‘Big bazooka’ plan could cut cost of Irish borrowing

The cost of Ireland’s borrowing could be significantly lowered over the next 15 months by the ECB’s ‘big bazooka’ plan to buy sovereign bonds as the country prepares to return to the markets.

But if the EU/IMF bailout programme fails to cut borrowing to sustainable levels, the Government would have to accept new conditions to have the ECB buy its bonds.

ECB president Mario Draghi said the monetary mechanism in each euro country was under threat, that there were severe distortions in the markets with interest rates diverging in different countries, while investors feared the euro would break up.

The bank’s governing council ignored the objections of its German Bundesbank president Jens Weidmann, who was the only dissenting voice at what many regard as a landmark decision. However the second German council member, Jörg Asmussen, voted in favour, reflecting the consent of the German chancellor Angela Merkel.

The well-publicised announcement was welcomed in many quarters, though most acknowledged that it could be just part of the solution to the crisis.

The OECD’s Ireland expert David Haugh said while the ECB buying Irish bonds would very helpful, it was still crucial the Government got a deal on restructuring the banking debt.

How the EU and ECB deal with the money injected into the banks by the State “will be crucial” when the country returns to the markets and to make the debt sustainable, he said.

Mr Draghi said that Ireland, and Portugal, as countries in an EU programme, were eligible for the bank’s bond-buying programme when they regain market access.

But before the ECB would consider buying a country’s bonds, that country would have to apply either for a full macro adjustment programme or for an enhanced conditions credit line, available under the ESM rescue fund.

Once this had been approved by the eurozone ministers then the ECB would buy the bonds on the secondary market. The start, continuation and suspension of bond buying would be decided just by the ECB. The maturity of bonds bought would be up to three years and would include bonds with up to that period left.

The bank will be treated the same as all other creditors, unlike what happened with Greece where it refused to take a haircut when other creditors took a hit of up to 80%. The IMF would be preferably involved for monitoring purposes too, he said, while primary market purchases at auction could also be carried out by the EFSF and ESM.

However, Spain would have to apply for a bailout programme before the bond buying could come into force and while there was no sign that the country was about to do so yesterday, the ECB’s announcement resulted in Spanish 10-year bonds trading below 6% for the first time since May.