Draghi sets out unlimited ECB bond-buying plan
by Daniel Mason
European Central Bank president Mario Draghi has outlined an unlimited but conditional bond-buying plan designed to reduce borrowing costs in struggling eurozone countries such as Spain and Italy and restore confidence in the single currency – while leaving eurozone interest rates unchanged at 0.75 per cent.
Draghi said the move was necessary to "address severe distortions in government bond markets" originating from "unfounded fears on the part of investors" about the euro's future. It followed the Italian's comments in July that the ECB would do "whatever it takes" to save the single currency, which raised expectations ahead of today's meeting of the bank's governing council in Frankfurt.
The hotly-anticipated meeting was attended by Eurogroup chief Jean-Claude Juncker and European Commissioner for Economic and Monetary Affairs Olli Rehn, and Draghi said the bond purchases – to be known as 'outright monetary transactions' – would act as a "fully effective backstop to avoid destructive scenarios". He insisted the measures did not breach the ECB's mandate to ensure price stability in the medium term, saying they would "safeguard the transmission of monetary policy". Purchases of sovereign bonds with a maturity of between one and three years will be made on the secondary market with no quantitative limit.
Draghi said the bank would not demand seniority over other bondholders as it did in its previous, more limited, 'securities and markets programme'. The SMP has now been terminated. In addition the bond purchases will be fully sterilised, meaning the overall stock of money will remain unchanged – differentiating the scheme from quantitative easing, which adds to the money supply.
However, no country will benefit from the scheme unless it meets strict criteria. The ECB will only buy bonds if the relevant country signs up to a macroeconomic adjustment programme or precautionary programme with the eurozone bail-outs funds, the European Financial Stability Mechanism or European Stability Mechanism. The involvement of the International Monetary Fund in monitoring fiscal consolidation and structural reforms will also be sought. Draghi said the bond purchases would end either when their objectives were achieved, or if the country in question failed to comply with the conditions.
He added that the decisions were not made unanimously but that there was just one dissenting voice. Germany's Bundesbank president Jens Weidmann has consistently opposed the idea of the ECB intervening in bond markets, warning earlier this month that countries could become "addicted" to central bank aid instead of reforming their economies. But Draghi said today: "We act strictly within our mandate to maintain price stability over the medium term, we act independently in determining monetary policy, and the euro is irreversible."
The bond purchases will only be triggered if a government requests it. Spanish Prime Minister Mariano Rajoy has previously said he would make a decision on whether to ask for a bail-out after the ECB detailed its plan. But the wider deterioration of the eurozone economy was emphasised today by Eurostat, which confirmed that the 17-nation euro area's gross domestic product contracted by 0.2 per cent in the second quarter.
Markets rallied strongly after the measures were announced. Marie Diron, a senior economic adviser at Ernst & Young, said: "The ECB did not disappoint in its decisions to start a vast bond purchase programme. While we had little doubt that such a programme would be announced, some of the details go beyond what we expected."
European Parliament President Martin Schulz heralded the ECB's "courageous decision" as a "major step towards resolving the sovereign debt crisis and restoring the stability of the eurozone". "The ECB decision must not be treated as panacea," he added. "Its implementation must be accompanied by an active strategy for growth and jobs as well as sound fiscal policies and structural reforms. "
Guy Verhofstadt, leader of the Alliance of Liberals and Democrats in the parliament, said that Draghi's new programme "confirmed once again to the markets, against constant speculation, that the euro is here to stay". But he warned that action by the ECB would not be enough to solve the crisis. "Member states remain reluctant to make the much needed political jump towards a federal union, including a common bond market, which would have stopped the crisis and sheltered the euro," he said.
The influential chairwoman of the parliament's economic and monetary affairs committee, Sharon Bowles, welcomed the ECB's decisions while adding that it was "essential to keep up all the measures for stability and reform that are at various stages of implementation and planning, including the banking union proposals". European Commission President JosÚ Manuel Barroso is due to unveil plans for a euro banking union next week.
Sven Giegold MEP, from the Greens/European Free Alliance group, said the ECB had been "forced to fill a vacuum resulting from the persistent failure of the European Union's political leaders to agree and implement concrete measures" to resolve the crisis. "With a number of eurozone sovereigns facing unmanageably high interest rates, the ECB has to act. However this raises clear concerns about democratic scrutiny and control."
But International Monetary Fund Managing Director Christine Lagarde welcomed the ECB decision, adding: "The IMF stands ready to cooperate within our frameworks. Decisive implementation of the new intervention program will help repair monetary transmission and support countries' efforts to secure finance at a reasonable cost, while they undertake sustained macroeconomic adjustment. We see the ECB's action as an important step toward strengthening stability and growth in the euro area."
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