ECB prepares bond purchase plan

AP

European Central Bank president Mario Draghi has prepared a plan for the bank to intervene in bond markets, which policymakers discussed yesterday ahead of its planned unveiling today. Photo: AP

Jana Randow and Jeff Black Frankfurt

European Central Bank (ECB) president Mario Draghi’s bond-buying proposal involves unlimited purchases of government debt that would be sterilised to assuage concerns about printing money, according to two central bank officials briefed on the plan.

Under the blueprint, which may be called “monetary outright transactions”, the ECB will refrain from setting a public cap on yields, according to the two sources, and a third official, who spoke on condition of anonymity.

The plan would only focus on government bonds rather than a broader range of assets and would target short-dated maturities of up to about three years, two of the people said.

In response, an ECB spokesman referred to an August 20 statement in which the central bank said it was misleading to report on decisions that had not been taken yet.

Draghi told the European Parliament this week that the ECB needed to intervene in bond markets to wrest back control of interest rates in the fragmented euro zone economy and ensure the survival of the common currency. Policymakers were to deliberate on the plan yesterday and Draghi is due to announce today whether it has been agreed to.

The sources said policymakers were likely to adopt the proposal, with Germany’s Bundesbank remaining the sole objector. At the same time, one said Draghi’s relationship with Bundesbank president Jens Weidmann remained relaxed, and the two men only disagreed on whether risks inherent in the bond plan were likely to materialise.

To sterilise the bond purchases, the ECB will remove elsewhere from the system the same amount of money it spends, ensuring the programme has a neutral impact on the money supply.

At the moment, the ECB mops up the impact of its mothballed bond-purchase programme by offering banks weekly term deposits that currently return 0.01 percent.

With the central bank’s deposit rate at zero and the euro zone banking system currently awash in about E800 billion (R8.4 trillion) of excess liquidity, a larger bond programme may not present the ECB with a major obstacle.

While the ECB did not expect to have to spend large sums on bonds, two of the people said Draghi’s plan called for no limits to be set. The ECB would not have seniority on any bonds it bought, they said, and no yield-spread targets or bands would be set publicly. Two said targets would not be set internally either and that interventions would be discretionary.

Draghi would stress conditionality of the programme today, with the ECB likely to stop buying the bonds of any government that failed to meet the conditions agreed at the time of signing up for aid from Europe’s rescue fund – a precondition for ECB action, two of the people said. Another proposal was for the ECB to sell the bonds it had bought if a country did not comply with the conditions. – Bloomberg