LJUBLJANA (MNI) – Conditionality is an essential key to activating
European Central Bank intervention in secondary government bond markets,
but the conditions attached to aid do not need to be “punitive,” ECB
president Mario Draghi said Thursday.

“We view conditionality as an essential part of the activation of
the OMT (Outright Monetary Transactions),” said Draghi, arguing that
conditionality will not only help to reduce moral hazard by governments,
but also protect the independence of the ECB.

The ECB President also said that conditionality could be seen as a
form of “credit enhancement” for countries benefiting from an OMT
programme because it provides “an incentive to pursue the right economic
policies, which has benefits for all parties concerned.”

“Conditionality is what makes the monetary policy effective and
what protect the independence of the ECB,” said Draghi.

Adequate conditions, however, “don’t need necessarily to be
punitive,” said Draghi, because fiscal and structural reforms have
social benefits, that if properly designed, should outweigh the costs.

Asked whether the reforms and targets that Spain has already
committed itself to meet were sufficient, Draghi said that “it is up to
the Spanish government to decide.”

“At this point it is really up to the governments to decide what
they want to do,” said Draghi. “The ECB has done what really was
possible, and the OMT would certainly create an environment which is
conducive to reform because it could remove the …redenomination
risks…it could remove tail risks,” he said.

The ECB’s OMT programme means that the Eurozone now has “a full and
effective backstop mechanism in place,” said Draghi.

Draghi said that the ECB would watch to see if any country
benefiting from an OMT programme abuses the scheme by issuing a
disproportionate amount of short term debt.

Draghi, however, said he thought such abuse would be unlikely
because of the “serious consequences” that such a rebalancing of a
country’s debt profile woudl carry.

–Brussels Newsroom, +324-952-28374; pkoh@mni-news.com
[TOPICS: M$$EC$,M$$CR$,M$X$$$]