Mario Draghi unveils new bond-buying programme

The European Central Bank yesterday unveiled a fresh programme to buy bonds issued by heavily indebted eurozone countries, under strict conditions, in a widely anticipated bid to save the euro.

Echoing remarks issued by German and Spanish leaders almost simultaneously in Madrid, ECB president Mario Draghi said the central bank would buy unlimited volumes of bonds with maturity of up to three years.

He spoke after the bank kept its main interest rate unchanged at 0.75 per cent and downgraded growth forecasts for the 17-nation bloc.

“We will do whatever it takes” to keep the eurozone together, Draghi said, stressing that “unfounded fears are just what they are, unfounded”.

Spanish Prime Minister Mariano Rajoy, who hosted German Chancellor Angela Merkel for talks, said that Madrid and Berlin would also do what it takes to “resolve the euro crisis”.

Merkel stressed that “we have to restore confidence in the euro as a whole”.

Draghi unveiled a new central bank instrument known as Outright Monetary Transactions (OMTs) in secondary markets for sovereign bonds but stressed that governments would also have to fulfil strict conditions.

The programme, which would replace a previous much-contested one called SMP, would cover sovereign bonds with maturities of up to three years, Draghi told a news conference. The bank has set no limit to the volume of bonds it will purchase under the new programme, he added.

“As we said a month ago, we need to be in the position to safeguard the monetary policy transmission mechanism in all countries of the euro area.”

The OMTs “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,” said Draghi. At the same time, “governments must stand ready to activate the EFSF/ESM in the bond market when exceptional financial market circumstances and risks to financial stability exist,” an ECB statement explained.

It referred to two eurozone financial rescue packages that were expected to work in conjunction with the ECB by buying longer-term bonds if necessary.