Radical ECB move may assist Ireland's return to markets
THE EUROPEAN Central Bank has taken new steps to ease Ireland’s return to private investment markets as part of a big but contentious new push to calm the debt crisis by intervening again in sovereign bond markets.
In an effort to shore up Spain and Italy, ECB chief Mario Draghi declared the bank ready to buy unlimited amounts of debt issued by weakened countries on condition that they enter a formal aid programme.
The ECB is proceeding with the move in defiance of objections from Germany’s Bundesbank, which said its chief, Jens Weidmann, believes the initiative is akin to “financing governments by printing banknotes”.
Such measures are illegal under EU law but Mr Draghi insisted the bank was acting within its legal mandate and said that all but one member of the ECB’s governing council backed the proposal.
“In the most recent discussions, as before, Bundesbank president Jens Weidmann reiterated his frequently substantiated critical stance towards the purchase of government bonds,” the Bundesbank said.
Although the ECB closely guards its operational independence, recent public statements from German chancellor Angela Merkel gave tacit support to Mr Draghi.
“We are in a situation now where you have large parts of the euro area in what we call a bad equilibrium,” the ECB chief told reporters in Frankfurt.
“You may have self-fulfilling expectations that . . . feed upon themselves and generate very adverse scenarios. So there is a case for intervening to, in a sense, break these expectations, which, by the way, don’t concern only the countries, the specific countries, but the whole euro area as such.”
The bond-buying plan prompted a stock market rally and was welcomed by the International Monetary Fund, whose chief, Christine Lagarde, has been calling on the ECB to intensify its response to the crisis.
José Angel Gurría, secretary general of the Organisation for Economic Co-operation and Development, said: “This is your bazooka. This is the muscle and the fire-power, which is quite awesome because effectively, theoretically, it’s unlimited.”
Although Mr Draghi suggested the ECB may buy the debt of bailout recipients like Ireland and Portugal as they go back to bond markets, he gave no further details. The objective, however, would be to provide an additional layer of support for the Government as the EU-IMF programme reaches its conclusion next year. In theory, at least, the ECB could boost the market for existing Irish debt when Dublin issues new debt.
Mr Draghi said there was nothing to say right now about bank debt relief for Ireland. Asked about Coalition infighting over the budget, he said the Government was an “exemplary model of compliance” with the EU-IMF programme: “I’m confident that, whatever the tensions, this will continue to be so.”
The ECB separately held its main interest rate steady at a record low of 0.75 per cent at yesterday’s meeting, and its governors expect economic growth in the euro zone to remain subdued. The new plan comes amid uncertainty over Greece, and rising Spanish and Italian borrowing costs.
It follows huge international pressure on the ECB to escalate the battle to save the single currency.
The bank will not buy new debt directly from governments and its operations will be confined to the secondary market on which investors trade existing debt.
A previous, similar campaign proved highly divisive, prompting the resignation of Mr Weidmann’s predecessor, Axel Weber, and the top-ranked German official on the ECB executive board, Jürgen Stark.
The ECB has now refined the policy. Governments seeking help from the bank must apply first for aid from Europe’s bailout funds and they will be obliged to execute a stringent fiscal policy programme.
Saying the ECB would terminate its interventions if governments do not comply, Mr Draghi said this put the onus on them to address their fiscal problems. Governments which do not want full-blown rescue aid from the temporary European Financial Stability Facility or permanent European Stability Mechanism funds will be allowed to seek a “precautionary programme”. However, such programmes must include the option of the EFSF or ESM buying new debt directly from them.