The European Central Bank disappointed markets as it said yesterday (2 August) that it is prepared to buy Italian and Spanish bonds on the open market but only after eurozone governments have activated bailout funds to do the same.
ECB President Mario Draghi indicated that any ECB intervention would start at the earliest in September and would depend on countries in trouble on bond markets making a request and accepting strict conditions and supervision.
He also indicated that German central bank chief Jens Weidmann had expressed reservations about bond-buying and further efforts would be needed to persuade the Bundesbank before a final vote to take action.
At a news conference following the central bank's monthly meeting, Draghi said the bank would consider other "non-standard" measures to rein in the euro zone crisis.
Markets underwhelmed by news from Frankfurt
"The Governing Council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective," Draghi said after the bank kept euro zone interest rates at a record low 0.75 percent.
The bank has already spent €210 billion buying bonds under its now dormant Securities Markets Programme (SMP) since May 2010, with limited impact, but Draghi said the new effort would be different in scope and conditionality.
Any new ECB action was conditional on eurozone governments using their European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM), the eurozone's bail-out funds first, he said.
"Governments must stand ready to activate the ESM/EFSF in the bond market when exceptional financial market circumstances and risks to financial stability exist," he said.
Financial markets seemed underwhelmed by the announcements, with some investors having interpreted Draghi's comments last week as a sign of imminent rather than future and conditional action.
Asian shares and the euro fell on Friday (3 August) as investors shunned risk after the European Central Bank took no immediate action and only hinted at future steps to tackle the euro zone's crisis, following similar inaction from the U.S. Federal Reserve.
Draghi was under intense pressure from investors, European leaders and even the US to deliver on Thursday on his pledge to do whatever it takes to save the euro by bringing high borrowing costs down and salving the debt crisis.
His comments in London last week that the ECB would do whatever it takes within its mandate to protect the currency bloc from collapse – "and believe me, it will be enough" – had already eased tensions on the debt markets.
Other countries, especially the United States, have raised pressure on the ECB to act as the two-and-a-half year old euro zone crisis weighs on global growth.
The U.S. Federal Reserve dashed expectations among some investors on Wednesday (1 August) by taking no immediate new measures to revive the economy.
The Fed stopped short of offering new monetary stimulus, though it signalled more strongly that further bond buying could be in store to help a US economic recovery that it said had lost momentum this year.
German central bank has reservations about ECB bond buying
ECB action, meanwhile, is hamstrung by EU rules forbidding it from financing governments. The ECB issued a legal opinion in March 2011 ruling out perhaps the biggest gun, giving the ESM bailout fund rights to tap the ECB for funds to increase its firepower.
The ECB also has to find a way to get any measures past Germany, the eurozone's largest economy and its principal paymaster. The Bundesbank issues regular reminders of inflationary dangers stemming from non-standard measures such as bond purchases and the limits central banks face.
Draghi said all members of the Governing Council endorsed Thursday's statement with one exception – a reference to Bundesbank president Jens Weidmann.
"The decision to do whatever it takes to preserve the euro as a stable currency has been unanimous," Draghi said.
"It's clear and it's known that (Germany's) Bundesbank have their reservations about the programme of buying bonds. The idea is we now have the guidance, the monetary policy committee, the risk committee and the markets committee will work on this guidance and then (we) will take a final decision and the votes will be counted."
His wording suggested he was prepared to outvote the German central banker if necessary.