--ECB may buy bonds in coordinated action with bailout funds
--ECB to examine in coming weeks other unconventional measures
--Draghi: bond buys will be tied to strong conditionality
--Draghi: ECB may not mop up government bond purchases in the future
--Draghi hints at possible further refinancing rate cut
FRANKFURT--The European Central Bank may soon step in to buy
government bonds on the open market and consider other unconventional
measures to lower "exceptionally high" borrowing costs of financially
stressed euro-zone economies, such as Spain and Italy, but only under
strict conditions and after they submit a request for aid, ECB
President Mario Draghi said Thursday.
Mr. Draghi said the ECB will in coming weeks come up with a plan on
its policy response to protect the euro, which could include its
much-debated government bond purchases in the secondary market in
coordination with the euro zone's rescue funds, in order to create
"the fundamental conditions for such risk premia to disappear."
In stark comments after earlier committing to do "whatever it takes"
to save the euro, Draghi pledged to draw up a set of additional
unconventional measures to preserve the common currency and allow
ECB's record low interest rates to feed through to the wider economy.
"The Governing Council, within its mandate to maintain price stability
over the medium term and in observance of its independence in
determining monetary policy, may undertake outright open market
operations of a size adequate to reach its objective," Mr. Draghi told
a press conference after the ECB left its main interest rate unchanged
at a historic low of 0.75%.
But by attaching strict conditions to any ECB action, Mr. Draghi
disappointed investors who had expected immediate action following his
comments last week.
"There is disappointment that many details need to be fleshed out and
likely concern that the eventual effectiveness of the ECB's bond
buying programme could be diluted by Bundesbank objections," said
Howard Archer, chief European economist at IHS Global Insight.
In a nod to recent objections by German central bank president Jens
Weidmann to ECB bond purchases, Mr. Draghi said one member reserved
itself during Thursday's discussion.
"The endorsement to do whatever it takes to preserve the euro as a
stable currency has been unanimous, but it is clear and it's known
that Mr. Weidmann and the Bundesbank, although we are here in a
personal capacity, have their reservations about programs that view
seeing buying bonds," Mr. Draghi said.
The Bundesbank has opposed the ECB's Securities Markets Program for
over two years, saying that it discourages governments from
implementing much-needed reforms, and strays too far into the realm of
fiscal policy.
"We suspect there will be a big deal of negotiation in the coming
weeks in order to find a way to revive the bond purchases, with
conditions that make the Germans happy," said Annalisa Piazza from
Newedge.
The various councils of the ECB will now examine what additional
measures could be taken such as easing collateral requirements further
and launching a new long-term loan and will decide on the use of those
steps if they see that needed, Mr. Draghi said.
At the same time, Mr. Draghi called on euro-zone politicians to
activate the region's bailout funds, the European Financial Stability
Facility and the European Stability Mechanism, to buy sovereign bonds
when market circumstances are exceptional. But he stressed that
support for governments should be tied to strict conditions.
In a sign that he doesn't favor giving the euro zone's EUR500 billion
permanent rescue fund unlimited firepower, he ruled out granting a
banking license to the ESM and stressed that the ESM wasn't a
"suitable counterparty" for the ECB's refinancing operations, adding
to the markets' disappointment.
Draghi's remarks, intended to show the central bank's unwavering
support for the euro -- which Draghi said is "irreversible" --
appeared to have the opposite effect on the market.
The single currency hit a near one-month high against the greenback
and traded as high as $1.2406 before falling to the day's lows and
trading as low as $1.2143, extending its pullback.
"The market clearly doesn't like the uncertain scenario as
policymakers seem to be borrowing more and more time whilst last
week's comments suggested that a "done deal" could have been presented
today," Ms. Piazza added.
Safe-haven German Bunds rallied, with the September futures contract
rising by over a point to 144.88 while the 10-year yield fell by 12
basis points to 1.25%.
Yields of Italian and Spanish bonds climbed again near levels they
were before Mr. Draghi's encouraging remarks last week. The 10-year
Italian bond yield is now 33 basis points higher at 6.24% while the
10-year Spanish bond yield is now 40 basis points higher at 7.10%.
Shorter-dated Spanish and Italian bonds fared better after Mr. Draghi
said any future purchases would be focused on short-dated debt, and
two-year yields remained lower on the day.
The bond purchases would be "adequate in size" and may or may not be
sterilized depending on whether the ECB regards that necessary to
maintain price stability, Mr. Draghi said.
At present, the ECB soaks up--sterilizes--every week in the form of
inviting deposits of the same amount it has spent on bonds to offset
the inflationary impact of the bond purchases.
The revamped SMP will also address at least one of the market's
concerns, that of the ECB's seniority to other creditors, Mr. Draghi
said, indicating that the ECB will consider waiving its right to be
paid first, ahead of other creditors, should there be an event of
sovereign default.
The ECB has spent some EUR200 billion on bond purchases over the past
years, a relatively small amount compared to its overall balance
sheet.
He said it will be "up to the countries" to decide whether they need
and want the help of the rescue funds.
At a press conference later Thursday, the leaders of Spain and Italy
applauded Mr. Draghi's pledges but shied away from asking for support
for their countries' frail economies from the euro-zone bailout funds.
Speaking to journalists after a meeting in Madrid, Spanish Prime
Minister Mariano Rajoy and Italian Prime Minister Mario Monti said the
actions promised by the ECB built on those agreed at the end of June
by European Union leaders.
The decision to revive the bond buys comes after German, French, and
Italian heads of governments also pledged in recent days their
commitment to the euro while U.S. Treasury Secretary Tim Geithner
visited Germany earlier this week to put pressure for action to lower
"interest rates in the countries that are reforming."
Mr. Draghi hinted that the one-week refinancing rate may be lowered
further from the current all-time low of 0.75% although the central
bank doesn't plan to cut its overnight deposit rate below the current
level of 0%.
"We have discussed a possible reduction of interest rates but the
council in its entirety decided this wasn't the time [to do it]," Mr.
Draghi said.
"On the deposit rate, let me say, for us these are largely uncharted waters."
Write to Margit Feher at margit.feher@dowjones.com
Christopher Lawton in Frankfurt and Neelabh Chaturvedi and William
Kemble-diaz in London contributed to this article
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(END) Dow Jones Newswires
August 02, 2012 09:25 ET (13:25 GMT)
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