Mario Draghi reveals ECB bond buying program but names no yield caps

The European Central Bank president has said there will be “no quantitative limits set on the size” of its bond buying program for short-dated debt, but at the same time he did not put a target cap on yields the bank would work towards in its strategy.

Mario Draghi said it did not make sense to target name a ceiling for yields, below which the ECB will aim to keep debt.

The banks will also be guided in its program by signals such as CDS spreads, beta spreads and “more generally the conditions of liquidity and volatility”.

He added the ECB will accept pari passu treatment with other creditors for debt it holds.

He rejected those concerned that the ECB buying bonds would add dangerously to already-high levels of debt, from previous programs, on its balance sheet.

Draghi emphasised governments should not stop austerity and reform programs as the ECB conducts its ‘outright monetary transactions’.

The ECB retains the power to stop bond purchases if governments do not fulfil their part of the bargain, he said.

Draghi said: “We want this to be perceived as a fully effective backstop that removes tail risk from the euro area, but at the same time, if we reach our objectives then why should we continue [buying], or if countries or governments do not comply, why should we continue [buying]? These are the two conditions.”

The purchases will be wholly sterilized, so that the overall impact on the money supply will be neutral.

He said the program would attach to countries receiving centralised support such as central rescue packages.

He called the measures “an effective backstop to tail risk in the euro area”.

He declined to put a size or time limit on its program, but reiterated earlier statements that the program would be “adequate” to achieve the ECB’s goal.

The ECB will concentrate on buying bonds with maturities of one to three years in secondary markets.

He said Eurozone bond issuers would not necessarily favour issuing more short-term debt in light of ECB buying demand, as there was “a cost” of doing this, inasmuch as such countries’ debt profiles would thereby be thrown out of balance.

He added the bond buying may also be considered for states even when they regain some access to debt markets.

In announcing the measure, eagerly awaited by markets, Draghi reiterated: “We will do whatever it takes within our mandate to have a single monetary policy and maintain price stability in the euro area and to preserve the euro.

“Unfounded fears of reversability are just what they are – unfounded fears.

“These decisions are necessary to restore our capacity to pursue price stability in the euro area and the singleness of monetary policy in the euro area.”

He also warned Eurozone governments should not give way on their austerity and reform programs in light of the ‘outright monetary transaction’ program by the ECB.

“We see that you may have self-fulfilling expectations that feed upon themselves and generate adverse expectations, and so there is a case for intervening and [for] breaking these expectations. This would justify the intervention of the central bank.

“But we should not forget why countries have found themselves in a bad equilibrium to start with – because of bad policy mistakes.

“If the central bank were to intervene without any action on the government side or conditionality, it would not be effective, and it would lose its independence.”


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