So Draghi, the president of the ECB, has decided not to support governments to reduce their debt. Instead, he's going to lend to banks. This basically means that he intends to deal with the effects of the sovereign debt crisis (the risk of triggering a bank run), rather than the underlying problem (their assets are bad). Apparently, this guy thinks the way to deal with a sovereign debt crisis does not in any way involve dealing with the sovereigns.
Draghi is completely correct when he calls plans that involve lending to the IMF or the EFSF "tricks". It's just that so are the things he's decided to do instead- which amount to providing the banks with free credit and allowing them to cut their cash reserves. This is not always the best way to help someone get out of debt. Both options present moral hazards- one for borrowers, one for lenders. Why not do the trick that actually works?
Even if you are trying to punish profligate national governments, it still amounts to an attempt to cut the yields on public debt. This amounts to still trying to fix the problem (thankfully), just without transparency and with a fair amount of extra-legal arm wrenching. As Nicolas Sarkozy helpfully pointed out...
"Italian banks will be able to borrow [from the ECB] at 1 per cent, while the Italian state is borrowing at 6–7 per cent. It doesn’t take a finance specialist to see that the Italian state will be able to ask Italian banks to finance part of the government debt at a much lower rate."
If that wasn't bad enough, the ECB couldn't even provide unanimity in cutting its rate to one percent. Demonstrating a commitment to prevent inflation can cut the yields on sovereign debt, but not in a situation where the markets think that tight monetary policy will result in a default. These debts are not payable with only two percent inflation. The ECB was never going to do an about face and suddenly decide to start targeting nominal GDP, but they could have at least demonstrated that they had a concern not only for the euro, but also the actual economy that backs it up.
There are two ways to deal with this crisis: either the ECB can provide aid through monetary policy (increasing inflation so that their euro denominated debt is worth less), or European heads of state can deal with it through fiscal policy by directly transferring funds to the at-risk countries (so that they owe fewer euros). The second is politically impossible.
