Sunday

21st Jan 2018

ECB expected to buy Spanish and Italian bonds

  • The ECB in Frankfurt: investors expect it to do more to save the euro (Photo: Valentina Pop)

The European Central Bank (ECB) board is meeting on Thursday (2 August) in Frankfurt amid high hopes from investors that it will deliver on what its chief suggested last week: a forceful intervention to help out Italy and Spain.

But Germany's central bank is against the move.

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ECB chief Mario Draghi last week said the bank would do "whatever it takes" to support the euro, adding "Believe me, it will be enough."

He specifically mentioned a controversial bond buying programme that last year helped bring down Spain and Italy's borrowing costs.

Both countries are again struggling to sell government bonds, as their interest rates are too high to be considered "sustainable," meaning investors are asking extra premiums for fear the countries may default.

Jens Weidemann, the head of Germany's central bank who also sits in the ECB governing council comprising of all central bankers from the 17 euro countries, is fiercely against such a move, however.

The ECB should not "overstep its own mandate" he said in an interview published on the Bundesbank website on Wednesday, just after the German banker met Draghi. Weidemann also underlined that the Bundesbank is "the largest and most important central bank in the Eurosystem and we have a greater say than many other central banks."

Last week, the Bundesbank also stressed it opposes bond purchases because they are an indirect way of helping governments, something that is forbidden under ECB rules.

A compromise solution may be found, however. Sueddeutsche Zeitung on Thursday reported that a majority of the board members are in favour of resuming the bond purchasing programme, which so far has put more than €200 billion into acquiring distressed government bonds.

The German paper said a plan may be put forward for a co-ordinated bond purchasing action of the ECB and the upcoming bailout fund (ESM) in September, after Germany's constitutional court rules on challenges brought against the ESM.

"He will really disappoint if he doesn't deliver," Carsten Brzeski, a senior economist with ING Bank told this website.

He noted that Draghi had raised expectations several times before and came out with much smaller moves than expected.

"It will probably be a collection of smaller things hinting at bigger moves between the lines. They could resume buying bonds like it was done last year, when ECB chief Jean-Claude Trichet said 'I never said the programme stopped' and at the same time the ECB was active on the markets," the economist recalled.

One of the "big moves" pushed forward by Italian Prime Minister Mario Monti is to give the ESM bailout fund a 'banking licence,' meaning unlimited borrowing from the ECB.

Speaking in Finland on Wednesday, Monti said he was confident such a move would "help" countries. "I think this will in due course occur," he said.

But Germany also opposes the big-bang option.

"A banking license for the ESM rescue fund is absolutely not our way," German deputy government spokesman Georg Streiter told reporters on Wednesday.

ECB chief indicates upcoming help for Spain

Markets rallied after European Central Bank chief Mario Draghi on Thursday pledged to do "whatever it takes" to salvage the euro and suggested the bank may buy more government bonds.

Investigation

The European Central Bank: a hamstrung firefighter

The European Central Bank is an important firefighter in the euro-crisis. But increasingly divergent eurozone economies are limiting the effects of its policies and democratic scrutiny remains an issue.

Germany gets its way on ECB bond-buying

The ECB has said it "may" buy Spanish and Italian bonds, but only if governments first sign reform pledges with the eurozone's bailout fund - a German demand.

ECB in nuanced denial of yield cap plans

The European Central Bank has condemned media reports about a bold plan for the bank to bring down eurozone government borrowing costs but has not denied the idea outright.

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