Draghi says ECB will act to protect 'irreversible' euro
by Daniel Mason
European Central Bank president Mario Draghi has signalled his readiness to step into bond markets to bring down high borrowing costs in struggling eurozone countries – if governments keep their side of the bargain.
He said details of a plan to intervene would be drawn up over the coming weeks but insisted it was up to governments to continue with cost-cutting measures, and to apply for assistance first from the eurozone bail-out funds, the European Financial Stability Facility and European Stability Mechanism.
Draghi was speaking after the monthly meeting of the ECB's governing council in Frankfurt, amid heightened expectations after comments he made in London that the bank would do "whatever it takes" to save the euro. Spain and Italy in particular have suffered from unsustainably high government bond yields in recent weeks.
The ECB chief said today that the governing council had "discussed the policy options to address the severe malfunctioning in the price formation process in the bond markets in euro area countries". He told reporters at a press conference that high bond yields resulting from fears about the euro's future were "unacceptable" and needed to be "addressed in a fundamental manner". "The euro is irreversible," Draghi said.
Calling on eurozone countries to push ahead with fiscal consolidation and structural reforms with "great determination", he repeated his line that the ECB could not replace the action of governments. But because those efforts would take time – and markets "only adjust once success is clearly visible" – governments should "stand ready" to request that the EFSF and ESM be activated to help bring down bond yields, he said.
Any request by a country for bond market assistance from the EFSF or its permanent replacement the ESM would come with a memorandum of understanding setting out strict conditionality in terms of spending cuts and tax rises. Draghi added that in those cases the ECB "may undertake outright open market operations of a size adequate to reach its objective". He said it would differ from its previous bond-buying programmes and would involve purchasing shorter-term bonds. He dismissed suggestions that the ECB was over-stepping its mandate.
The president said the question of the seniority of bonds bought by the ECB would also be addressed, and while admitting that German central bank chief Jens Weidmann had "reservations" about the potential bond-buying programme, Draghi added that the ECB "may consider undertaking further non-standard monetary policy measures". Meanwhile the ECB kept interest rates on hold at a record low of 0.75 per cent.
Philip Booth, from the Institute of Economic Affairs, said the ECB was "burying its head in the sand" by pledging to support the euro. "Instead, it should be contemplating the orderly end of the euro as a single currency across the eurozone and – where necessary – an orderly default on European government debt."
He warned: "The ECB appears to want to effectively underwrite the government debt of highly indebted nations by printing money. This policy can only succeed in its own terms if the action is substantial enough to create enormous inflation in the indebted countries. If this happens, the euro as a sound, non-inflationary currency is dead and bond yields throughout the eurozone will be on the rise again."
The German Bundesbank's "serious objections" to bond purchases suggested there was still "a lot more negotiating" to go on, said Howard Archer, chief European economist at IHS Global Insight. "As such there is currently a lot of wariness about the effectiveness of what the ECB will finally deliver." Early indications were that Draghi had disappointed markets, with Spanish and Italian borrowing costs rising and stock markets falling.
Nevertheless, in a statement the International Monetary Fund said it welcomed the ECB's willingness to act. "We share their concern about the need to repair monetary policy transmission in the eurozone, the Washington-based fund said, adding that the move would "ease tensions as other policies are implemented and take effect".
Meanwhile Sharon Bowles, chairwoman of the European Parliament's economic and monetary affairs committee, said: "These combinations of measures are backstopped by the political commitment that continues to be shown for reforming economic governance and putting in place a road map for greater fiscal integration. Markets should not underestimate the steps already taken". Bowles added that the ECB was "right to keep up its insistence on conditionality and not be seen as a soft option no matter how strong the demands of the markets".
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