Onus firmly on governments for plan to succeed
ANALYSIS:THIS IS the second big policy initiative since Mario Draghi took charge of the European Central Bank last year, and the bank’s third attempt in as many years to stamp out the debt crisis by buying up sovereign bonds on the open market. Will it work?
When Draghi unveiled the €1 trillion cheap loan scheme for banks last December, the hope was that it would give Europe breathing space for three years. In the event, the calm lasted for no more than three months. Turmoil flared up again and the search resumed for a long-term solution.
To those who may doubt the latest effort, Draghi expressed confidence yesterday that it will provide a “fully effective backstop” against the crisis “under appropriate conditions”.
He added that a new requirement on governments to follow strict fiscal policy guidelines was the most significant element of the plan.
There are other testing strictures to be observed but this is the biggest difference from the bond programmes initiated in May 2010 and August 2011. According to the ECB chief, the latest endeavour would fail without simultaneous action by the governments concerned to restore order in public finances.
“All of us are convinced that really you need two legs to make it work,” he said. “If the central bank were to intervene without any action on the government side, without any conditionality, it would not be effective. It would not be effective and it would lose its independence.”
This cuts to the very core of the dilemma faced by the ECB in the two previous bond-buying campaigns.
When the bank bought Greek and Italian bonds in 2010 and 2011, the governments concerned took that as a licence to slow down on the austerity front. The risk of a free-for-all was plain to see. No longer – or so Draghi hopes. He made it clear that the ECB will terminate its bond purchases in cases of non-compliance with the policy conditions.
At the same time, governments must first apply for aid from the European Financial Stability Facility or European Stability Mechanism bailout funds to qualify for the ECB’s assistance on markets. If that is certain to send shudders down the spines of the Italian and Spanish leaders, there is provision for a “precautionary” programme which stops short of a full-blown bailout.
Draghi and his allies are taking no chances. There will be no limits on the amount of bonds it might acquire and the bank has surrendered its preferred creditor status as a buyer of bonds. By giving the ECB and private bondholders equivalent (pari passu) status in the creditor queue, the aim to is dissuade market investors from shunning the bonds concerned.
While it is arguable that the weight of Europe was on the shoulders of Draghi and his colleagues as they hammered out the finer details of the plan in the last couple of days, this is still controversial territory for the ECB. Previous bond market interventions led to the departure of former Bundesbank chief Axel Weber and German ECB executive board member Jürgen Stark.
The situation is little different this round, with Weber’s successor, Jens Weidmann, making little effort to hide his distaste for the new plan.
“There was one dissenting view. We don’t disclose the details of our workings. It is up to you to guess,” said Draghi when asked about Weidmann’s stance.
Still, the sense remains that the two men have reached something of an accommodation. There may be no suggestion that Weidmann might quit in protest at the new plan, but his public resistance to it can be read as an effort to appease the doubters of the Bundesbank and the German political establishment.
The implicit message is that their concerns about illegal monetary financing – ie the ECB printing money to give to governments – remain at the heart of the bank’s internal debate. For good measure, Draghi said the ECB’s statute permits secondary market interventions. “We are sure that we are acting within our mandate,” he said.
But that still can’t get away from German accusations that Draghi has embarked upon a “lira-isation” of European monetary policy. While he brushed such claims away dismissively, the fact remains this is deeply contentious stuff.
“I would not identify this with this caricature of being a southern cabal or an Italian thing. No, it is not. It is the governing council that, in its almost unanimous decision, has taken this measure.”
So there it is. With this “almost unanimous” decision, the ECB has embarked on a drastic new effort to create order in the euro zone. The difference this time is that it has placed an especially high premium on government action. More politicking will surely follow.