Interest Rates Drop on Threat of ECB Action

ECB logo
ECB logo

ECB President Mario Draghi has not backed away from his assertion that the bank can buy the short-term paper of Europe's weakest nations. Some of his allies were worried that the resignation of Bundesbank President Jens Weidmann would help forces that want to hold Draghi back. But Weidmann does not appear to be leaving. And Draghi apparently is convinced that the region's financial crisis is so severe that he may be the only person who can offer a quick and decisive block to rates of Spain and Italy that have spiraled higher recently.

The belief that Draghi is about to act has brought interest rates down quickly. According to MarketWatch:

Short-dated Spanish and Italian government debt rallied sharply, dragging down yields and steepening yield curves Tuesday, a day after European Central Bank President Mario Draghi indicated a new bond-buying plan could embrace debt with maturities of up to three years without violating the prohibition on central-bank financing of government borrowing.

Douglas A. McIntyre

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