Brussels, 02/08/2012 (Agence Europe) - On Thursday 2 August 2012, the European Central Bank (ECB) announced that it is prepared, where necessary, to buy up struggling eurozone country bonds as long as the eurozone's 17 member use their bailout funds (EFSF and ESM) to take action beforehand. The ECB will not give details of amounts or countries in question unless and until it intervenes on the secondary markets. No information on timing has emerged yet as the details have yet to be decided (this will take place over the next few weeks). No eurozone countries have as yet requested intervention from the bailout funds.
The president of the ECB, Mario Draghi, said on 2 August: “The Governing Council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright market operations of a size adequate to reach its objective. In this context, the concerns of private investors about seniority will be addressed”. Private investors are concerned that institutional investors may be given priority for repayment in the event of a country defaulting on its debt.
Conditions. In the light of the damaging impact of excessively high interest rates for sovereign debt on monetary policy, the bonds may be bought of countries like Italy and Spain, which are making huge cuts and introducing reforms to make their economies more flexible, and are still coming under punitive attack from the money markets. On Thursday, Madrid successfully issued ten-year bonds, but at a higher yield than for its most recent similar emission (see separate article).
The ECB says member states must play their proper part because monetary policy cannot work if countries fail to reduce public spending and fail to reform their economies. Draghi said the most important thing was for governments to be prepared to activate the EFSF and ESM to buy up sovereign bonds in exceptional circumstances and in the event of exceptional risks to price stability. Draghi said this operation would be necessary, but would not be sufficient.
At its recent summit, the eurozone said that the EFSF and ESM could be used in a flexible and effective manner to stabilise the markets for countries that respect their country-specific recommendations and other obligations under the Stability and Growth Pact and the “European Semester” process (see EUROPE 10645), and intervention by the bailout funds would be accompanied by conditions set out in a Memorandum of Understanding. Firstly, however, countries have to actively request action from the bailout funds. Thus far, neither Spain nor Italy has requested aid, said Draghi.
The ECB's decision aims to clarify recent statements by Draghi that “whatever it takes” will be done to save the euro (see EUROPE 10664). It was taken unanimously by the ECB's Governing Council, bar the head of Germany's Bundesbank, Jens Weidmann, who has made vocal opposition to resumption of special bond buy-ups (see EUROPE 10668). Draghi said Weidmann did not challenge the argument that whatever it takes must be done to save the euro, adding that it was pointless to place short-term bets against the euro.
European money markets have greeted Draghi's comments with scepticism and the risk premium on Spanish ten-year bonds went up above 7% again. It remains to be seen whether investors will accept Draghi's comments.
Asked by reporters what had encouraged the ECB to act, Draghi said it was not any isolated incident, but rather the feeling that the sovereign debt crisis was deteriorating. Draghi said his greatest concern was market fragmentation as illustrated by the lower proportion of cross-border investment. Foreign investors only account for 40% of all bond sales at the moment, with a “significant increase in domestic collateral”, said Draghi. A similar trend has been seen for inter-bank lending and the secondary sovereign debt market. “This is what we have to overcome, repair and change”, added Mario Monti, formerly governor of Banca d'Italia.
No change in interest rates. The ECB on Thursday decided to leave euro interest rates unchanged (a month after increasing the refinancing rate to a record 0.75%, see EUROPE 10649). Draghi said that inflation had been contained in July (2.4%) and would continue to fall. In early 2013, it will be back below the 2% level, he said. (MB/transl.fl)