Cause and Effect in European Politics and Law

Draghi Said: "Yes, but ..."

Ralitsa Kovacheva, September 7, 2012

Yes, the ECB will buy sovereign bonds with maturity of between one and three years, and, yes - in unlimited amounts. But only if a country signs a macroeconomic programme with the eurozone rescue funds, which is a subject to strict conditionality. Failure to comply with conditions may result in termination of the debt purchase by ECB. On top of that, "the involvement of the IMF shall also be sought for the design of the country-specific conditionality and the monitoring" of the programme.

Put that way, the long-awaited news from the ECB's board meeting on 6 September is hardly what Spain and Italy had expected. Both countries need easing of the interest rates pressure but they preferred this to be done without signing a rescue programme, especially with the involvement of the IMF to avoid any allusion to the so called Troika. From a domestic political point of view, it was important for Madrid and Rome because the Troika does not enjoy public sympathy neither in bailout countries, nor in potential candidates for bailouts. Not accidentally, after the summit of the eurozone leaders at the end of June, when the new functionalities of the rescue funds were approved, European Council President Herman Van Rompuy explicitly noted that there would be no more countries under programmes in their previous form.

The programme announced by the ECB does not make life easier for Mariano Rajoy and Mario Monti. Italy keeps declaring that it wants moral, and not financial support. Spain has still insured itself by saying that it would decide whether to ask for help after seeing the details of the new ECB programme. It will be called 'Outright Monetary Transactions' (OMTs) and will take place in the secondary markets. Mario Draghi is adamant that by buying short-term debt the ECB acts within its mandate and does not violate EU treaties (the ban the ECB to finance directly the governments). In addition, the bank will "sterilise" (neutralise) the additional liquidity created as a result of the OMTs by removing from the system the same amount of money it spent to buy bonds.

The new programme will be implemented as for future rescue programmes, so for countries already under programme, but only "when they will be regaining bond market access." In this sense, Ireland is a potential candidate for the programme as the country has already made successful attempts to return to the markets. Mario Draghi said that Ireland was "exemplary" in its compliance with the rescue programme, adding that he had "no news" on the Irish government's application to take advantage of the new ECB programme.

From Draghi's statement it became clear that the ECB decision was not taken unanimously, as one the board members had a different opinion. It was probably Bundesbank President Jens Weidmann who lately strongly criticised the intention of the central bank to buy government bonds, arguing that this would violate the ban on the ECB to finance governments. German Chancellor Angela Merkel, however, indirectly supported Mario Draghi for the new programme and obviously signalling that the German position for strict conditions and signing of a macroeconomic programme was taken into consideration.

Before the media, Mario Draghi said that an ECB intervention would be justified when there were "self-fulfilling expectations that feed on themselves and generate very adverse scenarios." With the new programme, "under appropriate conditions, we will have a fully effective backstop to prevent potentially destructive scenarios," the ECB president said. But he once again reminded that the ECB alone could not solve the crisis, and the ball was now in the court of the governments that should continue implementing fiscal consolidation and structural reforms: "We are convinced that there is no intervention by any central bank that is effective without the concurrent policy action by the governments."

The other decision announced by the ECB was to suspend the application of the minimum credit rating threshold for bonds of countries under rescue programmes used as collateral at the ECB.