Mario Draghi cancels his speech

European markets have edged lower and have closed for the day.  The FTSE 100 is unchanged and is down 0.89 points, France’s Cac is off 0.9 per cent, Italy’s FTSE MIB being down with 0.13 per cent, Spain’s Ibex is off 0.88 per cent, and Germany’s DAX being down 0.64 per cent.

Mario Draghi, president of the European Central Bank has cancelled his speech to the meeting of the Federal Reserve which was about to take place at Jackson Hole. It is assumed that the European Central Bank will go back to buying government bonds.

The expectations concerning QE seem to be fading. The Dow Jones Industrial Average is up around 16 per cent.

Mario Draghi, President of the European Central Bank on Global Investment Conference

Mario Draghi plans a bond buying program

Mario Draghi, president of the European Central Bank plans a bond buying program but the German bank Bundesbank is against the idea.

Draghi concentrates on a bond buying program for Italy and Spain but Bundesbank is not in favour of it. The bank sees significant risks concerning this program and is in the opinion that European governments, not central banks should conduct sovereign bailouts.

The European Central Bank plans to set yield caps on Italian and Spanish bonds which unfortunately led to a fall in the two countries’ interest rates.

Mario Draghi’s plan is to buy bonds from countries that have already asked for help from the European bailout fund.

The talks will take place on August 23^rd in Germany, Berlin. There are about to gather the Greek Prime Minister Antonis Samaras, Angela Merkel and Fancois Hollande.  There is significant pressure exerted on Greece and it plans to ask for about 2 years more in order to meet its goals concerning austerity.

The ETF of iShares MSCI Germany Index has declined 0.3 per cent, 1.6 per cent for iShares MSCI Italy ETF and 1.4 per cent for IShares Spain ETF. The Eurodollar went 0.04% up this week.

The European Central Banks’ bond buying program is the solution for this situation.  If it succeeds, a global financial rally will occur. But if it does not, we can expect lower prices and more volatility.

Mario Draghi reacted badly to the German criticism of the bond plan of the ECB

The ECB President Mario Draghi reacted badly to the criticism of Germany concerning his wanting to intervene in bond markets. Moreover, he reminded the largest economy of Europe to anchor the euro.

Draghi has recently commented that the European Central Bank is always willing to act within the limits of its mandate and said that sometimes they need to go beyond standard policy tools it order to fulfill their mandate.

Some German politicians and Bundesbank President Jens Weidmann did not agree with the plan of Draghi to take up again government bond purchases in order to lower borrowing costs in some countries like Spain or Italy.  Chancellor Angela Merkel has shown great support for the bond buying of the EBC.

Mario Draghi has written that the ECB is not an institution but it is wholly dedicated to its responsibilities to the European Union. He said that the bank had never lost sight of its mission to provide a stable currency.

According to Weidmann, bond purchases will lead to the government being more reliable on the central bank and that would not solve the debt crisis in Europe.

Draghi’s plan includes winning government time for the implementation of fiscal reforms and making sure that any assistance is comes with conditions. The plan requires the request for aid from Europe’s bailout fund by distressed governments, which will also have to sign up a memorandum of understanding before the reducing of bound yields by the ECB if necessary.

The systematic risk includes the fact that ECB could become a risk to the financial system. What the EBC is doing to change the euro is illegal, added Frank Schaeffler.

Mario Draghi commented that in order for Germany to continue to prosper, it has to be an anchor of a strong currency.

A senior economist at Berengerg in London,Christian Shulz said that Draghi  seems to think that his critics are anti-European. He also said that there has been many misleading by the German politicians concerning what the ECB will do and what will come for the euro.

Draghi is convinced that they need a structured and gradual effort to complete EMU and if this happens, the euro will have stable foundations He says that the euro is founded on peace, prosperity and stability.