ECB poised to buy up bonds if terms met

Published Oct 5, 2012

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Matthew Brockett and Stefan Riecher Frankfurt

The European Central Bank (ECB) was ready to start buying government bonds as soon as the necessary conditions were fulfilled, president Mario Draghi said yesterday.

The ECB was ready to undertake outright monetary transactions “once all the prerequisites are in place” for the bond-buying programme, Draghi said at a press conference in Slovenia, after policymakers left the benchmark rate at a historic low of 0.75 percent.

The plan had “helped to alleviate tensions over the past few weeks”, and “it is now essential that governments continue to implement the necessary steps to reduce both fiscal and structural imbalances”, Draghi said.

A month after Draghi unveiled the unprecedented bond purchase plan to lower yields on government debt, Spain, the country most likely to take up the offer, is still mulling whether it wants to accept the conditions attached. At the same time, the euro zone economy probably entered a recession in the third quarter as the sovereign debt crisis damped spending and investment.

“Economic growth in the euro area is expected to remain weak,” Draghi said. Inflation should drop below the ECB’s 2 percent limit next year, he said.

Under Draghi’s plan, a country must make a formal request to Europe’s bailout fund to buy its debt on the primary market before the ECB considers buying bonds on the secondary market.

Spain has been widely seen as the primary candidate to apply for such aid, but has so far resisted making the move.

Spanish Finance Minister Luis de Guindos has said officials were still considering whether they needed EU aid.

Spanish bonds weakened for a second day as the nation sold e3.99 billion (R43.3bn) of two-, three- and five-year securities yesterday. Spain sold three-year notes at an average yield of 3.956 percent, up from 3.845 percent at the previous sale on September 20.

Italy’s Prime Minister Mario Monti cautioned last week that aid should not hinge on more conditions than leaders had already signed up to and the International Monetary Fund should not need to police it.

Separately, the Bank of England held its bond purchase target at £375bn (R5 trillion) and kept its key rate at 0.5 percent yesterday.

While the ECB waits on Spain, the euro zone economy is deteriorating. Manufacturing contracted for a 14th consecutive month in September and consumer confidence also declined. Last month the ECB forecast a deeper economic contraction for 2012 than it did three months earlier, saying gross domestic product would drop 0.4 percent instead of 0.1 percent.

A majority of economists in a survey forecast the ECB would cut its benchmark rate in December. – Bloomberg

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