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If you look at the futures, the rally took off during the European session. The following news is most likely behind the action:
Members of German Chancellor Angela Merkel’s coalition parties signaled they won’t stand in the way of European Central Bank chief Mario Draghi’s plan to buy government bonds.
The envisaged move to purchase troubled euro states’ government bonds is “a wise middle way” to solve the region’s debt crisis, Elmar Brok, a European Parliament lawmaker and executive-committee member of Merkel’s Christian Democratic Union party, told Deutschlandfunk radio today.
Norbert Barthle, CDU budget spokesman, said that German lawmakers will have veto rights over bond purchases by the euro- area’s rescue funds, which would operate in tandem with the ECB under Draghi’s proposal. The temporary fund “was created for a purpose and bond-buying is in the manual,” Barthle said yesterday by phone.
With Merkel on vacation for another week and parliament in summer recess, there was no official government reaction to Draghi’s announcement yesterday of a blueprint to ease bond markets and lower borrowing costs for Italy and Spain in return for strict conditions. In her last statement on the crisis, on July 29, Merkel echoed Draghi’s language, saying that she will do everything to protect the euro.
Live With It
“This is a political form of bond-buying which Berlin can just about live with,” Nicholas Spiro, managing director of Spiro Sovereign Strategy Ltd., said in an e-mailed comment. “In German eyes there is no risk of unlimited and unconditional support for Spanish and Italian sovereign debt -- precisely the kind of intervention which the markets would deem credible.”
Stocks and the euro rebounded today as investors digested Draghi’s proposal to buy Italy’s and Spain’s bonds on the market as long as the bailout fund makes purchases directly from the two countries’ treasuries, a move that is only possible if the respective governments ask for aid and commit to tough conditions. Draghi said the details would be worked out in the coming weeks.
The euro gained 1.2 percent to $1.2327 at 4:51 p.m. Berlin time. The DAX Index added 3.7 percent to 6,849.23, heading for a weekly gain of 2 percent.
Spain’s Prime Minister Mariano Rajoy said today that he would consider asking the bailout funds to buy Spanish debt if it was “in the best interest of Spaniards.” He said he needs to see more details on what the ECB is planning in terms of bond buying and non-conventional measures before taking any decision.
‘Right Balance’
German Economy Minister Philipp Roesler, whose Free Democratic Party is Merkel’s junior coalition partner and has been skeptical of bailouts, told broadcaster N-TV that bond purchases are “within the independence, the possibilities of the central bank,” according to an e-mailed transcript. “One always has to be careful to keep the right balance” to avoid accelerating inflation, he said.
Alexander Dobrindt, general secretary of the third coalition party, Bavaria’s Christian Social Union, called for a reform of ECB voting rules to give Germany a veto right in the Governing Council, according to an interview in today’s Tagesspiegel newspaper.
Handelsblatt, in a front-page article, focused on the “isolation” of Bundesbank President Jens Weidmann, whom Draghi signaled was the only Governing Council member to oppose the bond-buying plan. The business newspaper said that Merkel is distancing herself from Weidmann, her former chief economic adviser, and asked: “How long can he hold out?”
While Europe’s governments have spent too much and economic reform measures as well as spending cuts have to be implemented, more has to be done to solve the current crisis and the ECB will now provide that short-term aid, Brok said.
“We’re at an epochal turning point,” Brok said. “We’ve had 60 years of peace, freedom and welfare and now comes an attack that could destroy this concept, which we have to deflect.”
To contact the reporter on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net
To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net |
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