dormant Securities Markets Program (SMP).

“We are the largest and most important central bank in the Eurosystem and we have a greater say than many other central banks in the Eurosystem,” Weidmann said.

Draghi said all members of the ECB’s Governing Council had endorsed the statement issued after Thursday’s monetary policy meeting with one exception: presumably Weidmann.

“It is clear and it’s known that [the] Bundesbank [has its] reservations about the program of buying bonds,” Draghi said.