The European Central Bank (ECB) on Thursday announced a massive sovereign bond buy up, brushing aside German opposition to unleash a so-called “big bazooka” against the debt crisis.
ECB President Mario Draghi set out the plan as German Chancellor Angela Merkel and Spanish Prime Minister Mariano Rajoy met in Madrid to dispel fears about a possible break-up of the single currency. However, he also insisted governments need to do their bit to save the euro.
Draghi’s masterplan is designed to bring down the soaring borrowing costs that crisis-wracked countries say prevent them from getting back on their feet.
He appeared to have convinced investors the scheme could work, as stock markets across Europe jumped higher and Spanish and Italian borrowing costs tumbled on the news.
Asian markets surged yesterday. Taipei climbed 1.34 percent, or 98.19 points, to 7,424.91; Tokyo rose 2.2 percent, or 191.08 points, to 8,871.65; Seoul climbed 2.57 percent, or 48.34 points, to 1,929.58; and Sydney rose 0.3 percent, or 12.9 points, to 4,325.8.
Draghi’s new revamped program is to buy bonds issued by heavily indebted eurozone countries — a scheme named “Outright Monetary Transactions (OMTs).”
The OMTs will replace the ECB’s previous Securities Market Program (SMP), first launched in May 2010.
The SMP has come under heavy fire, particularly in Germany. Its critics say it blurs the lines between monetary policy, which is supposed to be free from all political influence in the euro area, and fiscal policy.
Bundesbank President Jens Weidmann kept up his criticism on Thursday.
In a statement, he hit out at the OMT program, saying he “regards such purchases as being tantamount to financing governments by printing banknotes. Monetary policy risks being subjugated to fiscal policy.”
Draghi told reporters there was one “no” vote to the OMT program on the 23-member governing council, saying: “I will leave you to guess who that was.”
However, he insisted the new program did not overstep the ECB’s mandate.
The 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.
“We will do whatever it takes” to keep the eurozone together, Draghi said.
The ECB would also only buy bonds with maturities of up to three years, but there was no limit set on the volume of bonds to be purchased, Draghi said.
Italy, one of those countries seen as a likely beneficiary of the new scheme, welcomed the move.
“Today I have seen an important step forward ... which goes towards a more satisfactory governance of the eurozone,” Italian Prime Minister Mario Monti said, adding that Italy was trying to avoid seeking help.
Spain is seen as another possible candidate for help, but Rajoy, whose country faces 30 billion euros (US$37.9 billion) in debt repayments next month, brushed aside questions as to he would seek a bailout and ECB help.
However, he did pledge to “do what it takes to definitively resolve the euro crisis.”
Most early press reaction from Germany was more hostile.
“Pandora’s Box had been definitively opened to the profit of countries riddled with debt,” the Munich-based conservative daily Muenchener Merkur wrote.
The right-wing national daily Die Welt wrote: “The markets are celebrating, but for Germany, the nightmare begins.”