ECB hasn't closed its headquarters in Frankfurt
Financial markets were eagerly awaiting the ECB press conference for more supporting measures concerning beleaguered indebted countries. Concerning high expectations on a European version of Bernanke, ie printing money and speeding up purchases of sovereign bonds, markets did not really get what they were after. As far as the ECB is concerned on this last issue, the message is still : "No Passeran !"
Next to the standard speak such as "well anchored inflation expectations", the following Trichet quotes capture the essence of the Frankfurt based central bank :
1) We delay withdrawal of emergency liquidity measures ; for 3 month tenders in full allotment, there is still a consensus within the ECB board ; However, although banks have stabilized their balance sheet, banks should further strengthen capital basis and should start to expand credit now demand is picking up.
2) Just as is the case with the delay in liquidity withdrawal, the SME (securities market program, bond purchasing) is a temporary emergency measure.
3) We will keep our bond purchasing program intact but we will continue to offset this in order to keep the money supply unchanged : The securities market program is not quantitative easing, we are withdrawing all the liquidity
4) We have a clear mandate and act accordingly. There is a clear need for governments to restore budget confidence by implementing ambitious fiscal plans.
So there you have it. Markets panic because the numbers don't add up and it is not for the Central Bank to start interfering. In the end, governments will have to come up with a structural solution, backed up by the entire monetary union. And looking at market reactions, he is given the benefit of the doubt : after the decision, the reaction on stocks and the euro was not that all great but euro quickly recovered while even spreads on beleaguered countries (Italy, Portugal, Spain and Belgium) continue to come in. For banks, especially the Spanish Cajas, a temporary relief as well because unlimited funding by the ECB is secured in the short term.
Markets were caught by the fact that the ECB last week increased its buying program which now totals 67 bio eur. This amount is however still far below the amount of the Bank of England (£ 200 bio) or the FED (almost USD 1,800 bio when concluded). Some months ago, it was already clear that some ECB council members were not at all amused with the outlook of increasing QE. It seems that Axel Weber & co haven't left the building yet.