Draghi repeats Trichet's mantras at ECB press conference
03/Nov/2011 • Currency Updates•
The hopes raised by the ECB decision to cut rates to 1.25% (surprising the consensus, which expected no change) were quickly dashed by Mr. Draghi’s plodding, hapless performance at the press conference. Mr. Draghi suggested that the decision to cut rates was prompted by weaker prospects for European growth. However, this appears to be about as far as the ECB is willing to go in acknowledging reality.
Draghi appears to have inherited his predecessor’s eerie detachment from the reality of the financial crisis. Predictably, he was bombarded with questions about the possibility of a Greek exit from the common currency. This has become more likely after Merkel and Sarkozy made it clear that a Greek referendum on the bailout package is in effect a referendum on Euro membership. Mr. Draghi replied, more than once, that he did not consider it a possibility, and suggested that the ECB had made no preparations for the eventuality, because “exit from the Euro is not contemplated in the treaty”, therefore, presumably, it cannot happen.
Draghi was similarly nonchalant when asked, rather pointedly, about the blow up of Italian sovereign rates above 6%, and the ominous inversion in the Italian curve, which means that the market is pricing in a non-negligible chance of default. In fact, one got the clear impression that many of the journalists asking questions had a better grasp of the situation than Mr. Draghi himself.
In summary, we are disappointed but not surprised at the lack of a clear break between Draghi’s leadership and Trichet’s. To repeat ourselves, again: no lasting solution to the Euro crisis is possible without massive ECB involvement. Draghi, like Trichet, insists that such involvement will not happen. We shall have to wait, again, for reality to force the ECBs hand. This is not a positive for the common currency. In the meantime, expect the enormous volatility in currencies to continue