Back-pedaling

The European Central Bank (ECB) seems to be shying away from its own boldness. Nervous financial markets are still anxiously awaiting decisive action to lower high interest rates for Spain and Italy, but no such action has been taken so far. Well, at least not yet. After Mario Draghi, president of the ECB, boldly announced last week that he would do just about anything to save the tarnished euro, his public appearance following the meeting of the ECB council in Frankfurt was rather more subdued.

Expectations have been running extremely high, especially since German Chancellor Angela Merkel, French President Francois Hollande and Italian Prime Minster Mario Monti had joined the chorus. But the expectations have been disappointed, and very badly at that.

Draghi did indeed announce that the Central Bank might perhaps buy Spanish and Italian government bonds once again with the aim of lowering interest rates in order to help refinance crippled states. However, he did not specify when and how such action is to be taken. He preferred to delegate the tricky matter to various committees within the ECB for further consultation - which may well last for quite a few weeks. Until then, financial markets are likely to drive up interest rates even higher.

A lack of transparency

At this point in time, the ECB president is not considering concerted action by the European Central Bank and European rescue funds to buy up massive amounts of government bonds. Almost grumpy, Draghi added that the governments in question have not yet submitted any requests for such aid. It cannot be the task of the ECB to take over the responsibilities of governments, he added bluntly in the direction of Madrid and Rome. He denied the existence of verbal agreements between heads of government and the Central Bank, although Jean Claude Juncker, Luxemburg's Prime Minister and head of the eurogroup, had hinted as much. Could there be a growing rift between the various euro-saviors after all?

Obviously, Draghi sees himself forced to backpedal a bit after having overextended himself in his announcement last week in London. Jens Weidmann, the powerful head of Germany's Bundesbank, is very skeptical about the acquisition of further government bonds by the ECB. He denied Draghi his approval during the council's meeting - making the dangerous rift in the very disparate group of euro-saviors ever more evident. Germany is opposed to rescue actions by the ECB since it considers the legal basis for such action as rather dubious. Furthermore, it fears that such action may increase the risk to shareholders - and ultimately to tax payers and voters in Germany. The ECB has already bought up massive amounts of government bonds of ailing states last year, adding up to a mountain worth 211 billion euros ($257 billion). The intervention has however only resulted in very short-term benefits. Its effect in helping ailing states has already run out of steam.

Disappointed hopes

Draghi has also largely damped the hopes of Italy, Spain and also France that the future rescue fund ESM would be able to borrow unlimited amounts of money from the European Central Bank. The ECB does not consider the ESM in its present form as a viable business partner. That means the ESM will not turn into a bank - unless the euro states change the ESM contract. However, that option does not seem likely. Germany's hands are bound at the moment as the government must wait for a verdict on the ESM by the Constitutional Court, a decision that is due not before September 12th.

The ongoing drama of saving the euro is about to enter the next stage. No grand coup has yet occurred. What we have instead is a rather weakened and indecisive central bank president. And that is not likely to enhance the ECB's credibility in the eyes of skeptical financial markets. Draghi now wants to wait for the ESM to act as soon as Spain submits a request for aid. Then the ECB can join the ESM in buying government bonds. But it won't take the first step. And that means, the ball is once more in the politicians' court.