French President Francois Hollande and Germany’s Angela Merkel on Friday echoed European Central Bank President Mario Draghi’s pledge by saying they will do everything in their power to protect the eurozone.
Their joint statement came after they consulted by phone and after the French Finance Minister Pierre Moscovici said he trusts Draghi “to do exactly what is needed, to act so the markets are appeased and so there can be a relaxation of the interest rates for Spain and Italy.”
Around Europe, Draghi’s comments were taken by the financial markets as a signal that the ECB may be ready to buy more Italian and Spanish bonds.
Though how exactly it would do that is as yet unclear as the Bank is barred by European law from using its balance sheet to finance government spending.
Still investment banker Emanuele Bonabello of Banca Finnatin in Rome welcomed the initial response: “There was a positive effect from the statement by the president of the European Central Bank; the markets seem to have reacted positively and even our borrowing costs have fallen compared to the last auction of government bonds.”
But can that effect last? That is the key question given that there are divisions within the ECB’s governing council on how far it can go to save the eurozone with Germany’s national central bank, the Bundesbank, particularly resistant to the idea of the ECB directly buying bonds.
The Bundesbank regards central bank purchases of sovereign debt as monetary financing of governments and its resistance could narrow the ECB’s options.
“The mechanism of bond purchases is problematic because it sets the wrong incentives,” a Bundesbank spokesman said.
The Bundesbank saw the possibility of the EFSF bailout buying government bonds “as less problematic”, the spokesman added.