Markets rise on bond plan
European blue chip stocks jumped today after the European Central Bank announced an aggressive bond-buying program to stop the spread of the euro zone's debt crisis.
The euro gained slightly after ECB president Mario Draghi said the central bank would undertake unlimited, short-dated bond purchases under strict conditions to ease funding pressures on governments that sought help. He added that the ECB and would not expect better treatment than other creditors in the case of default.
The EuroSTOXX 50 index of euro zone blue-chip stocks jumped about 3.3 percent to its highest level since early April. On Wall Street, the S&P 500 jumped nearly 1.8 per cent to reach its highest since May 2008.
Seeking to back up his July pledge to do whatever it takes to preserve the euro, Mr Draghi said the new plan, aimed at the secondary market, would address bond market distortions and "unfounded" fears of investors about the survival of the euro.
The scheme, which the Bundesbank is known to have opposed, would focus on bonds maturing within three years and was strictly within the ECB's mandate, Mr Draghi said. Only one member of the ECB governing council had dissented, he said.
The ECB would only buy bonds of countries that have initiated budgetary readjustment programmes, Mr Draghi said.
Purchases may also be considered for euro-area countries currently under bailout programs, such as Ireland, but only when they regain bond-market access, he said. Ireland's EU-IMF bailout programme still has another 14 months to run.
"Under appropriate conditions, we will have a fully effective backstop to prevent potentially destructive scenarios," Mr Draghi told a news conference after the central bank's monthly meeting.
"No ex-ante quantitative limits are set on the size of outright monetary transactions," he said, using the formal term for ECB bond-buying programmes.
Investors were on tenterhooks, waiting to hear how decisively the ECB would act to help bring down the borrowing costs of Spain and Italy, after disagreements among policymakers on the plan were played out in public last week.
Mr Draghi's statement at least met expectations, analysts said. With the bond-buying plan the focus of today's meeting, the ECB kept interest rates on hold, leaving its main rate unchanged at 0.75 per cent.
The euro initially surrendered gains against the dollar after Mr Draghi said the bank had cut its growth forecast for the euro zone. But it then recovered and traded at $1.2627, up 0.2 per cent.
Pressure on Mr Draghi intensified after an unsubstantiated German newspaper report last week that Bundesbank chief Jens Weidmann had considered resigning over his opposition to bond-buying, although several sources say he has made no such threat and believes in staying at the table to argue his case.
Mr Draghi appeared to have succeeded in securing overwhelming support on the governing council for a plan that Mr Weidmann can live with, despite his apparent negative vote.
The Bundesbank chief had expressed concern that intervening in the bond market would break the ECB taboo of financing euro zone member states. Other ECB policymakers see a greater urgency to help Spain and Italy and prevent the euro zone crisis from deepening.