ECB's Mario Draghi unveils bond-buying euro debt plan

 

ECB president Mario Draghi: "We will have a fully effective backstop to avoid destructive scenarios"

Mario Draghi, president of the European Central Bank, has unveiled details of a new bond-buying plan aimed at easing the eurozone's debt crisis.

He said the scheme would provide a "fully effective backstop" and that the euro was "irreversible".

The ECB aims to cut the borrowing costs of debt-burdened eurozone members by buying their bonds.

The Spanish government's implied borrowing costs fell sharply after the announcement.

Mr Draghi said the ECB would engage in outright monetary transactions, or OMTs, to address "severe distortions" in government bond markets based on "unfounded fears".

He insisted that the ECB was "strictly within our mandate" of maintaining financial stability, but reiterated the need for governments to continue with their deficit reduction plans and labour market reforms.

He added that the ECB's actions came in response to eurozone economic contraction in 2012, with continued weakness likely to continue into 2013.

The ECB expects the eurozone economy to shrink by 0.4% in 2012 and grow by 0.5% in 2013, with inflation rising to 2.6%.

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Some in the financial markets - and many governments - will certainly be disappointed that it has taken so long for the ECB to step up to the plate”

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OMTs will only be carried out in conjunction with European Financial Stability Facility or European Stability Mechanism programmes, he said.

In other words, countries will still have to request a bailout before the OMTs are triggered.

The maturities of the bonds being purchased would be between one and three years and there would be no limits on the size of bond purchases, he added.

The ECB will ask the International Monetary Fund to help it monitor country compliance with its conditions.

Market reaction

Mr Draghi is hoping that ECB intervention in the bond markets will help reduce the borrowing costs of debt-laden countries such as Spain and Italy and lessen the likelihood of them needing to ask for a full sovereign bailout, an eventuality that could bankrupt the eurozone and cause the collapse of the euro.

Analysis

This new proposal is different from the ECB's previous bond-buying programme in important ways.

The bank accumulated more than 200bn euros in bonds issued by Greece, Ireland, Portugal, Italy and Spain under its Securities Market Programme, but those purchases were always described as limited, and they were never accompanied by any formal conditions.

The OMT, on the other hand, is described by Mr Draghi as potentially unlimited in size.

Countries will first have to apply for assistance to eurozone bail-out funds, and they will have to agree to 'strict and effective' monitoring of efforts to reform their economies.

Ideally, the ECB would like the International Monetary Fund to be involved in that process too, and the Fund says it is ready to co-operate.

It all begins to sound like 'bail-out lite' - and it puts the ball firmly in the court of political leaders like Mariano Rajoy in Spain and - a little further down the line - Mario Monti in Italy.

They will have to decide whether they want more intrusive external surveillance of their economies - something they have been keen to avoid.

Spain is already benefiting from investors' response to the plan.

Earlier in the day, the Spanish government raised 3.5bn euros on the debt markets, selling bonds due to mature in 2014, 2015 and 2016.

The implied cost of borrowing over two years fell from 4.71% to 2.80%; the three-year rate went from 5.09% to 3.68%; and the four-year borrowing cost fell from 5.97% to 4.60%.

On the secondary market, where government bonds already in circulation are traded by banks and other financial institutions, the yield on 10-year bonds fell below 6%. In recent months, yields had topped 7%, the level at which Ireland, Portugal and Greece had been forced to seek international bailouts.

The yield on Italian 10-year bonds also fell.

Investors in European companies also appeared upbeat about the plan. European stock markets closed up.

The FTSE 100 ended 2.1% higher; the German Dax, 2.9%; the French Cac 40 index, 3.1%; and the Spanish IBEX, 4.9% at the close.

Bank shares in particular rose sharply, as they stand to lose billions of euros should any eurozone government default on its debts as a consequence of the crisis.

French banks Credit Agricole and Societe Generale both closed up 8%, while in Germany, Deutsche Bank rose 7% and Commerzbank, 5%. In London, Lloyds banking group rose 7%.

Long-term financing

Responding to the plans, Peter Westaway, chief economist for Europe at asset manager Vanguard, said: "This is just the good news that was priced by the markets, and it has now been confirmed."

However, the euro fell back against the dollar to $1.2571 following its high of $1.265 reached before the ECB announcement.

"There is a long-term question of whether this will be enough to meet the long-term financing needs of Italy, and that probably remains."

Crisis jargon buster
Use the dropdown for easy-to-understand explanations of key financial terms:
AAA-rating
The best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is minuscule.

While Mr Draghi was announcing the ECB's plans, German Chancellor Angela Merkel was meeting Spanish Prime Minister Mariano Rajoy for talks on the eurozone crisis.

In a joint news conference afterwards, Mrs Merkel said: "We have to restore confidence in the euro as a whole, so that the international markets have confidence that member countries will fulfil their commitments."

Mr Rajoy said: "We want to dispel any doubts on the markets about the continuity of the euro."

Global risk

Jens Weidmann, president of Germany's Bundesbank, remains vigorously opposed to the ECB's plan, concerned that member states could become hooked on central bank aid and fail to reform their economies sufficiently.

But the majority of the 23 ECB council members support the plan.

And the Organization for Economic Co-operation and Development (OECD) added its support for the ECB bond-buying plan on Thursday, as it warned that the eurozone crisis posed the greatest risk to the global economy.

It is calling for more action from central banks to prevent a break-up of the eurozone.

"Concerns about the possibility of exit from the euro area are pushing up [government bond] yields, which in turn reinforces break-up fears," the OECD said in its global economic outlook.

"It is crucial to stem these exit fears. This could be achieved by the ECB undertaking bond market intervention to keep spreads within ranges justified by fundamentals."

In other eurozone news:

  • The central bank kept the benchmark eurozone interest rate unchanged at 0.75%.
  • The unemployment rate in Greece rose to 24.4% in June from a revised 23.5% in May, according to the Elstat statistics service. However, Spain remains the eurozone nation with the highest jobless rate, at 24.6% in June.
 

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  • rate this
    0

    Comment number 379.

    So Europe's solution is to use borrowed money to buy its own bonds to make borrowing cheaper. Not only is this another pointless endeavor, but when China artificially manipulates the foreign exchange market to benefit itself, everyone complains; when Europe manipulates the bond market, apparently it's fine.

  • rate this
    0

    Comment number 378.

    And I thought the silly season was over. What a drag Mario is

  • rate this
    0

    Comment number 377.

    This will not End Fractional Reserve Banking as as long as we accept a complex currency in the euro and complex financial products banks will never go back to the old simplistic banking.

    The only way back to this is by strong government with a singular currency linked to them with this government can aim to collect enough tax not to borrow and thus governments not afraid of banks.

  • rate this
    +1

    Comment number 376.

    This can only work if there is political and social inclusion. The first sign of this not being the case then this acts as an explosive detonator.

    Once again the we need to ask the how longs a piece of string question how long can the euro last it will enivitabley end either peacefully or distructivley.

    Please let it be peacefully and soon before the web gets even more tangiled.

  • rate this
    0

    Comment number 375.

    Not sure what to make of this without more detail. If states can finally reclaim the prerogative of issuing their own currency debt free, put a stop to fractional reserve banking ie FULL reserve banking (no need for deposit insurance).Fewer bond issues would have pension funds looking for investments with plenty businesses wanting to borrow, we could actually achieve a steady state economy.

  • rate this
    +1

    Comment number 374.

    These so called intelligent people can't even make decisions to clear this mess up and this has been going on for years. The rich and elite are making mint out of this and the poor are getting poorer.

    Nothing will change unless the public grows a backbone and does something about it.

  • rate this
    +1

    Comment number 373.

    It seems that Merkel has conceded some ground but the Bundesbank has not. In addition

    - if you have to invent a new acronym, OMTs be very cautious. If you don't understand it, don't invest in it.

    - the ECB is effectively saying the market is wrong. Don't bet against the market.

    - the ECB says support will be unlimited. Make your own minds up whether that's bluster or not.

  • rate this
    0

    Comment number 372.

    What I find amusing is that entire countries are collapsing, millions of peoples livelihoods are disappearing into a great black hole and people *still* refuse to find out what money really is, what banks really do and how fractional reserve banking causes massive financial instability.

    All the information is there for free. Just google it.

  • rate this
    0

    Comment number 371.

    @366. margaret howard

    It's the countries bonds which are being dumped not the currency. If holders dump uk bonds or us treasuries either the FED or the BOE will buy them.

  • rate this
    +1

    Comment number 370.

    Another plaster on top of all the other plasters to hold back the inevitable day when all things come crashing down. This action could be the action to make the whole of Europe go belly-up...for the austerity/deficits are not going to change. Markets still could go "Yo-Yo-ing". Draghi took a gamble today (Thursday) now he has to wait till the result comes in. Let's hope he's a lucky "Gambler"!

  • rate this
    +3

    Comment number 369.

    I have spent more than my salary this month buying loads of ice cream for my kids so they think I'm a brilliant dad.... i've not enough money left to pay my bills... will any of you make up the difference and promise to do the same indefinitely... I realise I was never voted in but thanks ever so much all the same.

  • rate this
    +2

    Comment number 368.

    EU governments are becoming more insolvent! These governments, or politicians with an inflated sense of entitlement, are so GREEDY for CASH that normal avenues of provision cannot supply the need. So (to preserve their careers,) they vote themselves rules allowing them to just print their cash needs! The idea being ordinary people will suffer the austerity, whilst the politicians dodge it. Enjoy!

  • rate this
    +2

    Comment number 367.

    The Ponzi scheme called Europe has been saved for now...

  • rate this
    +1

    Comment number 366.

    131 KeithT

    "The euro is still there folks! Get used to it! UK eurosceptics and currency speculatotrs have failed to dislodge it now for 12 years"
    ==

    One can see by the 21 negatives you received just who has taken over these comments pages. Maybe the speculators will now turn on the real weak currencies, the dollar and the pound which are being weakened daily by "quantitative easing"

  • rate this
    0

    Comment number 365.

    Rearrange these words into a well-known saying or phrase: "has door after stable the horse the closing bolted". Now you know how effective these measures will be. Congratulations!

  • rate this
    0

    Comment number 364.

    The way out of here is to let the crisis run without intervention. The weak bizz & governments and banks will fall with job losses. But this will allow the stronger enterprises to succeed. As we are with govs around the world creating artificially low interest rates nothing will fail and we will limp on as we are now. Job losses and higher interest rates are hard to swallow but that's what we need

  • rate this
    +3

    Comment number 363.

    The Euro was a dollar-envy wet-dream of the Federalists in Brussells - those parasitical technocrats who have everything to gain by increasing their bureaucratic hold over what might have started out wth good intentions but what has become a Frankenstein.

    The Euro should be scrapped - it has been ineptly managed and technocrats like Draghi are the only people to gain. Citizens don't.

  • rate this
    -1

    Comment number 362.

    World Economy - Outlook and perspectives in 3 charts: www.miguelangeldiez.com/2012/09/05/global_economy

  • rate this
    -1

    Comment number 361.

    358. Icebloo
    First step to recovery is get rid of Angela Merkel.
    //////
    Firstly, can I ask how you voted at the last election and secondly, if it weren't for Merkel you and your family would already be feeding on scraps.

  • rate this
    +4

    Comment number 360.

    So let me get this straight, we are going to try and solve the debt problems of certain countries in the EU by lending them more money. Sounds like a winning plan to me. What we need is for politicians to realize they shouldn't spend more than the country earns. Hmm, don't suppose that will ever happen.

 

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