Draghi gets ECB backing for unlimited bond-buying

European Central Bank (ECB) President Mario Draghi on Thursday said policy makers had agreed to an unlimited bond-purchase programme to regain control of interest rates in the Euro zone and fight speculation of a currency break-up.

The programme “will enable us to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro,” he said at a press conference in Frankfurt after the ECB held its benchmark rate at a record low of 0.75 per cent. “Under appropriate conditions, we will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area.”

Draghi has staked his credibility on the bond plan, which is the most ambitious yet in the central bank’s fight to wrest back control of rates in a fragmented economy and save the euro after nearly three years of turmoil. Now it’s up to governments in Spain and Italy to trigger ECB bond purchases by requesting aid from Europe’s rescue fund and signing up to conditions.

AN AMBITIOUS MOVE

The whats & whys

• ECB will buy bonds with maturities of up to 3 years
• It will give govts time to come up with long-term response to the current debt crisis
• ECB will stop buying if a country does not comply with its policy conditions
• ECB would forgo its senior creditor status on the bonds it purchases

Likely impact on India

• The move could boost capital flows into the country and help cover the wide current account deficit
• Gold may become more attractive if overseas yields fall
• But, it could also jack up commodity prices
• And, any rise in prices could diminish hopes of monetary easing by RBI

 

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“Governments must stand ready to activate the EFSF/ESM (European Financial Stability Facility/European Stability Mechanism) in the bond market when exceptional financial-market circumstances and risks to financial stability exist — with strict and effective conditionality,” he said. The ECB reserves the right to terminate bond purchases if governments don’t fulfil their part of the bargain, he added.