Draghi pours cold water on euro zone grand bargain

December 9, 2011

By Pierre Briancon and Neil Unmack
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

We’ll take care of the banks; you deal with your debt. That’s the stern message European Central Bank President Mario Draghi chose to send to euro zone governments on the eve of their high-stake summit. By insisting repeatedly on the “spirit” of the European Union’s founding treaties, Draghi has scotched any speculation that the central bank could save the single currency by stepping up its sovereign bond-buying programme.

As if the message wasn’t clear enough, Draghi paid homage to the “Bundesbank tradition” that inspired the creation of the euro zone – specifically, that monetising budget deficits should be prohibited. He did, however, leave the door ajar for the second variety of bazooka that has been considered in recent weeks: using central bank loans to boost the International Monetary Fund’s resources.

It would be possible, Draghi implied, for the euro zone’s national central banks to lend to the International Monetary Fund, as long as their loans weren’t used for a dedicated euro zone fund. Even then, he acknowledged that this would prove legally difficult to do. Those who hoped for more aggressive action from the ECB’s new president will be disappointed – or at least will have to wait.

Draghi is, however, willing to help banks. Combined with a 25 basis point cut in interest rates, that should go some way to help ease the credit crunch that is threatening to tip the euro zone into another recession. The ECB will offer two separate three-year liquidity facilities, providing the long-term funding that private investors won’t.

Most notably, Draghi also loosened the rules on using bank loans as collateral, making it easier for lenders to raise funds against assets that can’t be easily repackaged into bonds. But the responsibility for such claims will be borne by the national central banks, not the ECB. Euro zone member states would take on greater liabilities at the same time as the central bank is demanding that they put their fiscal house in order: if Draghi was aware of the irony, he seemed impervious to it.

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