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ECB ready to put flesh on bones of vow to save euro

Sakari Suoninen Frankfurt

EUROPEAN Central Bank (ECB) president Mario Draghi will try to back up his pledge to do “whatever it takes” to save the euro tomorrow, when he will be presenting details of a new bond-buying plan that is transfixing markets hopeful it can ease the euro zone crisis.

Investors are on tenterhooks after brinkmanship in the ECB’s internal negotiations over the plan was played out in public last week, with one newspaper reporting that Bundesbank chief Jens Weidmann even considered quitting.

The ECB is being forced to take a greater role in fighting the debt crisis while governments negotiate legal and political hurdles to co-ordinating a longer-term response, but Germany’s Bundesbank wants to limit the scope of ECB action.

“Draghi certainly has to present something,” Citi economist Guillaume Menuet said. “A document of some sort, something of substance is what markets want to see in order to justify valuations.”

Spanish and Italian government bond yields fell yesterday as investors welcomed leaked comments made by Draghi behind closed doors in the European Parliament on Monday, when he suggested that the ECB could buy bonds with a maturity of up to three years, at the long end of market expectations.

The ECB is unlikely to reveal all details of the plan tomorrow.

“I’m not sure the ECB is ready to publish the nitty-gritty and the procedures of interventions, because no country has asked [for a bailout] and because there are still some important dates in the month that require prior approval,” Menuet said.

Spanish Prime Minister Mariano Rajoy said on Sunday that Madrid would consider seeking extra aid from Europe on top of an up to e100 billion (R1.05 trillion) rescue of its financial sector but saw no need for extra conditions beyond the EU policy guidelines it was already implementing. He wanted to see details of the ECB’s programme before deciding whether to proceed with a request.

EU paymaster Germany and Draghi said any bond buying support would require strict policy conditions and enforcement.

German Chancellor Angela Merkel and Rajoy will try to thrash out those differences at talks in Madrid tomorrow, just as the ECB is due to unveil more on its plans.

Spain and Italy have been sucked into the crisis as investors increasingly doubt their capacity to repay their debt. Yields on their bonds have risen to near-unsustainable levels.

Draghi responded in late July by saying the ECB would do “whatever it takes” to preserve the euro, and last month he signalled it was ready to resume buying government bonds.

Now markets want to hear details of the policy. But internal ECB tensions, fuelled by Bundesbank resistance to bond buying, mean it will reveal only a partial outline tomorrow.

“We’re expecting limited information, no quantitative indication on the targets or quantities to be purchased,” Nomura economist Nick Matthews said. “In terms of modalities, we’ll probably get something, but very little colour in total.”

The Bundesbank vehemently opposes government bond purchases, saying they come close to breaching a taboo of central bank financing of governments. Its previous head, Axel Weber, resigned in protest at a previous bout of ECB bond buying. – Reuters

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