U.S. Treasury Secretary Tim Geithner and International Monetary Fund chief Christine LaGarde almost begged European Central Bank President Mario Draghi to throw his weight behind the effort to steady the sovereign debt crisis in Europe. He said no, which will erode much of the confidence that global capital markets have in a broad turnaround of the financial state of the region.
Draghi says the deep problems of the national economies in the region cannot be solved by monetary policy. His opinion is not unlike that of Fed chief Ben Bernanke. Bernanke has told Congress several times that budget problems, stimulus and the national debt need to be addressed in legislation. The Fed can offer a short-term backstop with low rates and the purchase of bonds. But that is hardly adequate, Bernanke says, to tackle much broader issues.
Draghi says he will offer no more temporary help. He is arguing against reality to some extent. The ECB has loaned the region’s largest banks hundreds of billions of euros. Some of that money has been used to buy sovereign debt, which has helped lower interest rates on this paper. The action has, however, put the balance sheets of banks holding this sovereign debt in jeopardy if any other country goes the way of Greece.
The ECB is not in business to buy bonds issued directly by countries in the region. That is not part of the ECB charter, Draghi claims. And the central bank probably will not continue to loan private financial firms money at low rates. Draghi seems to believe that method of helping Europe is over. The ECB has done its best already.
Without the ECB, there will still be a great deal of concern about whether funds set by the IMF and European Union can solve sovereign debt problems on their own. The IMF has new commitments of 430 billion euros from its members. EU leaders have cobbled together a fund of about one trillion. But there are some restrictions on how this fund can be used and when. Between the IMF and EU facilities to help the most troubled sovereigns, the combined pools may not be enough.
Investors want a three-legged stool to renew their faith in the finances of the region. All they will get is two legs.
Douglas A. McIntyre