The European Central Bank (ECB) indicated on Thursday it may again start buying government bonds to reduce crippling Spanish and Italian borrowing costs, but the conditions it set and the dissenting voice of its key German member disappointed markets.
In the latest move to contain the eurozone crisis, ECB President Mario Draghi indicated that any intervention would not come before next month — and only if governments activated the eurozone’s bailout funds to join the ECB in buying bonds.
“The governing council ... may undertake outright open market operations of a size adequate to reach its objective,” Draghi told a news conference after the central bank’s monthly meeting, using the bank’s code for bond-buying.
The ECB kept eurozone interest rates at a record low 0.75 percent, but Draghi said the council did consider a further rate cut on Thursday amid signs that an economic recession in peripheral European countries is spreading across the continent.
A Reuters poll of nearly 50 economists after Draghi spoke found that most expect the ECB to start buying Italian and Spanish bonds next month and to cut rates to 0.5 percent.
Draghi was under intense pressure from investors, European leaders and the US to deliver on a pledge he made last week to do whatever it takes to preserve the euro by bringing high borrowing costs down.
However, stocks and the euro fell after the ECB chief’s remarks, and Spanish and Italian bond yields jumped, with Spain’s 10-year paper vaulting over the 7 percent danger level.
“It is quite disappointing ... There is a lack of any action so he has basically passed the buck back on to politicians,” Knight Capital strategist Ioan Smith said.
Draghi said three ECB committees would now work on detailed methods of intervention and a decision on whether to go ahead would be taken at a later stage.
If the central bank did step in to buy bonds, it could assuage concerns raised by investors when it asserted seniority over private bondholders by refusing to join a writedown on Greek debt this year, Draghi said. He did not say how.
The ECB would also consider other “non-standard” measures to rein in the eurozone crisis, he said, hinting it might move to quantitative easing (QE) — or printing money — by not withdrawing all the money it creates to buy bonds.
Unlike the US Federal Reserve and the Bank of England, which have engaged in QE since 2008 by creating money to buy securities, the ECB has so far “sterilized” all its purchases by taking in an equivalent amount in interest-bearing deposits.
The bank has already spent 210 billion euros (US$256 billion) buying bonds under its now dormant Securities Markets Program (SMP) since May 2010, with limited effect, but Draghi said the new effort would be different in scope and conditionality.
Any new ECB action would be focused on shorter-term debt and was conditional on eurozone governments using their bailout funds first, and on beneficiaries accepting conditions.
“Governments must stand ready to activate the ESM/EFSF in the bond market when exceptional financial market circumstances and risks to financial stability exist,” he said, referring to the European Stability Mechanism/European Financial Stability Facility.
Italian Prime Minister Mario Monti said after talks with his Spanish counterpart, Mariano Rajoy, in Madrid that Draghi’s statement marked “several steps forward,” but it was premature to say whether Rome would apply for such help.