By Johanna Treeck

FRANKFURT (MNI) – The European Central Bank is likely to keep
interest rates steady at 0.75% on Thursday and refrain from offering
additional insights into the modalities of its OMT bond buy program.

With Greece likely to run out of cash on November 16 and a decision
on a possible new debt restructuring for Greece pending, ECB President
Mario Draghi will likely be quizzed on the role the Eurosystem might be
willing to play in reducing Athens’ debt burden.

ECB policymakers have indicated that in their view a reduction in
official interest rates may not benefit the parts of the euro area that
need it most. “The priority has been to fix the monetary transmission
channels,” Executive Board member Benoit Coeure said.

Still, recent economic data would appear to justify the Council’s
previous assessment of “a very gradual recovery in the medium term, with
risks tilted to the downside,” so further monetary easing later this
year should not be excluded.

A rate cut “certainly remains an option,” Coeure said. While Draghi
is unlikely to offer more specific guidance or signal any urgency for a
rate move, he can be expected to keep the door open for a possible cut.

In this context, it will be worth watching to see if Draghi gives
any signal that the Council has decided against taking its deposit rate
into negative territory. Governor Council member Ewald Nowotny told MNI
late last month he didn’t think that a negative deposit rate was “a
realistic prospect.”

Draghi can be expected to firmly resist Spain’s call for an ECB
commitment to drive down Spain’s borrowing costs aggressively via the
OMT bond buying plan should Madrid seek a bailout package with the
European Stability Mechanism. Such a bailout, and the conditions
attached to it, is a pre-requisite for ECB intervention under the OMT
program.

But Spain has been resisting an application for ESM aid, in part
because its yields are now so far below their red-alert levels of the
summer. Prime Minister Mariano Rajoy upped the ante on Wednesday, saying
that an ESM program would only be an option if he knew how far down the
ECB would push Spain’s borrowing cost beyond the nearly 200 basis point
drop in 10-year yields already produced by the mere announcement of the
ECB’s bond buying plan.

Following previous calls from the Spanish governments for the ECB
to offer more details on its bond buying plans, Coeure said that the
central bank had already been “very clear on modalities of OMTs, and
we’re not going to provide any more details now.”

Draghi’s latest comments on those modalities do not suggest that he
has any intention of intervening aggressively on Spain’s behalf, even
if Madrid does end up seeking ESM assistance.

The ECB does “not want to completely eliminate differences in
interest rates between countries,” since high rates will keep the
necessary pressure on governments to pursue reforms, he said. Instead,
the ECB will intervene only if rate spreads “become excessive,” Draghi
added, without revealing the level at which spreads might be considered
“excessive.”

Draghi and other Council members have also stressed that the
central bank will stick to its pledge to provide support only under
appropriate conditionality and that it won’t shy away from halting bond
market interventions should the government in question fail to meet its
conditions in full.

The extent to which the ECB would actually live up to these
promises in the face of renewed market turmoil will only be clear once
the OMT program is up and running. Rajoy’s demand for full disclosure,
which will not be met by the ECB, appears to have pushed a possible
start date further into the future.

With Draghi likely to be mum on questions about OMT details, the
focus of the question and answer session may quickly to Greece and the
possible contribution the ECB may be willing to make to ease the
country’s debt burden.

The Governing Council has already rejected the option of
retroactively taking a haircut on the Greek bonds it holds, or
participating in a possible private sector debt buy-back scheme.

One contribution the Eurosystem could conceivably make – in
conjunction with the national governments – is to forego profits the
central bank would garner once its Greek bond holdings mature. Another
option would be for the ECB to launch a separate buy-back scheme in
which it sells Greek bonds back to Athens at the price it paid for them.
In such a scheme, the ECB would not take a loss on its holdings, and
would thus avoid engaging in what would otherwise be considered
outright monetary financing.

The beauty of the second option is that it would allow Greece to
reduce its debt burden immediately. The disadvantage is that Greece
would be paying higher prices to the ECB than to the participants in a
private buy-back scheme, which could raise fresh doubts about the
central bank’s commitment to shedding its senior creditor status for
future bond purchases. In any event, the debt relief for Greece would be
limited, with estimates around E9-12 billion.

As things stand, however, the Troika and national governments must
still overcome sticky disagreements about how best to keep Greece in the
Eurozone. The central bank may once again choose to maintain its
constructive ambiguity by declining “to provide any more details now.”

–Frankfurt newsroom +49 69 72 01 42; Email: jtreeck@marketnews.com

[TOPICS: MT$$$$,M$$EC$,M$X$$$,M$$CR$,MGX$$$]