ECB's bond-buying plans delight the markets

The euro reached a two-month high against the dollar today after Mario Draghi's bond-buying plan bolstered confidence in the eurozone.

by Rebecca Burn-Callander
Last Updated: 19 Aug 2013
Proof that the fate of a nation’s economy can turn on the whim of one man, following ECB president Mario Draghi’s promise to buy bonds yesterday, the markets have rallied. This is just a promise – nothing has actually happened yet. But the comfort derived from Draghi’s statement that his scheme will provide a ‘fully effective back-stop’ has got investors’ juices flowing.

Under the new plan, the ECB will be able to buy a potentially unlimited amount of bonds of debt-laden eurozone members. All the countries need to do to access this support is make a formal request for a bailout and then be seen to stick to any terms of austerity imposed by the ECB.

Draghi’s words have unleashed a full-scale trading storm. The euro rose 0.3% to $1.2673 in early trading, hitting a two-month peak against the Japanese yen and a one-month peak against the Swiss franc. In Paris, the Cac40 index has bounced up by more than 1%, with Frankfurt's Dax index also experiencing a rise, up 0.65% in the first few hours of trading.

And leaders from Spain and Italy will no doubt be sending Draghi a few nice bottles of chianti today. Yields on Spanish and Italian 10-year bonds have dropped steeply, slashing the implied borrowing costs for the two countries. As of this morning, Spanish 10-year bond yields fell to 5.77%, below 6% for the first time since May, while yields on the equivalent Italian bonds fell to 5.19%, out of the danger zone.

But will the euro’s lucky streak run out once the shine wears off Draghi’s promise and the bank has to put its money where its mouth is? Or is the ECB president right when he says, ‘the euro is irreversible’. Only time will tell.

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