ECB's Draghi Tells Euro Zone Leaders It's Up To Them - Investor's Business Daily

The European Central Bank dashed hopes Thursday for massive sovereign bond purchases, telling euro zone politicians that it's up to them to take action.
On Dec. 1, ECB President Mario Draghi seemed to hint at such buying, if stricter fiscal rules came first. But Thursday, he ruled out imminent action, questioning the legality of central banks providing money to the International Monetary Fund for debt buys.
Draghi claimed to be "surprised" that markets interpreted his Dec. 1 comments as hinting at big bond buys. He said a euro zone "fiscal compact" is the "most important precondition" for normalizing markets. While the ECB has "collaborated" in solutions, he stressed that "the responsibility is with the leaders."
But leaders, holding yet another crisis summit, remain divided. Germany quickly rejected some new European proposals.
U.S. stocks, which had rallied recently on European optimism, sold off. Italian debt yields, which had dived recently from above 7% to below 6%, spiked higher.
Yet some analysts said Draghi was not ruling out greater ECB bond buying, but was stressing that politicians must act first.
"The ECB is leaving the ball in the court of sovereign nations," said Richard DeKaser, Parthenon Group's deputy chief economist.
European leaders must come up with a believable promise for long-term fiscal sustainability to obtain a short-term stopgap to head off a financial meltdown.
A possible Standard & Poor's credit downgrade also looms. S&P this week issued negative outlooks on 15 of the 17 euro zone states, the European rescue fund, the entire European Union and most major regional banks. No deal this weekend would likely trigger ratings cuts.
The ECB's reluctance to take the lead was apparent in Thursday's split decision to cut rates to 1% from 1.25% after a quarter-point easing last month.
The ECB is inclined to support the sovereign bond market but must appease German desires for stricter budget rules and inflation worries, said Nariman Behravesh, chief economist at IHS.
"(Draghi is) playing to different audiences," Behravesh said. "He's walking a very fine line."
While the central bank didn't fire its "bazooka" at the debt market, it did increase liquidity aid to commercial banks struggling to obtain short-term financing.
The ECB lengthened a credit line for banks from one to three years, and eased rules on collateral. It also halved the money that banks must keep in reserve.
It already offers seven-day liquidity to nearly 200 banks each week, with the most recent round totaling 252.1 billion euros. Overnight emergency borrowing has hit a nine-month high.
The ECB's incremental sovereign debt buys aren't insubstantial, now totaling 206.9 billion euros. Most of that has been since August, when it started buying Spanish and Italian debt.
But such measures are meant to prevent a market collapse rather than resolve the problem.
German Chancellor Angela Merkel and French President Nicolas Sarkozy have proposed treaty fixes to promote fiscal discipline.
But at best, approval would take months. Member states must give a credible commitment now to convince the ECB, analysts say. What that might be is unclear.