Mario Draghi Roils Markets with ECB Announcement

Joel Anderson  |

While European Union members were in an all important meeting that will address the proposed treaty changes from German Chancellor Angela Merkel and French President Nicolas Sarkozy, markets reacted negatively to comments made by European Central Bank (ECB) president Mario Draghi that indicated that his institution would not be engaging in large-scale buying of bonds.

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Bank Loans, but No Bond Buying

Draghi announced plans to cut interest rates by a quarter percentage point to 1 percent while also unveiling two new 3-year plans for unlimited loans to European banks, stating that it "should ensure enhanced access of the banking sector to liquidity." While the health of European banks is clearly a major concern, with a European Banking Authority document released today revealing that European banks need to raise another $152.7 billion in capital to maintain adequate levels of liquidity, most investors were hoping to hear news of a more aggressive approach to the bond markets. Swirling rumors of a "bazooka" approach to bond buying by the ECB had given hopes to some investors that the debt crisis might be beginning to improve. Draghi, though, appeared to quash these hopes for a major ECB bond-buying program. Draghi's comments were focused on aiding European banks and the need for governments to create a fiscal pact that would guarantee budgetary restrictions and enforcement for the future while indicating that the ECB would not be engaging in an agressive bond-buying program.

Banks Leading the Way Down

Major indices across Europe and the United States were down, with the Dow falling over 1 percent, the S&P dipping over 1.5 percent, and the Nasdaq tumbling just under 1.5 percent. As per usual, it was the major financial institutions leading the way. European banks, despite rate cuts and the announcement of available loan programs from the ECB, slipped on the news that Draghi didn't appear ready to start buying up bonds auctioned off by troubled European countries. The Royal Bank of Scotland (RBS) fell almost 8 percent, Lloyds Banking Group (LYG) lost just over 8 percent, ING Groep (ING) dipped just under 7 percent, Deutsche Bank (DB) dropped just over 6.5 precent, Barclays (BCS) was off just over 6 percent, and Credit Suisse (CS) plunged nearly 5.75 percent.

The financial sector at home also took a major hit. Citigroup (C) lost almost 7.5 percent, Morgan Stanley (MS) fell over 7.25 percent, The Blackstone Group (BX) tumbled almost 5.75 percent, and America's favorite insurance company American International Group (AIG) was off over 4.75 percent. All told, the S&P Europe Financials Sector Index dropped over 3.8 percent, and the S&P 500 Financials Sector Index was down almost 3 percent.

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