Stringent conditions underpin ECB plan

Fri, Sep 7, 2012, 01:00

THE EUROPEAN Central Bank has laid down onerous conditions for its new bond-buying campaign, as all bar one of its governors backed a drastic new effort to calm the debt crisis.

Although ECB chief Mario Draghi did not name Bundesbank chief Jens Weidmann as the sole opponent, the reservations of the German central bank chief are well-known.

Mr Draghi took 19 minutes to read three prepared statements on the bond-buying plan, the bank’s decision to hold interest rates steady and a further move to loosen its collateral rules for its operations to support the banking system. However it was the bond initiative which dominated as the ECB set out the criteria for its Outright Monetary Transactions (OMT) as the plan will be called.

“We aim to preserve the singleness of our monetary policy and to ensure the proper transmission of our policy stance to the real economy throughout the area,” Mr Draghi told reporters in Frankfurt.

“OMTs will enable us to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro.”

The bank has placed no limits on the amount of debt it might buy and it will not specify the bond yields, which might trigger purchases, or a target yield that its interventions will aim to achieve.

At the same time the ECB insists that governments which want the bank to buy their bonds must apply for aid from Europe’s bailout funds and keep to strict fiscal policy guidelines in return for such aid. While the involvement of the International Monetary Fund will be sought when crafting and monitoring such programmes, Mr Draghi said this was not a prerequisite.

“Governments must stand ready to activate the EFSF/ESM in the bond market when exceptional financial market circumstances and risks to stability exist – with strict and effective conditionality in line with established guidelines,” he said.

“The adherence of governments to their commitments and the fulfilment by the EFSF/ESM of their role are necessary conditions for our outright transactions to be conducted and to be effective.”

The bank will terminate the purchases in the event of any failure to keep to the policy conditions.

These rank among key differences with the previous bond-buying policy, the securities market programme. The €210 billion in bonds the ECB holds under that initiative will be held to maturity.

This includes Irish bonds bought in the run-up to the EU-IMF bailout two years ago.

Whereas the ECB never publicly disclosed the quantities of bonds it held from individual countries, Mr Draghi said it would publish aggregate weekly figures from the OMT.