FRANKFURT (MNI) – European Central Bank President Mario Draghi
Thursday offered details of the ECB’s new government buying bond
program, putting substance behind his pledge that the institution
stands ready to do whatever it takes to save the euro.
While the central bank may be willing to go further than ever
before by opening the door for unlimited bond market interventions,
Draghi’s key message was that the ball in now firmly in government’s
court.
There were no major surprises in the design of the new program,
called “outright monetary transactions (OMTs),” which Draghi said should
offer “a fully effective backstop to avoid destructive scenarios with
potentially severe challenges for price stability in the euro area.”
The purchases under the program will be unlimited, subject either
to the strict conditionality of a full EFSF/ESM program or a lighter
“precautionary” one. For countries that meet the conditions, the
central bank will buy short-term maturities of up to three years, and it
will sterilize all purchases.
The central bank will not reveal any targets for the borrowing
costs of any country it supports with the new program, but will instead
look at a range of indicators including liquidity conditions, volatility
and credit default spreads, Draghi said. The ECB is also waiving its
‘preferred creditor status’ on bonds bought under the OMT program.
Draghi elaborated at great length why the plan announced today
would be better than its predecessor, the Securities Markets Program
(SMP), which he pronounced dead. He particularly stressed the importance
of conditionality, which would force governments to carry out reforms.
Draghi stressed that the ECB is in a position to keep governments
on course, noting that it would terminate bond purchases “once their
objectives are achieved or when there is non-compliance with the
macroeconomic adjustment or precautionary programme.”
Bundesbank President Jens Weidmann, the only Governing Council
member to oppose today’s decision, repeated his warning Thursday that
the new program poses a risk of monetary policy “being subjugated to
fiscal policy” and could lead “to member states postponing the necessary
reforms.”
Indeed, it remains questionable whether the ECB could really stop
its market interventions were governments to relent on their promised
reforms, since severe market tensions would likely follow such a
decision. As Draghi said of the new plan: “the proof is in the pudding.”
Aware of how difficult it would be to stop buying a country’s bonds
once it has started, the ECB might well try to ensure the strictest
possible conditionality before launching any purchases. Spain will
almost certainly provide the first test of how hard the ECB will push.
Prime Minister Mariano Rajoy has thus far signaled no readiness to
accept additional austerity conditions, arguing that in his view Spain
already meets the requirements for aid.
Beyond the new bond buying program, which garnered most of the
attention today, the ECB left interest rates unchanged at 0.75%. Draghi
noted that the Governing Council had anticipated the latest weakening of
the business cycle when it last cut rates. Still, he left the door for
further easing wide open, noting that the Council had debated the issue.
The Council does not appear terribly concerned about the latest
jump in inflation to 2.6% in August or by upwardly revised ECB staff
forecasts for inflation to a mid-point of 1.5% in 2012 and 1.9% in 2012.
While “inflation rates could turn out somewhat higher than expected a
few months ago,” the Council continued to assess the risks to the price
outlook as broadly balanced, Draghi said in the introductory statement.
Much as expected, the central bank also eased collateral
requirements one more time to ensure that banks will maintain access to
ECB liquidity operations. The minimum credit rating will be suspended
for marketable debt instruments issued or guaranteed by governments of
countries under adjustment programs, which should avoid problems in
Spain and Italy in the case of future credit downgrades. In addition,
major currency debt issued and held in the euro area can be used as
collateral.
Draghi had said during his August 2 press conference that “various
committees will now review the various non-standard policy options.” But
today he dismissed questions on additional measure such as buying
private debt or conducting another long-term refinancing operation. He
noted that the ECB had already taken very important decisions. This may
suggest that no additional measures are in the pipeline at present.
The next step now must come from governments. “We have decided now
a ‘parcours’ a route,” Draghi said. “It’s in the hands of the
governments and the Eurogroup – in the government of Spain and the euro
area.”
–Frankfurt newsroom +49 69 72 01 42; e-mail: jtreeck@marketnews.com
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