The European Central Bank agreed yesterday (6 September) to launch a new and potentially unlimited bond-buying programme to lower struggling eurozone countries' borrowing costs and draw a line under the debt crisis.
Seeking to back up his July pledge to do "whatever it takes" to preserve the euro, ECB President Mario 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, to which Germany's Bundesbank reiterated its opposition, would focus on bonds maturing within three years and was strictly within the ECB's mandate, Draghi said. Only one member of the ECB Governing Council had dissented, he said.
"Under appropriate conditions, we will have a fully effective backstop to prevent potentially destructive scenarios," 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.
"The details … released today add to the credibility of the safety net taking shape in the eurozone and should support demand for eurozone assets," said Andrew Cox, G10 strategist at CitiFX in New York.
Eurozone blue chip stocks soared 3.2% to levels not seen since March in response.
Pressure on 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.
Draghi succeeded in securing overwhelming support on the Governing Council for the plan despite Weidmann's opposition.
It is now time, Draghi indicated, for the ECB to graduate from the narrowly inflation-focused priority rooted in the German model and assume greater responsibility for the functioning, or even the survival, of the system.
Pressure to help Spain, Italy
Other ECB policymakers saw a greater urgency to help Spain and Italy and prevent the eurozone crisis from deepening.
Draghi said the ECB would only help countries that signed up to and implemented strict policy conditions, with the eurozone's rescue fund also buying their bonds, and preferably with the IMF involved in designing and monitoring the conditions.
Renewed ECB intervention in the eurozone's bond markets is crucial to buy governments time to come up with a longer-term response to the bloc's debt crisis, which began in early 2010.
Spanish and Italian government bond yields have fallen significantly since Draghi said on 2 August that the ECB would buy bonds issued by Madrid and Rome. They fell further after he fleshed out his plan to intervene.
ECB debt purchases – which would succeed the bank's Securities Markets Programme that has been dormant since March – would be suspended if countries did not comply with the terms.
With Germany's constitutional court not due to rule on the new ESM rescue fund until next week, there was no prospect of the ECB intervening immediately.
International Monetary Fund chief Christine Lagarde welcomed the new ECB bond-buying programme and said the global lender was ready to cooperate "within our frameworks".
Spanish Prime Minister Mariano Rajoy and German Chancellor Angela Merkel said they did not discuss conditions for aid for Spain, despite expectations Rajoy would seek Germany's support for a bailout in a bilateral meeting in Madrid on Thursday.
"In the most recent discussions, as before, Bundesbank President Jens Weidmann reiterated his frequently substantiated critical stance towards the purchase of government bonds," the German central bank said in a statement.
"He regards such purchases as being tantamount to financing governments by printing banknotes," it added.
The Chairman of the EPP Group, Joseph Daul, and the EPP Group's Coordinator in the Economic and Monetary Affairs Committee of the European Parliament, Jean-Paul Gauzès said in a joint statement:
"We welcome the European Central Bank's decision to launch a programme of sovereign bond purchases under strict conditionality. This is the right decision that goes in the direction of solidarity."
"Once again, we see that reforms are indispensable. The EPP Group strongly supports public deficit reduction, coupled with sustained growth and job creation. Today's decisions help national governments undertake difficult fiscal consolidation programmes to respect their engagements on public deficit reduction," they added.
Vice President Olli Rehn said in a statement following the decisions of the ECB Governing Council:
"The Outright Monetary Transactions scheme, agreed by the Governing Council of the European Central Bank, should help restore investor confidence in the targeted sovereign bond markets while enhancing the functioning of the monetary transmission mechanism, within the ECB's primary mandate and in full independence."
"The governments of vulnerable euro area member states must continue to take determined action for sound public finances and sustainable growth and job creation. The pursuit of these policies will remain the responsibility of the governments concerned," he added.
"The Commission stands ready to play its part in the enhanced surveillance of strict and effective conditionality," Rehn said.
European Parliament President Martin Schulz made the following statement in reaction to the ECB's decision to initiate the Outright Monetary Transactions programme to lower high borrowing costs of some euro zone countries::
"This courageous decision is a major step towards resolving the sovereign debt crisis and restoring the stability of the euro zone."
"A failure to resolve the euro zone's economic problems will throw more and more people into poverty and undermine their confidence in the European Union. I share the ECB's view that the euro is an irreversible project," Schulz said.
The European Central Bank said on 2 August that it was prepared to buy Italian and Spanish bonds on the open market but only after these countries had made a formal request to activate the region's bailout funds and accepted painful reforms to restore their public finances.
The bank has already spent €210 billion buying bonds under its now dormant Securities Markets Programme (SMP) since May 2010, with limited impact, but ECB President Mario Draghi said the new effort would be different in scope and conditionality.
The German government has resisted calls from Italy and struggling countries to introduce common eurozone bonds or take other action to help alleviate the bloc's sovereign debt crisis, saying it would remove pressure to enact painful reforms.
- 12 September: German Constitutional Court to rule on the European Stability Mechanism (ESM)
- 12 September: European Commission to lay out its banking union plan
- 12 September: Dutch elections
- 12 September: European commission president to deliver State of the Union add
European Central Bank: Mario Draghi introductory statement at the press conference 6 September 2012 European Central Bank: Technical features of Outright Monetary Transactions
Financial Times:ECB signals resolve to save euro The Guardian: Draghi pins hopes for saving the euro on plan to buy struggling countries' bonds Financial TImes: Draghi's audacious gamble