ECB Gives Markets What They Wanted, Confirmation That An Unlimited Bond-Buying Program Is Being Put Into Place

Friday, September 07, 2012 06:48
ECB Gives Markets What They Wanted, Confirmation That An Unlimited Bond-Buying Program Is Being Put Into Place

Tags: bonds | economy | European zone

The European Central Bank (ECB) thrilled global markets by announcing after its monthly meeting on September 6 that it indeed would begin a bond-buying program designed to ease credit costs for distressed European countries including Spain and Italy.

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ECB president Mario Draghi said the plan would involve open-ended purchases of short maturity bonds that already exist. No limits to the purchases will be announced in advance and the ECB will only come to the rescue of those countries whose governments satisfy criteria stipulated by the euro zone.
Draghi made the case once again that the bond-buying program was within the ECB’s mandate to maintain price stability. Details of the plan had been leaked but confirmation of the plan sparked rallies in equity markets as well as the bond markets in Spain and Italy.
Draghi said the bond buying would be matched by taking an equal amount of money out of circulation. He also said the International Monetary Fund would be consulted in designing policy conditions of the new program.
The strain evident in the financial markets were becoming so great that the euro was in danger of collapsing. The markets were increasingly betting on the breakup of the Eurozone, a situation that Draghi says could have become self-fulfilling.
All bonds issued or guaranteed by European governments will be accepted as collateral for credit. This is a reversal from an earlier stance. Purchases made to help a government will only be continued for as long as that government complies with conditions set by the Eurozone.
At the same time, the ECB left interest rates unchanged at 0.75%.
The move still does not address the long-term fiscal issues for the Eurozone but it buys time for political leaders to put in place a permanent and reliable structure through which to monitor each other’s spending and to promote business growth.

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