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.