Draghi says ECB ready to make further bond purchases
The European Central Bank (ECB) is ready to make purchases of sovereign bonds to support weaker eurozone economies, as it believes the markets are over-stating the risk of eurozone breakup.
ECB president Mario Draghi said a "severe malfunctioning" exists "in the price formation process in the bond markets of euro area countries", and that risk premia related to fears of a eurozone breakup were "unacceptable". "The euro is irreversible," he told a press conference today (August 2).
The exact form of the bond market intervention, however, remains unclear, and it is still likely to face some German opposition. "These are largely uncharted waters," Draghi said, adding the ECB will work out the details of its plans over the coming weeks.
The ECB chief emphasised that any central bank intervention needed to be met by reform efforts from eurozone governments. "The ECB cannot replace governments," Draghi stressed. Action by national authorities should include fiscal consolidation, structural reform and European institution-building," he said.
Draghi also highlighted the need for struggling governments to take advantage of funding from the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM), before seeking assistance from the ECB. "As implementation takes time, and financial markets often only adjust once success becomes clearly visible, governments must stand ready to activate the EFSF or ESM," he said.
But Ken Watrett, chief eurozone market economist at BNP Paribas, said "conditionality" imposed by the ESM was a "stumbling block" in the process. "The governments have to request assistance, to set the wheels in motion. The two governments under scrutiny, Spain and Italy, are reluctant to ask for help – there's a huge stigma attached," he said.
Nevertheless, Watrett said the conditionality embedded in ESM assistance could lead governments to press ahead with important reforms. "In the longer run, this is potentially a big step forward," he said.
The ECB, meanwhile, maintained its benchmark interest rate at 0.75% today. Draghi said the central bank expected inflation to decline further in 2012 and fall below 2% in 2013. "Inflation expectations for the euro area economy continue to be firmly anchored," he said.
Separately, the Monetary Policy Committee of the Bank of England today voted to maintain its benchmark interest rate at 0.5%, and to continue the asset purchase programme at its current size of £375 billion ($583 billion).
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