ECB brings out its 'bazooka' to save euro
FRANKFURT – The European Central Bank on Thursday announced a plan for a massive sovereign bond buy up, overcoming German opposition to unleash a so-called "big bazooka" against Europe's debt crisis.
But ECB chief Mario Draghi insisted governments also needed to do their bit to save the euro.
Draghi set out the plan as German Chancellor Angela Merkel and Spanish counterpart Mariano Rajoy met in Madrid to dispel fears about a possible break-up of the single currency.
His masterplan is designed to bring down the soaring borrowing costs that crisis-wracked countries say prevent them from getting back on their feet.
He appeared to have convinced investors the scheme could work, as stock markets across Europe jumped and Spanish and Italian borrowing costs tumbled on the news.
In one of the most highly anticipated meetings in ECB history, the bank left its key interest rates at their current all-time lows, as most had expected.
Its main interest rate was left unchanged at 0.75 per cent and the ECB also downgraded its growth forecasts for the 17-nation bloc.
But the focus of markets' attention was on neither of those, but on Draghi's new revamped programme to buy bonds issued by heavily indebted eurozone countries – a scheme named "Outright Monetary Transactions."
The OMTs will replace the ECB's previous Securities Market Programme or SMP, first launched in May 2010.
The SMP has come under heavy fire, particularly in Germany. Its critics say it blurs the lines between monetary policy, which is supposed to be free from all political influence in the euro area, and fiscal policy.
The head of the German central bank or Bundesbank, Jens Weidmann, kept up his criticism on Thursday.
In a statement, he hit out at the programme, saying he "regards such purchases as being tantamount to financing governments by printing banknotes. Monetary policy risks being subjugated to fiscal policy."
Draghi told reporters there was one "no" vote to the OMT programme on the 23-member governing council, saying: "I will leave you to guess who that was."
But he insisted the new programme did not overstep the ECB's mandate. The 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," Draghi said.
"We will do whatever it takes" to keep the eurozone together, Draghi said. Unlike its forerunner, the SMP, the OMTs would be subject to strict conditions and the ECB was not offering crisis-hit countries a blank cheque, Draghi explained.
Countries wishing to benefit from the OMTs would first have to apply for a bailout from one of the eurozone's two rescue funds, the EFSF or ESM, he said. And any such cash from those funds is conditional on governments meeting agreed reform targets.
"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 ECB said.
The ECB would also only buy bonds with maturities of up to three years, but there was no limit set on the volume of bonds to be purchased, Draghi said.
Leaders of Italy and Spain, the two countries seen most likely to benefit from the prospect of ECB bond purchases and to have recourse to seek such help, welcomed the move.
"Today I have seen an important step forward... which goes towards a more satisfactory governance of the eurozone," said Italian Prime Minister Mario Monti, adding Italy was trying to avoid seeking help.
Spanish Mario Rajoy, whose country faces 30 billion euros in debt repayments in October, brushed aside questions whether it would seek a bailout and ECB help.
However he pledged to "do what it takes to definitively resolve the euro crisis." Analysts also welcomed the OMT scheme.
"Draghi has delivered," said Berenberg Bank chief economist Holger Schmieding.
"After one year in which the ECB allowed turmoil in sovereign bond markets to obstruct the transmission of its monetary policy, the ECB is now addressing the core issue in the eurozone crisis," he said.
The ECB has signalled "more clearly and in much more detail than before that it will not let any solvent euro member go bust," Schmieding said. ING Belgium economist Carsten Brzeski said: "All in all, the ECB has presented a big new bazooka which should help buying time.
"This is probably the furthest the ECB can go to help governments. The ball is now back with eurozone governments."
UniCredit economist Marco Valli said the programme "creates a substantial and credible firewall, which reduces the risk of a disruptive market event in the near term while keeping pressure on governments to continue to reform.
"As such, this is a game changer," Valli concluded.AFP