European Central Bank President Mario Draghi disappointed investors hoping for more central bank action to mitigate the effects of the sovereign debt crisis on Italy and Spain.

Basically, he failed to announce any definitive measures at a press conference this morning.

Journalists and analysts had interpreted his promises last week to "do whatever it takes to preserve the euro" as a sign that he was about to take non-standard measures that would relieve mounting pressure on soaring borrowing costs in countries like Spain and Italy.

While Draghi did say that plans were in the works that would allow the ECB to launch such a program, his criteria for doing so were steep.

His demands were two-fold:

  • EU leaders need to resolve concerns that the official sector has become senior to private holders of sovereign debt. Greece's official sector creditors (the ECB, European countries, and the IMF) refused to take haircuts on their sovereign debt holdings when the country's debts were restructured, essentially forcing private sector debtholders to take bigger losses. This de facto seniority in Greece would discourage investment in Spanish or Italian bonds if the ECB were to buy more of them, and diminished demand for those bonds increases these governments' borrowing costs.

  • Draghi also said that ECB action will await commitment from EU leaders that they will use the eurozone bailout funds, the EFSF and ESM, to bring down Spanish and Italian borrowing costs. While both funds are supposed to be able to purchase these bonds, some EU leaders have publicly resisted calls to do so. With yields spiraling out of control, the time is ripe, and Draghi is forcing EU leaders to stick to their end of the bargain.

In other words, it appears that Draghi is still putting pressure on leaders to make sweeping reforms, something he has done before.

But this time his brinkmanship is far more worrisome than it was in late 2011 when he held off on the announcement of two liquidity-providing three-year LTROs.

That's because we are essentially back where we were last week, when Spanish and Italian bond yields were rising rapidly and concerns were mounting that the Spanish government would need a full bailout.

With no immediate news from Draghi, we're likely to see the return of the European market death spiral—yields going crazy and a flood of rumors about what and when European leaders plan to do.

The problem with this is that European leaders are supposed to be going on vacation this month, like many workers in Europe. Believe it or not, this is actually an important signal that all is well in the world and that the financial system won't collapse. Therefore, if we start getting a lot of headlines during this period, the situation will begin to appear worse than previously suspected, and (at this point) dire.

In all likelihood, market angst and volatility will continue until we receive word that European leaders are getting started fulfilling the demands Draghi laid out for them. And given today's market movements, that could be sooner rather than later.

On the positive side...The ECB's Game-Changing Solution To The Euro Crisis That's Getting Closer And Closer >

Watch our video guide to the ECB decision today:


Produced by Daniel Goodman