The European Central Bank has resembled a sieve this week. Ahead of Thursday's much anticipated press conference, financial websites and business papers were full of reports detailing ECB President Mario Draghi's plan for holding down the borrowing costs of debt-plagued euro-zone member states. Discretion was in short supply.
When Draghi did finally step in front of the microphone on Thursday, he confirmed what most already knew. The ECB is to launch a new bond-buying program to hold interest rates on euro-zone sovereign bonds in check. The program, called Outright Monetary Transactions (OMTs), allows for unlimited ECB purchases of sovereign bonds on the secondary market. The program is to focus on bonds with a period of three years and less.
"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," Draghi said in a statement. "Hence, under appropriate conditions, we will have a fully effective backstop to avoid destructive scenarios."
The decision to essentially restart the ECB's bond-buying program, which saw the bank amass over 210 billion euros worth of sovereign bonds from heavily indebted euro-zone member states in 2010 and 2011, was not uncontroversial. Particularly Jens Weidmann, head of the German central bank, the Bundesbank, and a prominent member of the ECB Governing Council, has been vocally opposed to such a move.
In an interview with SPIEGEL at the end of August, Weidmann said that bond purchases were "too close to state financing via the money press for me. The central bank cannot fundamentally solve the problems this way. It runs the risk of creating new problems."
On Thursday, though, it appears that Weidmann was largely alone in his objection to the bond-buying program. Draghi said that only a single member of the ECB Governing Council had opposed the plan -- a clear reference to Weidmann.
Still, it appears that Weidmann was able to put his mark on the OMTs program. For example, the ECB will only assist countries that appeal for help to the euro bailout fund and submit to the required austerity conditions. Their adherence to those conditions is to be monitored, in part, by the International Monetary Fund (IMF).
Furthermore, Draghi indicated that any bond purchases would be counteracted by measures to ensure that the money supply in the euro zone remains stable in order to avoid inflation, a top concern in Germany.
The focus on buying bonds on the secondary market is to avoid the appearance of direct state financing, which is against ECB rules.
Equally important, Draghi indicated that when making bond purchases, he would waive the ECB's claim to preferred creditor status. In so doing, he removes the requirement that the ECB be paid back ahead of private sector investors so as not to scare away such investment with mass purchases of bonds.
The plan fulfills the promise Draghi made in July that the ECB would do "whatever it takes" to save the euro.
And similar to the summer pledge, his news conference on Thursday provided an immediate boost to the markets, with the German stock index DAX spiking upwards. The euro also bumped above $1.26 and was trading at its highest level in weeks.
cgh -- with wire reports
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