The “unlimited” sovereign bond-repurchasing program approved Thursday by the European Central Bank’s Governing Council left the ball firmly in Spain and Italy’s court if they want to avail themselves of the mechanism to lower their borrowing costs.
At a news conference after the meeting, ECB President Mario Draghi reiterated that any country seeking intervention by the bank in the secondary market would have to first ask the European Financial Stability Facility (EFSF) and its planned permanent successor, the European Stability Mechanism (ESM), to intervene in the primary market for government bonds. Such assistance will come with “strict” strings attached.
“Governments must stand ready to activate the EFSF/ESM in the bond market when exceptional financial market circumstances and risks to financial stability exist — with strict and effective conditionality in line with the established guidelines,” Draghi said.
Failure to meet the conditions imposed for help from the EFSF and the ESM will result in the ECB abandoning the purchase of bonds of the euro-zone member in question and even the sale of the bonds it has already purchased.
It’s all in the hands of the governments of Spain and of Europe”
The new ECB program, which has been named Outright Monetary Transactions (OMTs), was approved by the ECB monetary policy board unanimously, with the exception of one “dissenting voice,” presumably Germany’s.
The previous program — the Securities Market Program — which has been replaced by OMTs had no conditions attached. Now, Draghi said, countries can opt for a full bailout or an “enhanced” credit line. “It’s very much up to governments themselves to decide the precise shape of conditionality.” Draghi said the IMF would also be invited to participate in the program.
Asked if Spain would be able to avail itself of the new scheme before the large amount of Spanish debt that has to be refinanced in October, Draghi limited himself to noting: “It’s in the hands of the government of Spain and the governments of Europe.”
The ECB will buy sovereign debt with maturities of between one and three years. This will also include, for example, 10-year government bonds with up to three years left to maturity.
The ECB will look at yields, yield spreads, volatilities and other factor in determining whether intervention is required. The program will be implemented with a great deal more transparency than the previous one, with regular publication of interventions, details of the bonds purchased, the amount purchased and the countries involved.
Draghi said “purchases of bonds would be adequate to reach our objectives,” adding that there would also be no time limit to intervention.
He justified the move despite German objections on the need to restore order in the financial markets and facilitate the ECB’s implementation of monetary policy.
“OMTs will enable us to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro,” the ECB chief said. Hence, under appropriate conditions, we will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area.”