Central Bank Sets Bond Plan Meant to Ease Euro Debt Peril
Johannes Eisele/Agence France-Presse — Getty Images
Mario Draghi, the European Central Bank chief, in Frankfurt on Thursday.
Published: September 6, 2012
FRANKFURT — The
European Central Bank
said Thursday it had agreed on a framework for buying the bonds of
troubled euro-zone countries on the open market in unlimited quantities,
but set conditions that could delay action for weeks or longer.
Despite the many conditions and qualifications, the E.C.B.’s action took
euro zone monetary policy into a new dimension. While the E.C.B.
president,
Mario Draghi,
insisted that the central bank was not violating a prohibition on
financing governments, it is effectively becoming lender of last resort
to nations as well as banks.
“We will have a fully effective backstop to avoid destructive scenarios
with potentially severe challenges for price stability in
the euro area,” Mr. Draghi said at a news conference. “The euro is irreversible.”
As many analysts had warned, there will be no immediate help for
countries, like Spain, that are hoping E.C.B. intervention in the bond
markets could reduce their borrowing costs. The euro zone’s troubled
countries want such relief in order to roll over their debts and get
their economies moving again after two years of crisis.
In essence, the bank left the next step to the beleaguered governments.
They would be required to ask the E.C.B. formally to begin buying their
bonds in the open market and would have to agree to follow detailed
conditions for paying down their debt and hewing to fiscal discipline.
While such programs will be overseen by other European Union
governments, it would ultimately be up to the E.C.B. to determine
whether the terms of the agreement were acceptable, and whether the
government was meeting those conditions over time.
By forcing governments to impose fiscal discipline on each other and
remake their economies along lines dictated by the E.C.B., power will
inevitably drift from national capitals to Brussels and Frankfurt.
“The E.C.B. did not disappoint in its decision to start a vast bond
purchase program,” Marie Diron, an economist who advises the consulting
firm Ernst & Young, said in a note.
Markets seemed to agree. Major stock indexes rose more than 2 percent in
Europe — more than 4 percent in Spain and Italy — and Wall Street
powered almost 2 percent.
The need for strong action has arguably increased. E.C.B. economists
issued a more pessimistic prognosis for the euro zone economy Thursday,
predicting a decline in output of 0.4 percent this year and little or
not growth next year.
“We expect the euro area economy to recover only very gradually,” Mr. Draghi said.
A bond-buying program by the E.C.B. has been the subject of deep
dispute, especially among Germans who remain fearful that such a
strategy runs contrary to the bank’s mandate to control inflation and
would falsely prop up the weakest countries in the currency zone.
“We act strictly within in our mandate to maintain price stability,” Mr. Draghi said.
He did not give an exact starting date for the bond purchase program,
saying it depended on action by governments. A government must request
help and agree to a “macroeconomic adjustment program” with the European
rescue fund, the European Stability Mechanism. But the E.C.B. said this
could be a so-called precautionary program, implying that it would be
less onerous than the programs agreed to by countries like Portugal or
Ireland.
The E.C.B. will buy bonds with maturities of three years or less, and it
will withdraw as much money from circulation as it adds by buying
bonds. This so-called sterilization is intended to forestall inflation.
The central bank will not treat itself as a preferred creditor, entitled
to get paid before other bond holders if a country defaults. But it
will not take losses on Greek bonds it already holds, even though
private creditors were required to do so.
The E.C.B. also announced it would hold interest rates at their
record-low level of 0.75 percent. The bank has cut its main interest
rate three times since Mr. Draghi became president in November, but he
and other central bank officials have complained that market interest
rates have remained stubbornly high in the countries most desperately in
need of credit.
Small companies in Spain and Italy pay more than 2 percentage points
more for loans than their German counterparts, according to E.C.B. data.
The higher interest rates make it even more difficult for companies to
invest and for those economies to recover.
The bond-buying strategy could prevent borrowing costs for countries
like Italy and Spain from becoming too high for the governments to
afford. But bond buying is also designed to help companies, because
market interest rates tend to track the rates paid by governments.
“A monetary policy signal, for example the one that the E.C.B. made in
July with an interest rate cut, has only a modest impact or no impact at
all in the real economy,” Jörg Asmussen, a member of the executive
board of the E.C.B., said in Frankfurt on Tuesday.
Mr. Draghi said that the vote on the bond-buying program was not
unanimous, but he refused to name the one dissenting vote, telling
reporters coyly, “It’s up to you to guess.”
Jens Weidmann, president of the Bundesbank, has warned that euro zone
governments could become addicted to E.C.B. support for their debt, and
had vocally expressed his disagreement with Mr. Draghi’s proposal ahead
of Thursday’s meeting.
Even if Mr. Weidmann is a lone voice on the 23-member governing council,
he heads the central bank of the largest euro zone country. He is
likely to have pushed hard to limit the bond buying and his dissent
could raise doubts about how decisively the E.C.B. will act to contain
market interest rates.
Within minutes of the announcement, members of Germany’s liberal Free
Democrats party, coalition partners in Chancellor Angela Merkel’s
government, warned the E.C.B. that it was risking its credibility by
launching the bond buying program.
“We view with great concern that the mandate of the E.C.B. is
increasingly endangered,” Rainer Brüderle, the party’s parliamentary
leader told reporters, the German news agency, DPA reported. He said it
risked taking pressure off of the countries in crisis needed to push
them to carry out necessary changes to return to competitiveness.
Melissa Eddy reported from Berlin.
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