Monday

3rd Oct 2022

ECB to buy Spanish bonds, but with strings attached

  • Spanish bonds are expected to sell well in the coming months (Photo: Valentina Pop)

The European Central Bank on Thursday (6 September) announced an "unlimited" bond-buying programme once governments apply for eurozone financial assistance with strict conditions and supervision.

"The Governing Council today decided on the modalities for undertaking Outright Monetary Transactions (OMTs) in secondary markets for sovereign bonds in the euro area," ECB chief Mario Draghi said in a press conference after chairing the council of eurozone's central bank governors.

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The new programme will allow the ECB to buy government bonds with a maturity of 1-3 years from countries phasing out of a bailout or for countries who are entering a new bailout programme, be it full-blown of 'precautionary'.

"Unlimited" - a key word - meets expectations raised by Draghi earlier this summer when he promised the ECB would do "whatever it takes" to save the euro.

He explained that the eurozone continues to be very "fragmented" and that in some countries the reforms done are not enough to convince markets, which are still spooked by the prospect of a possible breakup of the eurozone.

Such fears, he insisted, were completely false. "The euro is irreversible," he said.

During the vote in the council of bank governors, only Germany's Jens Weidmann opposed the plan, in line with his previous statements.

"Monetary policy is at risk of becoming the tow-rope of fiscal policy. Its capacity to ensure a stable currency in the eurozone should not be jeopardised with such interventions," Weidmann said in an emailed statement.

But his stance is unlikely to hamper the new scheme, particularly since one of the core German principles is kept: no money without strings attached.

"We had the previous experience, it had just one leg and it didn't work," Draghi said, in reference to the mistake made last year when it relied on a gentleman's agreement with then Italian Prime Minister Silvio Berlusconi to make reforms in return for bond purchases, only to be left in the cold once Rome's borrowing costs went down.

Draghi warned governments that may apply for such aid that the ECB will suspend the bond purchases if the conditions enshrined in a memorandum of understanding with the eurozone bailout fund are not kept.

The same wording came also from German Chancellor Angela Merkel on Thursday, who met Spanish Prime Minister Mariano Rajoy in Madrid just as the ECB was convening: "Monetary intervention cannot replace political action," she warned.

Signalling that Berlin is fully behind the new scheme, Merkel said that OMT was "in line with the ECB mandate" of ensuring a stable euro, while keeping its full independence from politics.

She denied having talked about any new bailout requests with Rajoy, but said she was "very impressed" with the reforms his government was pursuing.

Rajoy also denied having held any discussions about a possible aid request. "When there is news I will tell you," he told reporters.

European officials both in Brussels and Frankfurt meanwhile have told this website that patience is wearing thin with Spain and that they "should wake up to the reality that there is no way around having to ask for a bailout."

Madrid already waited as long as possible to request a €100bn bailout for its banks, which was finally agreed in June.

It can still avoid the full-blown bailout Greece, Portugal and Ireland had to ask for, as under current rules, the temporary bailout fund EFSF can buy Spanish bonds if Madrid signs up to increased supervision of reforms they are already doing or promised to do under EU's strengthened budget rules.

Opinion

The monetary masquerade

Massive monetary expansion defers vital structural reforms in the advanced world, writes Dan Steinbock.

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