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Fast Money & Foreign Objects
September 6, 2012
Central Bank to Snap Up Debt, Saying, Euro Is Irreversible
By JACK EWING and STEVEN ERLANGER
FRANKFURT The European Central bank took its most ambitious step yet toward easing the euro zone crisis, assuming sweeping new powers to throw its unlimited financial clout behind an effort to protect Spain and Italy from financial collapse.
Mario Draghi, the E.C.B. president, overcame objections by Germany and won nearly unanimous support from the banks board for a program of buying government bonds that would effectively spread responsibility for repaying national debts to the euro zone countries as a group.
The announcement is one of the biggest steps yet on the uncertain and winding road to a more federal Europe, instead of the collection of nation states that often seem to share little more than a common currency and a slumping regional economy. While many risks remain, Mr. Draghi demonstrated once again that he is Europes most indispensable leader, perhaps the only one capable of brokering an accord among politicians whose mistrust of one another and national concerns have allowed the crisis to boil for two and a half years.
In fact, Mr. Draghi may be the most powerful central banker in the world, with authority that transcends national borders. For the bank itself, the pledge Thursday to buy bonds from sovereign states, in conjunction with a fund financed by euro zone governments, is a major evolution from its original narrow mandate to restrain inflation.
Although the bond-buying program announced Thursday should reduce the pressure on Spain and Italy, if those countries choose to seek its protection, it will not solve the deep structural problems of the euro, Europes common currency. But it could buy time for the political leaders of the 17-nation euro zone to follow through on their past promises to back the currency with a more tightly integrated fiscal union and more disciplined oversight of national budgets.
It takes away from the table an important risk in the short term, said Lorenzo Bini Smaghi, a former member of the E.C.B. executive board. Now I think the ball is in the hands of the governments.
The E.C.B. will buy bonds on open markets, without setting any limits, of countries that ask for help, which Spain is expected to do. The E.C.B. said it would act only after countries agreed on conditions with the euro zone rescue fund, which will be known as the European Stability Mechanism. The E.S.M. would buy bonds directly from governments, taking responsibility for imposing the conditions, while the E.C.B. would intervene in secondary markets.
The bank and its president, Mr. Draghi, have had the quiet support of all European leaders in taking this latest bold action, aimed at keeping bond speculators from driving Spain and Italy into budget-blowing borrowing costs. The euro is irreversible, he repeated several times Thursday.
Crucially, support for Mr. Draghi includes Berlin and the German chancellor, Angela Merkel. Her backing comes despite complaints from within her own coalition government and from the head of the countrys central bank, the Bundesbank, Jens Weidmann, that the bank is opening up the taps to inflation and fiscal irresponsibility and giving up an important part of its independence. Mr. Weidmann, a former Merkel aide, is thought to have been the sole dissenting vote on the E.C.B. board against the bond-buying plan, in something of a symbolic protest.
He regards such purchases as being tantamount to financing governments by printing banknotes, the Bundesbank said in a statement, confirming that Mr. Weidmann had voiced his objections during a meeting of the E.C.B. Governing Council.
Significantly, Jörg Asmussen, Mr. Weidmanns friend from university days and the German member of the E.C.B.s executive board, has publicly agreed with Ms. Merkel that the banks bond buying is a necessary evil to promote stability and buy time for European leaders to act and for Spanish and Italian leaders to continue to overhaul their economies.
Ms. Merkels concern was that a bond speculators run on Italy and Spain, the third- and fourth-largest economies in the euro zone, would overwhelm the European bailout funds. And that, she worried, would pose a fundamental crisis for the euro union, possibly sinking the currency, long before European politicians could put in place the necessary legal basis they have agreed to in principle for maintaining fiscal discipline and banking health in euro zone countries.
The financial market fears have been heightened recently by new speculation about whether Greece will be able to meet the debt obligations of its bailout program or have to leave the euro.
What we really have here is a beginning of answering the question of how we deal with Spain and Italy, said Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington. How do we bail out these countries in a way that is sustainable as well as politically possible?
As much as Germans may complain about the less competitive indebted countries of the south, the costs to Germany of a euro collapse would be enormous. And if Spain and Italy are shut out of the debt markets, the bailout funds are too small to bail them out. So it was crucial that E.C.B. step in to insure that those two large countries could continue to borrow at sustainable interest rates, which the E.C.B. acting as a ready lender through bond purchases could help ensure.
The move toward greater unity and discipline, as promised in the last European Union summit meeting in June, will take months of negotiation, subsequent approval by parliaments and possibly even a rewriting of European treaties. And that could require constitutional amendments and referendums in some states, including Germany itself.
As it is, European leaders are waiting for a ruling on Sept. 12 by the German constitutional court on whether the permanent bailout fund the E.S.M., itself only 500 billion, $630 billion, is acceptable under the German Basic Law. Most expect the court to go along, if reluctantly. But more sweeping ideas, like Brussels oversight over the German budget, or collective euro bonds would probably require, in Germany alone, many months of debate and a formal process of constitutional change.
Mr. Draghi is likely to continue playing a crucial role as moderator and power broker, using his own diplomatic skills and the enormous financial resources of the E.C.B.
For his part, Mr. Draghi downplayed his own role, repeating several times that the E.C.B. was simply fulfilling its mandate and rejecting a suggestion that he is pushing forward European integration.
I would think that would be a very ambitious objective, he said at a press conference. Whether bond buying will have implications for the broader political destinies of the euro area, he said, is very much in the hand of our leaders and much less in the hands of central bankers.
In June, the European leaders promised to create a single banking authority to oversee euro zone banks to ensure their health and also to use the bailout funds more flexibly to recapitalize troubled banks in countries like Italy and Spain, who have not requested special bailouts with tough conditions, as Greece, Ireland and Portugal were forced to do. But these measures, like the promise of euro zone countries to write debt limits into their laws, require months of political work.
Mr. Draghi did not give an exact starting date for the bond purchase program, but analysts at Barclays predicted that Spain will ask for help by the end of October. A government that requests help must agree to a macroeconomic adjustment program with the E.S.M. But the E.C.B. said this could be a so-called precautionary program, implying that it would be less onerous than the programs agreed to by countries like Portugal or Ireland.
The E.C.B. will also request help from the International Monetary Fund, which has more experience overseeing countries with debt problems. The I.M.F. stands ready to cooperate within our frameworks, Christine Lagarde, the I.M.F. president, said in a statement.
American officials had no immediate comment on the news. But they have conducted a years-long behind-the-scenes campaign of shuttle diplomacy to urge Europe to do more, welcoming any steps forward that will calm the markets. At the end of July, for instance, The Treasury secretary, Timothy F. Geithner, traveled to the Continent to meet with Mr. Draghi and Wolfgang Schäuble, the German finance minister.
The E.C.B. will buy bonds with maturities of three years or less, a strategy that will help keep elected officials from backsliding on promises to overhaul their economies. They know they will have to face investors again in a few years.
The bank will withdraw as much money from circulation as it adds by buying bonds. This so-called sterilization is intended to avoid any inflationary effect, though many analysts see no danger of higher prices when the euro zone economy is shrinking.
The central bank will not treat itself as a preferred creditor, entitled to get paid before other bond holders if a country defaults. But it will not take losses on Greek bonds it already holds, even though private creditors were required to do so.
The E.C.B. also announced it would hold interest rates at their record-low level of 0.75 percent.
The bank has cut its main interest rate three times since Mr. Draghi became president in November, but he and other central bank officials have complained that market interest rates have remained stubbornly high in the countries most desperately in need of credit.
The rationale for bond buying is to push down interest rates in countries like Spain for companies as well as governments. We need to be in the position to safeguard the monetary policy transmission mechanism in all countries of the euro area, Mr. Draghi said.
Steven Erlanger reported from Paris. Melissa Eddy contributed reporting from Berlin and Annie Lowrey from Washington.
http://www.nytimes.com/2012/09/07/b...at-0-75-percent.html?_r=1&hp&pagewanted=print
