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ECB unveils scheme to buy bonds and help reduce borrowing costs
Source: Agencies |
September 7, 2012, Friday
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Print Edition
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EUROPEAN Central Bank President Mario Draghi yesterday unveiled a long-awaited program to buy up bonds and help bring down the borrowing costs of Europe's struggling governments.
The plan envisions no set limit on the amount of bonds the ECB could buy, making the program "a fully effective backstop" against a further worsening of the debt crisis in the 17 countries that use the euro.
The initiative - dubbed Outright Market Transactions, or OMT - goes beyond an earlier, limited bond purchase program that was not big enough to decisively lower borrowing costs.
Draghi emphasized that the new, unlimited program by contrast was open-ended and had "no quantitative limits." He said it would work because it was "very very different from any program we have had in the past." The new program would continue until its goal of lower borrowing costs is achieved, or a government violates the conditions attached to getting the help.
Marie Dimon, senior economic adviser at Ernst & Young, said: "The ECB did not disappoint in its decision to start a vast bond purchase program."
Bond purchases push bond prices up and interest yields down, since price and yield move in opposite directions. Governments can then take advantage of the lower yields when they borrow. Countries must constantly borrow by selling new bonds to pay off old ones that are coming due. If rates rise too much, it can make it impossible for the country to maintain its debt burden. That's what forced Greece, Ireland and Portugal to seek bailout loans from other eurozone countries.
Spain and Italy are in the same difficulty now, with Spain paying more than 6 percent on 10-year borrowing and Italy more than 5 percent. The fear is that they are too large to bail out, and that a failure to pay their debts could trigger financial turmoil that could break the eurozone apart and disrupt the global economy.
Following yesterday's announcement, Spain's interest rate on its 10-year bond lost 0.3 percent on the day at 6.09 percent, while Italy's 10-year rate shed 0.18 percent at 5.25 percent.
A key feature of the OMT is that countries that want the ECB to buy their bonds must first officially ask for help from Europe's bailout funds and agree to "strict and effective" budget policy conditions. That is to ensure they won't relax their efforts to reduce deficits once the bond purchases take the financial pressure off them.
The plan envisions no set limit on the amount of bonds the ECB could buy, making the program "a fully effective backstop" against a further worsening of the debt crisis in the 17 countries that use the euro.
The initiative - dubbed Outright Market Transactions, or OMT - goes beyond an earlier, limited bond purchase program that was not big enough to decisively lower borrowing costs.
Draghi emphasized that the new, unlimited program by contrast was open-ended and had "no quantitative limits." He said it would work because it was "very very different from any program we have had in the past." The new program would continue until its goal of lower borrowing costs is achieved, or a government violates the conditions attached to getting the help.
Marie Dimon, senior economic adviser at Ernst & Young, said: "The ECB did not disappoint in its decision to start a vast bond purchase program."
Bond purchases push bond prices up and interest yields down, since price and yield move in opposite directions. Governments can then take advantage of the lower yields when they borrow. Countries must constantly borrow by selling new bonds to pay off old ones that are coming due. If rates rise too much, it can make it impossible for the country to maintain its debt burden. That's what forced Greece, Ireland and Portugal to seek bailout loans from other eurozone countries.
Spain and Italy are in the same difficulty now, with Spain paying more than 6 percent on 10-year borrowing and Italy more than 5 percent. The fear is that they are too large to bail out, and that a failure to pay their debts could trigger financial turmoil that could break the eurozone apart and disrupt the global economy.
Following yesterday's announcement, Spain's interest rate on its 10-year bond lost 0.3 percent on the day at 6.09 percent, while Italy's 10-year rate shed 0.18 percent at 5.25 percent.
A key feature of the OMT is that countries that want the ECB to buy their bonds must first officially ask for help from Europe's bailout funds and agree to "strict and effective" budget policy conditions. That is to ensure they won't relax their efforts to reduce deficits once the bond purchases take the financial pressure off them.
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