ECB’s decision on unlimited bond purchases hailed as ‘game changer’

The ECB decision to make unlimited purchases of three-year bonds for stressed eurozone member states is being hailed as a game changer, although it does not guarantee the euro will survive.

The markets have so far reacted favourably to ECB president Mario Draghi’s plans to save the euro, unveiled yesterday.

Southern member states have seen a huge erosion in competitiveness compared with Germany and other northern European countries over the past few years. Unless these imbalances are corrected, the debt crisis will persist.

For the ECB to make unlimited purchases of a country’s short-term bonds, then it would have to agree for the eurozone’s permanent rescue mechanism, the ESM and the EFSF, to buy up its 10-year bonds but crucially in return for economic reforms laid out by the IMF and the EU.

Goodbody Stockbrokers economist Juliet Tennent says yesterday’s ECB announcement is a game changer: “Because the ECB has promised to make unlimited purchases at the short end of the curve [bonds with maturities of between 1-to-3 years], which gives countries the time needed to make these structural adjustments.”

Head of fixed income at NCB Stockbrokers, Cathal O’Leary, says there had to be conditions attached if countries such as Spain sought to activate the outright monetary transactions . “This would be a positive.”

Moreover, Mr Draghi said the ECB would accept collateral in other currencies which could ease the funding costs for banks. Adjunct lecturer in finance at Trinity College Dublin Constantin Gurdgiev says it is “theoretically possible that this measure could save the euro, but it depends on factors like the world economy returning to growth and the structural adjustment programmes working.”

Mr Gurdgiev argues that Mr Draghi’s decision to make the outright monetary transaction unlimited is an attempt to call the market’s bluff so that he never has to use it.

But this will depend on whether these tough structural adjustments work in periphery countries, which is no guarantee, he added.