The latest from Europe — little clarity on Eurozone fate

Well, I have to say that I’m not heartened by the news from the summit in Europe today. The European Central Bank has not made the bold moves that seem required, and the political brinksmanship between Europe’s wealthiest countries and those with the worst debt crises seems likely to continue.

From the NYT’s European Central Bank Moves to Head Off Credit Crunch:

The European Central Bank moved aggressively to head off a recession and credit crunch in the euro area Thursday, cutting its benchmark interest rate for the second month in a row and taking unprecedented steps to expand emergency funding to cash-starved banks.

But stocks fell after Mario Draghi, the E.C.B. president, quashed hopes that the bank might drastically scale up its purchases of euro area government bonds to help contain the sovereign debt crisis. Yields on Italian and Spanish bonds rose, an indication that investors were more pessimistic about those countries’ creditworthiness.

The Financial Times’ Brussels Blog has been tracking developments daily — and hourly. From a post within the last hour:

All in all, Mario Draghi’s comments have gone down pretty badly in the markets. The euro is down 0.7 per cent to $1.3310, the FTSE Eurofirst 300 is off 0.9 per cent and Wall Street’s S&P 500 is down 0.8 per cent, despite a bigger than expected fall in US weekly initial jobless claims.

Over on the FT’s Money Supply blog, the tireless Claire Jones has gauged the significance of what Draghi said earlier today.

“From markets’ perspective, it was pretty much a presser of two halves.

“It started well enough with the ECB president announcing a raft of measures to soothe funding strains, including an offer of three-year loans and far more relaxed collateral requirements. With €230bn of eurozone bank debt falling due in the first quarter of 2012 alone, that will undoubtedly help.

“But markets will be less than enamoured with what followed, when Mr Draghi made clear that the option of capping government bond yields had not been raised at the governing council meeting.”

Calculated Risk has a number of links and policy summary here.

From the WSJ’s European Sovereign Bond Yields Jumping on Draghi Disappointment:

European bonds are not liking this Mario Draghi press conference.

From the WSJ’s Peripheral Bonds, Euro Slump As Draghi Refuses To Commit:

The ECB cut key interest rates for a second straight month and said it will lend banks as much money as they want for three years to ease strains in financial markets. But Draghi tempered rising expectations that the ECB will increase its purchases of Italian and Spanish government bonds.

He also sounded a cool note about another option for easing the crisis, this one involving loans to the International Monetary Fund for use as aid to troubled euro-zone governments.

“We shouldn’t try to circumvent the spirit of the treaty, no matter what the legal trick is,” Draghi said at his second rate-setting press conference since he took over from Jean-Claude Trichet last month.

The ECB has resisted forceful action to ease the crisis, saying that could fly foul of its role as defined in the European Union’s 1998 Maastricht treaty.

Yields on Italian and Spanish bonds rose sharply and the euro slid more than one and a half cents from its session highs against the dollar, while safe-haven German bonds recovered from earlier declines to trade higher on the day.

The two-year Italian bond yield rose 56 basis points to 5.93% while the 10-year yield rose by 30 basis points to 6.27%, according to Tradeweb. The two-year Spanish bond yield climbed by 40 basis points to 4.54% while the 10-year Spanish bond yield rose by 27 basis points to 5.64%.

Not good news from Europe today, where leaders seem content to kick the sovereign debt can down the road. How much longer can that continue until the crisis spins out of control?