BREAKINGVIEWS - Draghi's bazooka could be third-time lucky

LONDON, Sept 6 Thu Sep 6, 2012 10:29pm IST

The European Central Bank (ECB) President Mario Draghi speaks during the monthly news conference in Frankfurt September 6, 2012. REUTERS/Alex Domanski

The European Central Bank (ECB) President Mario Draghi speaks during the monthly news conference in Frankfurt September 6, 2012.

Credit: Reuters/Alex Domanski

Related Topics

LONDON, Sept 6 (Reuters Breakingviews) - The ECB's third bond-buying plan is a gamble on governments keeping their promises. At least it will buy time for the euro zone to seriously address the fundamental flaws of the monetary union.

Mario Draghi's announcement of his "outright monetary transactions" (OMTs) won't please everybody. Governments hoping to draw on the European Central Bank's aid will be irritated that it will most likely involve the International Monetary Fund - which will be felt as humiliating in some capitals. And investors who hoped the central bank would reveal its targets for excessive bond yields predictably were disappointed.

Many challenges remain now that the basic plan has been outlined. Conditionality is still an issue. Countries will have to take a bailout and be bound by a memorandum of understanding, but there is scope for tension if governments stray off course. The ECB says it would stop supporting them, but how credible is that threat really? Even the issue of whether the ECB's bonds legally rank alongside other creditors is only half-resolved. Draghi said that a legal act will ensure the ECB ranks pari-passu with private creditors. But its Greek holdings were supposed to be pari-passu too. And the legal act may not apply to the ECB's roughly 200 billion euros of existing bonds which it says it will hold till maturity. Finally there's the fragility inherent to a programme that the German Bundesbank formally opposes.

But markets have reacted well to Draghi's plan. Spain's 10-year bond yields have fallen nearly 40 basis points to just over 6 percent. Italy's are at a sustainable 5.3 percent. And they are right. The "OMT" won't solve the crisis and isn't meant to, as Draghi repeatedly said. Many investors will stay wary of peripheral debt for fear that the probable recession will sap countries' ability to grow out of debt or reform. International banks and companies won't start lending or investing in peripheral economies right away. But it buys time, by bringing down funding costs for governments and economies and tying them to economic reforms. Draghi described the OMT as having two "legs": the ability to intervene aggressively in an unlimited fashion, and a clear conditional framework, to mitigate moral hazard. The ECB's third bond-buying programme has legs; whether it will run depends on euro zone governments.

CONTEXT NEWS

- Reuters: Draghi gets ECB backing for unlimited bond-buying (Read story here)

(Editing by Pierre Briançon and David Evans)

FILED UNDER:

Economic Pulse

REUTERS SHOWCASE

Vodafone Tax Dispute

Vodafone Tax Dispute

India advised against challenging Vodafone tax ruling - source  Full Article 

Banking Sector

Banking Sector

India's laggard state lenders face tough sell on capital raising plan  Full Article 

Trade Deal

Trade Deal

WTO postpones trade deal by a day after last-minute objection.  Full Article 

Falling Oil Prices

Falling Oil Prices

Saudis signal no push for oil cut as market to "stabilise itself"  Full Article 

Raising Stake

Raising Stake

Nippon Life to raise stake in Reliance Capital fund unit  Full Article 

Sterilisation Camps

Sterilisation Camps

Sterilisation targets remain in all but name, critics say  Full Article 

Share Buyback

Share Buyback

Samsung Electronics to buy back $2 billion in shares  Full Article 

Microsoft in China

Microsoft in China

Microsoft to pay China $140 million for 'tax evasion'   Full Article 

Flashback: 26/11

Flashback: 26/11

The three-day attack in November 2008 left 166 dead.  Slideshow 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device  Full Coverage