European Central Bank Unveils New Bond-Buying Program

Mario Draghi announces program to quell “unfounded” fears about the euro’s survival.

Despite German resistance, the president of the European Central Bank Mario Draghi on Thursday announced a potentially unlimited bond purchase program to quell the “unfounded” fears of investors about the survival of the euro.

“Under appropriate conditions, we will have a fully effective backstop to prevent potentially destructive scenarios,” Draghi told a news conference after the central bank’s monthly meeting in Frankfurt. Bundesbank president Jens Weidmann was the only dissenting member of the governing council.

Weidmann warned last month of the “danger that central bank financing can become addictive like a drug.” If Southern European states like Italy and Spain can reduce interest rates on their bonds by having the central bank buy billions worth of their debt, their governments will be under less pressure to reduce spending and liberalize their economies.

In an interview with the German weekly Der Spiegel, Weidmann added that buying government bonds is “too close to state financing via the money press.”

Dutch prime minister Mark Rutte voiced similar concerns in an election debate on Thursday night but argued that the new central bank intervention did not amount to printing money because it will be offset by taking an equal amount of money out of circulation. Moreover, the bank will only buy existing bonds in the secondary market and won’t claim the status of senior creditor if the bonds it buys subsequently have to be restructured.

Draghi raised expectations of another bond buying program in July when he said that he was “ready to do whatever it takes to preserve the euro.” He later clarified his remark by suggesting that countries that suffer high borrowing costs “need to go to the EFSF first,” the European Financial Stability Facility that can finance eurozone member states. Italy and Spain are reluctant to apply for such a bailout, however, because help would likely be conditioned on budget and economic reforms as has been the case in Greece, Ireland and Portugal.

The central bank has apparently succumbed to Southern European pressure and changed it position. Italian prime minister Mario Monti has campaigned for intervention from Frankfurt since January. He lamented at the time that despite Italy’s sacrifices, “we do not see concessions from the EU, such as in the form of lowered interest rates.”

On Thursday, Monti welcomed Draghi’s decision. “Today there’s been an important step forward,” he said. European Commission president José Manuel Barroso agreed. “The ECB cannot and should not finance governments but if the integrity of monetary policy is lacking and if countries commit to fixing their public finances, I think the ECB can and should intervene.”

The European Central Bank previously purchased more than €200 billion worth of Greek, Irish, Italian, Portuguese and Spanish bonds without specifying the amounts per country.