Central banker in training

We are having a pullback in the market after the new ECB head Mario Draghi quashed some hopes of ECB being involved in solving the Euro crisis by lending to the IMF. Last Thursday in a speech, Draghi had mentioned the words “other steps might follow” if the European nations agree on stringent fiscal rules. Those words were taken by the markets and the financial media as hint to a stronger ECB involvement in dealing with the Euro crisis.

There has been talk about a program of the ECB lending to the IMF which will in turn lend to European countries. The reason you have take this circular route is because by law the ECB cannot lend directly to sovereign countries.  So this is a technicality to get around that law because the ECB is allowed to lend to the IMF, although in spirit it is going against the law. Today Draghi strongly suggested that he wants to stick to the spirit of the the European treaty and he expressed surprise at how his words were interpreted. Draghi is new on the job and I think it is a lesson for him that whenever he gives speeches he has to be pretty specific, unless he wants to achieve a policy end by being vague.

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