Draghi's ECB bond plan on the way

ECB president Mario Draghi is expected to announce today that the bank will begin buying the bonds of troubled eurozone states.

by Andrew Saunders
Last Updated: 07 Dec 2012
Draghi, who famously said recently that he would do ‘whatever it takes’ to save the euro, is about to reveal what that means in practice. The ECB is widely expected to start buying the bonds of countries like Spain and Italy, in an effort to keep their borrowing costs at a sustainable level.

But details are as yet thin on the ground and any such plan has been vigorously opposed by the German Bundesbank. For starters, will the ECB publish a cap – a level of bond yield above which it will automatically intervene? According to the latest reports this is unlikely. There is also the question of quid pro quo – what kind of strictures and budgetary restraint will be demanded in return for ECB support, and how will they be enforced?

The debate goes to the heart of the eurozone debate – one the one side, the ECB - and probably the majority of eurozone member states, which believe that some kind of debt support is essential to avoid the prospect of the Spanish and perhaps Italian economies spiralling out of control. On the other, the Germans (which is the only Eurozone country really in a position to pay for such activities) plus some smaller allies like Finland, The Netherlands and Luxembourg. This group believes that price stability is the only concern of central banks, and that, by buying bonds, the ECB simply risks getting the benefactor nations hooked on their cheap debt, as well as removing the key incentive for austerity and restraint. ‘Kicking the can down the road’ as the Americans say.

Who’s right? Well that is the 64bn euro question. But the markets are clearly expecting intervention of some kind – the yield on Spanish and Italian debt has fallen in advance of this afternoon’s meeting between the ECB board and the finance heads of 17 eurozone countries. The Euro has also risen against the dollar. So if the plan doesn’t live up to expectations, there could be some pain on the Bourses tomorrow…

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