ECB steps up response to crisis with bond proposal

ECB president Mario Draghi said it may wade forcefully into bond markets in tandem with Europe’s rescue fund, stepping up its crisis response despite the reservations of Germany’s Bundesbank.

“The euro is irreversible,” Mr Draghi said at a press conference in Frankfurt yesterday after keeping the benchmark interest rate at 0.75%.

Elevated bond yields “that are related to fears of the reversibility of the euro are unacceptable, and they need to be addressed in a fundamental manner”, he said. The ECB may therefore “undertake outright open market operations of a size adequate to reach its objective”.

The euro declined and Spanish bond yields rose on disappointment that Mr Draghi didn’t signal imminent ECB action.

While Mr Draghi said the Bundesbank has reservations about ECB bond purchases, and the details of the plan still need to be hammered out, the proposal nevertheless signals a new chapter in the battle against the debt crisis.

Mr Draghi left open the question of whether the ECB would print new money by refraining from sterilising asset purchases

“Although the ECB did not start to actually intervene in bond markets yesterday, Mr Draghi sent a strong message that the ECB will do all it takes,” said Holger Schmieding, chief economist at Berenberg Bank in London.

“Of course, the ECB cannot and has not solved the euro crisis. But all in all, the chances have risen substantially that the worst of the current wave of the crisis could soon be over.”

Unlike the ECB’s last bond-buying programme, which was shelved in March, Mr Draghi said no decisions have been taken on whether new purchases would be sterilised.

If they aren’t, the ECB would be entering similar territory to the Federal Reserve and Bank of England by pumping new money into the system without draining it elsewhere.

“The market reacted positively when Mr Draghi said the ECB will address the seniority issue,” said Mohit Kumar, head of European fixed income strategy at Deutsche Bank, Germany’s biggest bank. “But then when details emerged, it suggested he is giving guidelines without giving concrete measures.”

Financial markets and politicians ratcheted up pressure on the ECB to act after Draghi last week pledged to do “whatever it takes” to save the euro.

The Bundesbank reiterated the next day that it opposes further ECB purchases of sovereign debt, saying they blur the line between fiscal and monetary policy.

“It is clear and it is known that Mr Weidmann and the Bundesbank have their reservations about programs that buy bonds,” Mr Draghi said, referring to the head of the German central bank.

Mr Draghi said the ECB may introduce additional non-standard measures and that officials also discussed cutting interest rates further, raising the prospect they will ease policy as soon as next month.

“I’m convinced that there’s concerted action being prepared in the background,” said Stephan Rieke, an economist at BHF-Bank in Frankfurt.

“But we’re all treading in the dark and Draghi isn’t much ahead either. He’s presented a target, given strong guidance, and now we’ll have to see.”


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