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ECB’s Mario Draghi Saves the Euro with Bond-Buying Plan

Ufff! The euro is saved. And together with euro, we, debt-ridden European Southerners, are save too. Head of European Central Bank, Mario Draghi announced on Thursday, that the ECD will buy bonds of countries in debt crisis until they recover. Draghi’s decision comes despite Germany’s objections fearing that member states could become hooked on central bank aid and fail to reform their economies sufficiently.

ECB’s Mario Draghi unveils bond-buying euro debt plan

Mario Draghi, president of the European Central Bank, has unveiled details of a new bond-buying plan aimed at easing the eurozone’s debt crisis.

He said the scheme would provide a “fully effective backstop” and that the euro was “irreversible”.

The ECB aims to cut the borrowing costs of debt-burdened eurozone members by buying their bonds.

Ahead of the announcement, the central bank kept the benchmark eurozone interest rate unchanged at 0.75%.

Mr Draghi said the ECB would engage in outright monetary transactions, or OMTs, to address “severe distortions” in government bond markets based on “unfounded fears”.

He insisted that the ECB was “strictly within our mandate” of maintaining financial stability, but reiterated the need for governments to continue with their deficit reduction plans and labour market reforms.

He added that the ECB’s actions come in response to eurozone economic contraction in 2012, with continued weakness likely to continue into 2013.

The ECB expects the eurozone economy to shrink by 0.4% in 2012 and grow by 0.5% in 2013, with inflation rising to 2.6%.

OMTs will only be carried out in conjunction with European Financial Stability Facility or European Stability Mechanism programmes, he said.

In other words, countries will still have to request a bailout before the OMTs are triggered.

The maturities of the bonds being purchased would be between one and three years and there would be no limits on the size of bond purchases, he added.

The ECB will ask the International Monetary Fund to help it monitor country compliance with its conditions. (Full article BBC)

PS Next step is, the ECB should/would start printing its own money, in times of need and despair.

 

 

 

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11 comments

  1. There is however one little sting in the tail of this tale. The scheme is only open to countries who operate in the secondary OMT themselves. Meaning, this “saving gesture” is NOT available to Greece

    http://www.standaard.be/artikel/detail.aspx?artikelid=DMF20120906_147

    I’ll find a generally more accessible link for this nasty little bit of “small print”.

    Bottom line, Greece is excluded from the scheme. And with this, Draghi has done exactly what governments do

    Divide et impera

    The scheme is open to Spain and Italy, it is not open to Greece, Portugal or Ireland. The split will be very effective!

  2. why should the split be effective. can u explain?

  3. Within the EU, the periphery (Spain, Italy, Greece, Portugal and Ireland) has become a group of nations who, if they worked together and supported each other, could be a real, and lethal threat to the Neo-Liberal policies pursued by the EU. Rapid social deterioration in these countries made that threat a very real one. In fact, the Spanish PM made no bones about telling the EU that a little cooperation would be advisable. That was not advice, that was an open and blatant threat. But he spoke for Spain alone.

    This arrangement has effectively split the periphery in two. Spain and Italy, who as individual countries could possibly scupper the whole EU game, but in cooperation with each other and Ireland, Portugal and Greece were most definitely in a position to do so, have now been split from the group and given access to more funding. The remaining 3 countries, who between them can do serious but not lethal damage, have once again been hung out to dry.
    This OMT scheme was called for many a time in the past, but always stopped by German veto. For the simple reason that Germany needed time to raise it’s defenses against a possible exit. Schauble himself, and quite a few of his minions have declared in the recent past that the “Grexit” is now manageable, meaning not a threat anymore. For that reason, Greece Portugal and Ireland have not been offered the same courtesy of a lifeline as is now being offered to Spain and Italy. They are now well and truly considered “expendable”
    and without the possible cooperation from Spain and Italy in getting a fair deal from the EU, it does not look too good for any of the 3…

  4. are you sure about that?

  5. The steps undertaken by the ECB are providing glimmers of hope towards rectifying a great injustice. Some North European governments and banks are borrowing money from the ECB at interest rates of less than 1% and then lending some of that money to South European countries at much higher interest rates. Why on earth there’s a need for intermediary profiteers? The ECB could assist struggling EU economies directly, providing that they will fulfill their commitments, and in the process make profits.

  6. I am unfortunately very sure. It has meanwhile been re-stated by the ECB that the scheme is indeed only open to countries who are operating in the markets, and Portugal, Ireland and Greece have been explicitly named as not eligible.
    On condition (amongst many others!) Ireland comes “out of the program” in 2014 and enters the markets again, it will them ,maybe be able to avail of this. should it be needed. Ditto for Portugal and Greece, but they have to enter the markets again first.

  7. Here is a more accessible link to the whole scam scheme.

    http://www.ecb.int/press/pr/date/2012/html/pr120906_1.en.html

    note the following sentence:

    Outright Monetary Transactions will be considered for future cases of EFSF/ESM macroeconomic adjustment programmes or precautionary programmes as specified above. They may also be considered for Member States currently under a macroeconomic adjustment programme when they will be regaining bond market access.

    They emphasis on may is mine, as it is the most important word in the whole sentence, meaning NO GUARANTEES.

  8. Nicolas, you are mixing up two things here. This has nothing to do with bank borrowings, it has everything to do with sovereign borrowing through the issuing of bonds.
    Banks borrow directly from the ECB. Certain countries, like Greece, Ireland, Portugal etc. have been excluded from that facility because of the state of their banking systems. Their banks are given access to emergency funding at a higher interest rate. It was the ferocious uptake of those emergency funds by Irish banks that pushed Ireland into the situation it is in now. The then president of the ECB, Trichet, personally put an end to that practice (the famous letter referred to elsewhere), resulting in the bailout for Ireland.
    States issue bonds which they sell on the markets in order to get direct funding for the state, not for the state’s banks.
    Once the interest rate to be paid on those bonds goes over the 7%, it is deemed unsustainable, and governments stop issuing bonds. What the ECB is doing now is stepping in and buying unlimited (as opposed to previously limited) quantities of state bonds in order to force the interest rate down. As a direct result of this new plan the Spanish interest rate dropped by about .3%.
    At the moment, the ESFS interest rates are between 2.5 and 3%, the market rates are something like 6% on average. Because Greece, Ireland and Portugal or not in a position to sell Bonds, the ECB cannot buy them at lower interest rates, and these countries are therefor not allowed to play…
    With these new OMT’s the situation changes again, and it is not really clear how this is going to work. The vocabulary used is, as usual, deliberately vague, leaving plenty of wiggle room and back peddling space…

  9. I dont agree wiht you. I think Germany, Holland, Austria and Finland didnt vote no cause there was nothing to vote against. No monies will suddenly be shoved out the door to countries who cant borrow. This is just a continuation of excisting policies like SMP. Now its called OMT but nothing really changes. I guessing Spain voted no cause now they have to go beg wiht the EFSF/ESM and the IMF instead of getting monies without conditions.
    If Draghbi would have said tomorrow the ECB gonne buy up 3000 bil in toxic debt from Spain, Italy, Greece, Portugal and Ireland with no questions asked that would be something new. A number what in my opinion is the minimal needed to save those countries. A number that is also not acceptable for the core countries they will rather vote no for that and leave the euro themselves then sign up on that.
    Also i think there is not gonne be a 3 big bailout package for Greece. Time is up they are indeed expandable. Sorry to say that but thats how the mood is in the countries who have to pay for this.
    So in a way yesterday pressconference is very bad news.

  10. Greece, Ireland and Portugal are periphery. Italy is certainly core – see the history of the EU. Also probably Spain is core, because of its size and boarder with France.

    Hance the different treatmemt.

  11. yes. meanwhile I heard the explanations and exclusions too. At least the rest of EUROpe will be saved.