Bank snubs Berlin on bond plan

Bank snubs Berlin on bond plan

Bank snubs Berlin on bond plan

Spanish President Mariano Rajoy greets German Chancellor Angela Merkel (R), during her visit at the Moncloa Presidential Palace in Madrid, Spain. EPA photo

European Central Bank President Mario Draghi unveiled yesterday a long-awaited program to buy up bonds and help bring down the borrowing costs of Europe’s struggling governments, but the move was met with German chagrin.

President Draghi’s 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.

German Chancellor Angela Merkel said after a meeting with Spanish leader and Draghi yesterday that the ECB was acting within its mandate and independence, declining to comment on its new bond-buying program, according to Agence France-Presse.

“The ECB acts within its independence and within its mandate and is responsible for the stability of the currency, the value of the currency, and [for taking] the appropriate decisions,” she told a news conference in Madrid.

Jens Weidmann, the head of the German Bundesbank, had opposed the program, arguing that that was tantamount to monetary financing, where the central bank prints money to pay off a country’s debt.

The initiative – dubbed Outright Market Transactions (OMT) – goes beyond an earlier, limited bond purchase program that was not big enough to decisively lower borrowing costs. The International Monetary Fund cheered the program and said it would cooperate if possible within its own rules.

Draghi emphasized that the new, unlimited program was, by contrast, open-ended and had “no quantitative limits,” The Associated Press reported. He said it was “very, very different from any program we have had in the past.” The new program will continue until its goal of lower borrowing costs is achieved, or a government violates the conditions attached to getting the help.

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.