FRANKFURT (MNI) – The European Central Bank continues to be
parsimonious with details of its new OMT bond buying plan, but recent
comments suggest that the ECB has no intention of aggressively driving
down the borrowing costs of peripheral Eurozone governments.

ECB President Mario Draghi, stressing the importance of ongoing
economic and fiscal reforms by national authorities, noted that high
sovereign refinancing costs remain the most powerful tool to ensure
governments remain on the right track.

“High interest rates are the most significant source of pressure
for a government resisting reform,” Draghi told Germany’s Der Spiegel
magazine in an interview published over the weekend. Consequently, the
ECB does “not want to completely eliminate differences in interest rates
between countries,” he said.

Rather, the central bank will intervene only if rate spreads among
Eurozone member states “become excessive,” Draghi said. Unsurprisingly,
he declined to reveal the level at which that would be the case.

Draghi’s repeated description of the new OMT program as a
“backstop” would also suggest that he does not view the program as a
tool to aggressively drive down sovereign yields from current levels but
as a last resort measure to establish a ceiling should spreads threaten
to spiral upward.

Sending a similar message, Governing Council member Yves Mersch
said last week that, in line with the ECB’s price stability mandate,
“OMTs will be only used if – and to the extent – necessary to ensure
price stability.”

Executive Board member Benoit Coeure said the OMIT program is “not
here to lower borrowing costs of countries.” He also stressed that the
ECB will not offer any clearer guidance on the shape or scope of the
bond purchasing program. “We’ve been very clear on the modalities of the
OMTs…We’re not going to provide any more details,” Coeure said last

So before Spain formally seeks aid from the Eurozone’s bailout fund
– the European Stability Mechanism (ESM) – and the ECB actually
kick-starts the OMT program, it will be difficult to make any clear
projection of the ECB’s target or the scope of its possible

On Monday, markets appeared increasingly nervous about the
possibility that Spain might hold off on the bailout request needed to
finally shed some light on the ECB’s plans. Interestingly, however, ECB
Governing Council member Ewald Nowotny discouraged Spain from seeking a
second bailout right away.

“As far as I’m informed, Spain is essentially refinanced for 2012,”
Nowotny told Austrian radio over the weekend. “That means it has no
immediate need, and I also believe it’s thoroughly sensible to try to
fix things at home and only come back and ask for help if this doesn’t

With regard to its policy interest rates, the ECB’s guidance points
to a steady hand in the months ahead, even though economic data largely
surprised on the downside in October. Coeure said that while a rate cut
remains an option for future, it has not been a priority for the
Governing Council.

Policy-makers have noted that as long as the monetary transmission
mechanism remains impaired, cutting official interest rates would be of
little use for parts of the Eurozone that might require monetary

Interest rates are “very accommodating” and there would be “very
little marginal utility from any further adjustment,” Luc Coene told MNI
earlier this month. In an interview with MNI last week, Nowotny went a
step further, noting that a rate move appears unnecessary in the near
and medium term.

–Frankfurt newsroom +49 69 72 01 42; Email:

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