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.
- Reuters: Draghi gets ECB backing for unlimited bond-buying (Read story here)
Editing by Pierre Briançon and David Evans