ECB Bond-Buying Conditions Need Not be Painful (Photo : Reuters)
European Central Bank President Mario Draghi said on Thursday everything was in place for the bank to buy the bonds of troubled euro zone countries such as Spain and that conditions linked to it need not be punitive.
At the first ECB meeting since Draghi unveiled his controversial bond-purchase plan a month ago, markets were looking for signs of when Spain might make a formal aid request and trigger the program that some have hailed as a savior for the battered euro zone.
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Draghi offered no clues in that regard, but did say that Spain had made "significant progress" in addressing its fiscal problems, and that the bond plan - dubbed "Outright Monetary Transactions", or OMT - had calmed financial markets, even if it hasn't been used yet.
He declined to comment on whether Spanish bond yields were at appropriate levels. An auction earlier on Thursday saw Spanish borrowing costs fall.
"I could say that today, we are ready with our OMT," Draghi told a news conference outside the Slovenian capital of Ljubljana. "We have a fully effective backstop mechanism in place once all the prerequisites are in place as well."
The euro pushed up against the dollar and Wall Street stocks opened higher, buoyed by Draghi's positive assessment of the bond-buying plan's impact on sentiment.
But the market boost that followed Draghi's late-July promise to do "whatever it takes" to combat the three-year old euro zone crisis has already begun to fade, amid concerns Spain is resisting a formal bailout request.
Spanish two-year note yields have climbed more than half a percentage point over the past month - a reminder that action not words are needed to resolve the euro zone's three-year old crisis.
"He sounded very satisfied with the OMT, like a proud father saying we've produced this fantastic tool and others have to do it," said Carsten Brzeski of ING. "It's very hard to say that increased or diminished the pressure on Spain."
Beset by anti-austerity protests and threats of secession by the wealthy northwestern region of Catalonia, Spanish Prime Minister Mariano Rajoy has declined to seek a bailout, in part because Germany opposes one, sources told Reuters this week.
He is also worried about the perception that Spain's policies are being dictated from abroad, although analysts said the ECB was unlikely to attach stricter conditions to any bond-buying than those set by the EU and the IMF.
"There is a tendency to identify conditionality with harsh conditions," Draghi said. "Conditions don't need to be necessarily punitive."
Draghi, however, shot down suggestions that the ECB would help Greece by extending the maturities of the Greek debt it holds, saying that would be financing governments, which its rules forbid the ECB from doing.
Before his news conference, the central bank announced that its governing council had decided to keep its main refinancing rate steady at 0.75 percent, a record low.
Some analysts still expect the bank to cut rates later this year, although Draghi said a cut had not been discussed at the meeting in Slovenia, one of two the bank holds each year away from its Frankfurt headquarters, reducing chances of a reduction in borrowing costs next month.
"While there was no discussion of an interest rate cut in October, the ECB's press statement does little to dilute suspicion that interest rates will sooner or later be trimmed to 0.50 percent," said Howard Archer of IHS Global Insight.
Annual inflation in the euro zone stood at 2.7 percent in September, the 22nd straight month that it has been above the ECB's target of just below 2 percent. This has limited the bank's room to act on rates, even as the currency bloc risks returning to recession in the third quarter.
The rate decision was in line with expectations -- a majority of 73 economists polled by Reuters had expected no change.
"Owing to high energy prices and increases in indirect taxes in some euro area countries, inflation rates are expected to remain above 2 percent throughout 2012, but then to fall below that level again in the course of next year," Draghi said.
"Current levels of inflation should thus remain transitory and not give rise to second round effects."
Undercutting the Spanish government on Thursday was its newly appointed central bank governor Luis Maria Linde, who described Madrid's forecasts for economic growth and tax revenues in 2013 as overly rosy.
Investors are still expecting Rajoy to seek aid by the end of the year, triggering the ECB's bond-buying program.
"Markets are giving Spain the benefit of the doubt in anticipation of a rescue," said Sassan Ghahramani, head of New York-based hedge fund consultancy SHG Macro.