Monday

21st Aug 2017

Draghi puts the ball in Spain's court on ECB bond-buying

The European Central Bank is ready to deploy its new bond-buying scheme if Spain requests it and signs up to "conditionality," which would not be any harsher than what the country is already doing, European Central Bank (ECB) chief Mario Draghi said on Thursday (4 October).

"We are ready to undertake Outright Monetary Transactions, once all the prerequisites are in place," he said at a press conference after the monthly meeting of the bank's governing council, which took place in the capital of Slovenia, Ljubljana.

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The so-called "OMT" programme was first hinted at in August and would provide an unlimited backstop to countries like Spain struggling with too high borrowing costs but which are not under a full bailout.

For the bond-buying to take place, however, the Spanish government has first to ask for the financial assistance and to sign a memorandum of understanding with eurozone finance ministers, outlining deadlines for ongoing fiscal and labour market reforms.

Madrid has so far hesitated in asking for the bond-buying for fear markets would interpret it as a full-blown bailout.

But Draghi made it clear that the strings attached do not have to be harsher than the austerity measures already underway in Spain.

"There is a tendency to identify conditionality with harsh conditionality. But conditionality does not need to be punitive. There can be great social benefits to it," he said.

Conditionality is essential for the ECB to preserve its independence from politics, as enshrined in its founding treaty. In case a government fails to deliver on the reforms it signed up to, the bank would halt the bond-buying scheme, Draghi explained.

Making the actual request for the first OMT is now "up to the Spanish government and the other euro area governments to decide," he added.

He also clarified that Portugal would not qualify for this scheme because it has not yet gained "full market access," even though he praised the bailed-out country for its reforms and for managing to sell a five-year bond on Wednesday, the first time since June 2011.

On Greece, Draghi ruled out any ECB involvement in a possible further debt restructuring. "We have said several times that any restructuring of our holdings would qualify as monetary financing," he said.

The ECB governing council also decided to keep the key interest rate at 0.75 percent, unchanged in three months. Unaware his microphone was still on, Draghi noted: "This was a dull press conference."

"With the OMT, the ECB has tackled and exorcised fears of an imminent eurozone break-up. For the time being, the ECB can lean back, watch and twiddle thumbs," ING economist Carsten Brzeski commented after the event.

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Analysis

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Markets rallied on Tuesday when two German lawmakers suggested Berlin is warming to the idea of a Spanish bailout. But the wait-and-see game in Madrid is likely to take a few weeks longer.

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